Economic Recovery? History Says No Way. Not Yet.

Take a long enough perspective, and it is no surprise that what some had been calling the GGBAT (the Greatest Global Boom of All Time) ended with the GGRSGD (the Greatest Global Recession Since the Great Depression). Both the boom and its panicky finale fit neatly into a long, human tradition of greed, self-deception and financial folly. And, never mind the Dow at 10,000. Eight centuries of history suggest the GGRSGD is a long way from over.

That, anyway, is one of the cheery conclusions you take away from This Time It's Different: Eight Centuries of Financial Folly, a book co-authored by economists Carmen Reinhart of the University of Maryland and Harvard's Kenneth Rogoff. The title, in case you didn't notice, is ironic. The authors' point is that it's never different: the temptation to justify reckless financial behavior as long as it's profitable in the short run is as old as lending. We're human. We can't help it. Sigh.

Professor Reinhart, who this spring gave CBS MoneyWatch a sneak peak into her book's insights, met with us editors yesterday. She is disarming, funny, deeply knowledgeable and, as her publicist put it, about the only economist you'll meet who wears Chanel. What she is not, is optimistic.

Some findings from her research:

• Every crisis is preceded by a boom in which people convince themselves that the ordinary rules no long apply. Reinhart recalls visiting Asia in the mid-1990s with the International Monetary Fund, where she worked at the time, and being told in country after country that currency crises could never happen there. "We're too productive, we have too high a savings rate," she was told. "Crises only happen in places like Latin America." That stuck with the Cuban-born Reinhart, especially when the Asian currency crisis hit three years later.

Americans take a second seat to none in our capacity to fool ourselves.

1. "Profits don't matter" : Internet-bubble wisdom, circa 1999


2. "Deficits don't matter": George W. Bush fiscal policy, allegedly voiced by Dick Cheney


3. "Credit quality doesn't matter": conventional magical thinking during the GGBAT

What that says about our ability to recognize future bubbles in their formative years and head them off is not very encouraging.

• History suggests we've got a long way to go. Banking crises like the one we're in tend to stick around. On average it takes six years for home prices to recover, five years for unemployment to turn around and two years for the economy to come back.
• We're acting Japanese and don't know it. We lectured the Japanese during their lost decade on the need to bite the bullet and deal with zombie banks. But now, in the same pickle as the Japanese were, we're acting with the same irresolution. Remember how TARP was supposed to get troubled assets off the banks' balance sheets? They're still there.

And like us, the Japanese flooded their economy with stimulative cash that helped jump start growth. By the mid-1990s, though, central bankers and government lost their nerve and began to tighten up. That helped turn a lost five years into a Lost Decade. It's a repeat of the Japanese mistake that worries Reinhart the most about our current situation.

• Watch out for Treasuries. Almost every financial crisis going back in history has led to a huge surge in sovereign debt. On average, it doubles, and the surge frequently leads to default. In this crisis, the U.S. has made pikers of such world class debtors (and defaulters) as Argentina and Indonesia. Our debt has tripled in a year to $1.2 trillion. A default on U.S. Treasuries is impossible. A downgrade or hyper-inflation, not so impossible.
• Don't trust anyone telling you that they've found a way around risk That applies equally to insurance salesman selling equity indexed annuities and to central bankers telling you they're smarter than their predecessors.

If you're thinking about acting on this outlook, remember that Reinhart and Rogoff's grasp of history doesn't necessarily give them a failsafe grip on the future. History isn't kind to prognosticators either, however far back their data goes. (See Jeremy Siegel, Stocks for the Long Run.) But after talking to Reinhart, I'm double checking my allocations to U.S. Treasuries and thinking of adding more to my inflation-adjusted bonds. If you can't learn from history, as George Santayana said, you could be doomed to subpar real returns.

Continue reading on CBS MoneyWatch.com

 

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Comments

[Sundialsvc4]

I prefer "GGDSF-BST": "Greatest Global Depression So-Far, But Stay Tuned."

Making money on paper is easy. Making it in the real world is not. Laziness and sloth, crime and cruelty are all deeper-set in our veins than any sense of charity or wisdom will ever be. Nations like the US come onto the scene thanks to, say, a happy accident of geography and transporta­tion-techn­ology, but they repeat the same mistakes that are by now lost in the desert-sands of time. Sometimes their ending is so utter and complete that literally all that is left of "mighty works" is a solitary broken stone tablet.

