It May Not Be 1929, but It Sure Feels Like 1928
It's Not 1929, but It's the Biggest Mess Since
By Steven Pearlstein
Wednesday, December 5, 2007; D01
It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.
We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.
But let me assure you, you ain't seen nothing, yet.
. . . If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.
That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically.
It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets.
It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year.
And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.
This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.
Steven Pearlstein is probably the most savvy guy writing about economic issues today. One of the reasons I say that is he agrees to a large degree with me--and who can possibly ignore such a compliment?
What is dangerous is what Henry Paulson and Ben Bernanke are dreaming up to stem the flow (of blood). The delicate balance of requiring losers to lose is always in jeopardy when Fed and Treasury maneuverings are done for political purposes rather than sound economics.
If we are not there, we are very close to there. Paulson is the ex-CEO of Goldman Sachs, who took (and continues to take) a very cold bath in the sub-prime debacle. You can bet his phone is ringing. Bernanke is an academic along the Milton Friedman line and has made statements in the past that argue for turning on the printing presses during deflationary times--a position that hasn't found credibility in decades.
The best we can do in these troubled times is to continue to read Pearlstein.