November is almost here, a month much celebrated in 1954. On the 23rd of that month, the Dow Jones Industrial Average for the first time closed above the level it had reached at its peak on Sept. 3, 1929.
Are we in for another 25-year wait before share prices match their October 9, 2007 peaks? Only a brave man or a fool would attempt to predict the course of share prices, which have been gyrating at a rate that would be the pride of any belly dancer.
And it would take an even braver and more foolhardy one to venture the prediction that the situation in which we find ourselves is not going to deteriorate to levels last seen in the depression of the 1930s.
So here goes.
A bit of history. In the 1930s, the U.S. economy shrank by 30%, the unemployment rate rose to 25%, and prices fell at an annual rate of 10% during the early part of the decade.
Since World War II we have lived through 10 expansions, averaging four years in length, and 10 recessions, with an average length of one year.
The two longest recessions (1969/1970 and 1973/1974) lasted for five quarters, and recorded only modest declines, at least by the standards of the Great Depression. That history might provide a bit of comfort to those who fear that recessions typically collapse into a 1930s-style debacle.
Still, this recession is not like those of the recent past. It has many similarities to those setbacks, of course. Unemployment is rising, consumer confidence is fading, output is shrinking, many investors are being burned, the housing market is a shambles, some firms are being driven to the wall.
Sigmund Freud is alleged to have said, “Sometimes a cigar is only a cigar.” And sometimes a recession is only a recession. But the one in which we are stuck is different.
For one thing, the intensity of the seizing up of credit markets, the ubiquity of bad IOUs on the books of financial institutions, the massive indebtedness of consumers, the rattling of the banks’ credit bowls at the doors of the Treasury and the Federal Reserve Board.
A more important difference is in the policy responses. Yes, we have had bailouts in the past, but we did not see the government buying shares in banks, or guaranteeing money funds, or the Fed opening its “window” to collateral that, to put it politely, is not of the highest quality.
All of these moves are generally correct policy responses to what some call the worst financial crisis in 100 years, a veritable “tsunami.”
In the Depression, the Fed got it wrong, and tightened when it should have been loosening credit. Franklin Roosevelt almost got it wrong when he promised to cut spending and balance the budget, a promise that he wisely decided not to keep.
Now the authorities are getting things right. Federal Reserve chairman Ben Bernanke has added a variety of innovative credit-loosening measures to a series of interest rate cuts that culminated in Wednesday’s reduction to 1%.
The recapitalization of the banks is underway on a massive scale, putting them in a position to resume lending. The extension of government deposit guarantees has calmed the panic that threatened to create queues at the withdrawal windows of the world’s banks.
Measures to encourage banks to resume lending to each other seem to be having some effect, although bank hoarding of cash remains a problem.
There are tentative signs that the steps taken to ease conditions in the moribund commercial paper market are working, so that businesses can again cover their short-term cash.
Everywhere, fiscal policy is becoming more stimulative, piling deficit on deficit. There are certainly more shocks to come, but the policy trajectory is in the right direction.
It is important to note that few of these measures have had time to work any magic they might contain. Interest rate cuts take effect only after an 18-month lag. It was only last week that some of Hank Paulson’s $700 billion began to find its way onto banks’ balance sheets.
And all of the talk in Europe about leading the way to recovery has yet to be followed by the injection of cash in quantities that match French President Nicolas Sarkozy’s words, as he offers French statist capitalism as an alternative to what he sees as the failed U.S. free-market model. Only when the cash really starts to flow will we find out whether the 1930s is in our future.
Examiner columnist Irwin Stelzer is a senior fellow and director of the Hudson Institute’s Center for Economic Studies.