We can learn many things from pithy wisdom like Rothschild's "blood running in the streets" quote, but we can also learn from much older tales, like the Prodigal Son. The most-important lesson of that story is that the Son, who was in fact always a Prince from a mighty house, did not get up out of that pig-sty until he had been taught what could have been a fatal lesson from an angry pig. He did not get up and do what he could have done at any time, until he had absolutely nowhere else DOWN to go.

You can read the Book of Ecclesiastes in about half an hour, given a decent translation of the book. You might just spend the evening at that pace. There really IS "nothing new under the sun."

[lightningbolt]

There will be no recovery unless we make bribery (aka private campaign finance) illegal. As long as corporations can bribe elected officials, the government will work for those corporations. As long as those corporations govern us, money will continue to be sucked from our pockets into theirs. And if money is being sucked from our pockets into theirs, those corporations will run out of consumers to buy their products. And in the end, those corporations will collapse. And when they collapse, they will be bailed out AGAIN, and their executives will get bonuses and more bribery money. Once enough people are pushed into poverty, a revolution will start and those corporate executives will be taken to the guillotine.

[Sundialsvc4]

Heh.

It already is, for all the good it does.

Article 2, Section 4. The Supreme Law of the Land. (sic)

[drkazmd65]

Everybody should consider reading this book as well:

The Fourth Turning: An American Prophecy by Strauss and Howe (c1996)
http://www.fourthturning.com/

A lot of the same kind of material is covered. The authors look back in time over generations since the late Middle Ages in Europe and recongnize the same 80-odd year pattern, over, and over, and over. We are nearing the endgame for the latest 80-year cycle,...

[crom]

Global economic recovery?

Thomas Sankara, assassinated former president of Burkina Faso realised that debt was a fundamental obstacle to the development of the African continent.

http://cromalternativemoney.org/index.php/en/media/news/thomas-sankara-assassination-and-origin-of-africas-debt.html

History has proven he was right in insistence that Africa shouldn't repay it's debt.

Global economic recovery and our future depends more on us and less on politicians and economists­...

[azphoenixwolf]

Let's see: Billions in TARP loans not being repaid on schedule, 100 Banks insolvent and the FDIC billions in the red (they're the ones who insure our bank accounts - sleep well tonight), Freddie Mae and Freddie Mac with 1 Trillion in bad loans, the FHA ready to go into meltdown, the Commercial Real Estate sector getting ready for meltdown, thousands of snailmail jobs lost at the postoffice, print media jobs, and outsourced jobs that are NEVER coming back (realize this is a permanent DEPRESSION for them), Viet Nam I (Iraq war of lies- remember the campaign promise to end the war there - at the Capital address on that issue we would be leaving a permanent force of 50K), Viet Nam II (Afganistan - we just sent 12K more troops there and there are requests for more), and Viet Nam III (Pakistan - we've just got our toes wet for now sending billions and billions in "aid" and Terminator style bombing drones - oops, I guess they forgot to program Asimov's laws of robotic nonviolence in them, I guess they must not have read the book), many pension funds down 30%, 40%, 50% from the stock debacle, tax revenue down 17% which will result in more state and city layoffs. More like black roots, not green shoots. We are becoming an Obama banana republic. The two political parties are just vultures feeding on different sides of the economic corpus. Joining them are cash for bankers, health care, oil industry,

[FreedomCorpse]

Yeah. $1.14 quadrillion in notional value derivatives and CDS's sounds pretty normal for historical references and comparative analysis. Oh wait.

[ProfessorDuh]

It didn't "just happen." It was done to us by an unregulated Wall Street, and playing with the idea that it "just happens" lets the thieves continue to run free, and to plan their next heist.

[marinara]

What most people don't realize about "japan's lost decade" Is that it was a bank bailout. The bank was saved, winners were picked, and the average Joe lost a decade.

[josephXY]

A really great illustration of the thinking and expert hype during the boom, including awefully
wrong forecasts by a bunch of leading financial pundits is that video. Many financial experts are
to blame for the misled conceptions and self-deceptions. The viewer can instantly figure out
how incredibly wrong the TV experts were:
http://www.youtube.com/watch?v=2I0QN-FYkpw

[ImmanuelGoldstein]

The situation , with all the rhetoric about 'the end of the recesssion' has become downright Orwellian. We are told we are in recovery even as the situation continues to worsen. We are told about 'jobless recoveries' in an economy where most people live on wage labor.
They seem to think that if they talk about recovery loud and often enough that people will just start spending money they don't have again and everything will be back to normal. Is it really possible that they think we'll just go back to the way things were? They don't seem to have any conception of what else is supposed to happen. I find the whole business less sinister than confusing.

