According to the Economist, ``MANY comparisons may be made between the devastation being wrought on America's financial system today and the Wall Street crash of 1929. One similarity that the world is desperate to avoid is a repeat of the depression of the 1930s. Hopes are pinned on the American bail-out plan that the House of Representatives is set to reconsider on Friday October 3rd. If the fear of depression is anything to go by, the future looks bleak. A survey of newspaper articles over the past two decades shows a sharp spike in mentions of the dreaded D-word, as commentators have started to think the worst. The prognostications may possibly turn out to be true, or perhaps the only thing we have to fear are the fears of journalists themselves.” (underscore mine)
Courtesy of the EconomistGrowing fears of “A Mother of All Banking System Run” or its downright collapse emanating from the unresolved gridlocked in the global credit markets have aggravated such an outlook, compounded with the rapidly deteriorating economic environment.
Even Warren Buffett, the world’s most successful stock market investor, acknowledges part of this anxiety and analogizes the present conditions to one of the US Economy lying "flat on the floor” and undergoing a “Cardiac Arrest”.
In a recent CNBC interview with Charles Rose, Mr. Buffett said,
``Paramedics have arrived…and they shouldn't argue about whether to put the resuscitation equipment a quarter of an inch this way or a quarter of an inch that way, or they shouldn't start criticizing the patient because he didn't have blood-pressure tests.” In reference to his advancement of the bailout package, which was recently approved by the US Congress.
He relates the impact of the credit crunch as ``sucking the blood out of the economic body of the United States”.
Anyway, the Mr. Buffett in apparent empathy with the US, ``In my adult lifetime, I don't think I've ever seen people as fearful, economically, as they are right now….They are not wrong to be worried.''(highlight mine)
Plainly said, the fear the US faces from the present risks environment seems justified, although Mr. Buffett believes that these presents itself as opportunities from which to profit over the long term, ``The prices make a lot more sense now…You want to be greedy when others are fearful and you want to be fearful when others are greedy.''
A classical Mr. Buffett act.
From our end, we understand this as nothing really new. Boom and Bust always bring about attitudinal change. Inflation is followed by deflation. Greed turns to Fear, Panic and ultimately to depression. Aggressive risk taking morphs into morbid aversion to risk. Generosity turns into frugality. Profits segue into losses. Debt level falls. Collateral values fall. The negative feedback loop of margin calls from reduced collateral values reinforces downward price spirals on asset values. Company Balance sheet shrinks. Unemployment rises. Conspicuous consumption shifts into consumption based on necessities. People’s time references are lowered. Real currency values rises as people and corporations hoard cash. Government fiscal deficits rise as rescue efforts mount or as contingent liabilities are realized as losses. Zero savings can mean more savings. Current account deficits could become surpluses. So what else is different?
Eventually most of the malinvestments and excess levels of gearing or leverage will be reduced to the point where the economy affords them. All these take time. But the adjustments won't be painless.
It’s what history has repeatedly shown. It’s what all cycles are all about. It’s the nature of human beings, especially when misdirected decisions have been impelled by policy incentives that lead to such behavior.
Besides, is this not the essence of capitalism: Profits and losses? We can't say capitalism is purely a one way street of profits, while loses need be socialized. That's the Keynesian brand of capitalism. And that's what has got us into this in the first place.
As US President Franklin D. Roosevelt in his First Inaugural Address on a Saturday of March 4, 1933 ``So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself -- nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
While there is nothing to fear but fear itself, eventually there will be a resolution to the crisis as it always had been. It's not the end of the world as we know it. Although we are hopeful that in learning from history we could avoid taking on the similar paths that would risk actualizing these fears.
