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The panic of 2008: a letter from America

By Wendell Cox - posted Monday, 16 March 2009


The household value of stocks and mutual funds has declined for five consecutive quarters, as of December 2008. There was a more sustained drop over six quarters in 1969-1970, although the decline in value was less than the present loss, at 37 per cent. A larger decline (47 per cent) was associated with the four quarter decline of 1973-1974. Comparable data is not available for household stocks and mutual fund holdings before 1952. The less complete data available indicates that the gross value of common and preferred stocks fell 45 per cent from 1929 to 1933. As late as 1939, a decade after the crash, the loss had risen to 46 per cent, indicating both the depth and length of the Great Depression.

The present downturn seems on course at a minimum to break the post-depression loss record with an overall decline at 58 per cent as of March 2 (this assumes the change in the value of the market is proportional to the change in the Dow). This would correspond to a household loss of $8.5 trillion from the peak.

Consumer confidence

The Conference Board’s Consumer Confidence Index reached an all time low of 25.0 in February, down a full one-third in a month. Even with its petrol rationing, the mid-1970s downturn saw a minimum Consumer Confidence Index of 43.2. Normal would be 100; as late as August of 2007, consumer confidence was above 100. Consumer confidence is important. Where it is low, as it is today, there is fear and even people with financial resources are disinclined to spend. Confidence is a major contributor to economic downturns, which is why they used to be called “panics”. Restoring confidence is a requirement for recovery.

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Government confidence

If there were a US government index of confidence, it would probably be near zero. This is demonstrated by the trillions that both political parties in Washington have or intend to throw at banks, private companies and distressed home owners to stop the downturn. Never since the Great Depression have things become so bad that Washington has opened taxpayer’s checkbooks for massive financial bailouts.

How much wealth has been lost?

The net worth of all US households peaked at $64.6 trillion in the third quarter of 2007, according to the Federal Reserve Board. Since that time, it seems likely that the housing, stock and mutual fund losses by the nation’s households could be $13 trillion - $4.5 trillion in housing and $8.5 trillion in stocks and mutual funds. This is a major loss and is unlikely to be recovered soon. Yet it makes sense to consider these losses in context. Unemployment is far lower than in the 1930s, when it reached 25 per cent, and the Dust Bowl is not driving people from the Great Plains to California (indeed, more than 1,000,000 people have migrated from California to other states this decade).

Born yesterday Jeremiahs

It is fashionable to suggest that the current economic crisis is the result of over-consumption and an unsustainable lifestyle. The narrative goes that the supposed excesses of the 1980s and 1990s have finally caught up with us. In fact, however, even with the huge losses, the net worth of the average household is no lower than in 2003 and stands at 70 per cent above the 1980 figure (inflation adjusted). This may be a surprise to “born yesterday” economic analysts.

The reality is that the United States (and Australia and the rest of the first world) achieved astounding economic and social progress since World War II. The reality remains that even after the losses we are not, objectively speaking, experiencing Depression-like conditions. Critically, the answer to the question, "Are you better off today?" (PDF 60KB) in 1950, 1960, 1970, 1980, 1990 and even 2000 is “yes”. This is a critical difference with the situation in the 1930s when we were much poorer, and far less able to withstand such punishing losses.

Beware the Panglossians

Even so, it seems premature to predict that the economy will turn around soon. Some Panglossian analysts who predict recovery later in the year or in 2010 seem likely to miss the mark by years. Remember, analysts - particularly those tied to both the real estate and stock sectors - have discredited themselves with their past cheerleading. In addition, the international breadth and depth of this crisis cannot possibly be fully comprehended at this time.

And even when the recovery starts, it is likely to be slow because of the public debt run up to stop the bleeding. When the recovery begins, the nation and the world will have to repay the many trillions in bailouts one way or the other. This can take the form of higher taxes, inflation, rising real interest rates or, perhaps all three.

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How bad is it? Bad enough

The present downturn is not as serious as the Great Depression. Nonetheless, the Panic of 2008 is without question, the most serious economic downturn since the Great Depression. The real question is whether the US government will react as ineffectively as it did back then, and prolong the downturn well into the next decade. Wise policy out of Washington, so often in short supply, is required not only for the United States but also for the rest of the world, which remains so tied to the American economy.

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This article is adapted from one previously published in newgeography.com.



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About the Author

Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life.

Other articles by this Author

All articles by Wendell Cox

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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