[ProfessorDuh]

Contemporary American discourse is completely dominated by advertising, not journalism. Everything is treated as an advertising campaign where truth is irrelevant even when it's not actually troublesome. Selling the product — whether it's war, torture, economic Pollyanna pabulum or a Balloon Boy — is the only thing that matters, and the corporate news media always lays the groundwork for the ad campaign. Their alleged professional commitment to seeking the truth is itself no longer anything more than an advertising pitch. Makes a great slogan when your real interest is in peddling the soothing lles of "conventional wisdom."

[Jimboy17]

Hi there Adorno.

[Factonfact]

The United States never fully recovered from the Great Depression. That catastropher changed everything -- the nation, its people, how things work and don't work, what we have to do to get by.

Now comes the Great Recession and we hear talk of "recovery", as though everything someday (soon) will get back to "normal".

Not on your life.

Count on it!

[John Robert]

President Obama means jobs ??

[olephart]

End the Wars
Cut funding for the military empire
Reduce other defense/security spending by half
Apply these savings to a National Health Care system
Investigate and prosecute those responsible for the fraudulent Wall Street fiasco
Remove all Government support of those institutions and allow them to fail
Reorganize these institutions in bankruptcy without their former owners into smaller entities
Regulate the financial markets to exclude speculation and provide transparency of transactions
Rescind the Bush tax cuts including the “middle class” tax cuts
Rescind the AMT patch and reduce lower income tax rates
Apply these monies to deficit reduction
Levy the Social Security/Medicare tax on unearned incomes
Remove the ceiling on Social Security taxes
Separate the Social Security budget from the Federal budget; make a full accounting of all “borrowed” funds with interest
Increase the tax on gasoline by $2 per gallon sequestering the proceeds from Congress
Apply these proceeds to credits for individuals and businesses for small scale point of use alternative energy investments
Tax natural gas and coal at a rate to make wind and solar energy cost comparable
Provide Government backed zero interest loans for large scale alternative energy projects
Exclude natural gas and bio fuels from taxation if used as transportation fuels replacing imported oil
Provide credits to purchase or convert vehicles to natural gas
Provide credits to purchase electric or high mileage plug in hybrids
Decriminalize most drugs excluding amphetamines
Tax marihuana like alcohol; require a yearly license to grow your own

[paddio]

what you said!!!! Break up the Big Box Stores....­make them retail in one or two areas or become wholesalers.
Have a National program to build High Speed Rail.

[WVGALE]

Lot of good ideas there. I'm inclined to thing most of them would work if the couple of thousand super wealthy families that run the country would let them.

Not much chance of that tho, i'm afraid

[Kassandra]

This has actually been going on alot longer than 8 centuries. You take a look at the history of Rome and even farther back you'll see this has been going on since the Hyksos invaded the fertile crescent.

I attribute it to the "alpha male syndrome"; somebody's always got to make their mark on HIS-story. Someone's always got to feel superior to someone else, whether its' the knitting circle or high finance or government or war, especially war.
How anyone could NOT believe we are descended from apes when we act so much like them in our societies, is beyond me!
We've be come very adept killing machines, us humans, especially the male part of the equation. As Lawrence Summers said in summary...­." it doesn't matter who else starves as long as my masters eat well."

Here's a great article form my state that pretty much says how bitterly the "little people" are taking this, The comments are excellent as well...enj­oy:

They always sacrifice the bottom-dwellers
http://newmexicoindependent.com/40252/they-always-sacrifice-the-bottom-dwellers

[terramartom]

Greed has the same tormented rationale as religion.
Miracles, luck, superstition, God, justified and defined without reasoning.
Cause and effect, change, choice, all go hand in hand and rule the Universe.
Wall St and the Stock market are simply gambling using with other people's money using fictitious numbers to create an illusion of responsibility, when there is actually none!
All Stock is Bernie Maddoff-ed!

GREED, the ultimate American, Political, religious family value of the day it seems?
God wants you to be rich, right?
But Jesus said just the opposite, and to give away your wealth to the poor?
So that would make Jesus/God schizophrenic ?

http://www.richmonk31.blogspot.com