Geisst: Post 2007 Economy Echoing 1930s, And Could Get Far Worse
CNN
If investors leave, the 1930s could return
By Charles Geisst, Special to CNN
August 10, 2011 10:38 a.m. EDT
The events look and sound familiar. A stock market collapse and a debt crisis forced the United States into dire economic circumstances that no one anticipated. At congressional hearings on the causes of the crisis, investors testified that their brokers had sold them bonds, assumed to be safe, only to discover that they were worth even less than stocks. That destruction of wealth had profound and long-lasting repercussions for the markets.
Almost 20 years to be accurate. The crisis, of course, began in 1929 and lasted 10 years, until the outbreak of World War II. But the effects lasted until the Korean War and the beginning of the Eisenhower administration.
Wall Street suffered 20 years in the desert before regaining its traditional foothold in the American economy. Brokers and investment bankers became pariahs. Their testimonies before congressional committees only reinforced the impression that they had something to hide. Politics and public opinion were firmly against them. Politicians legislated against them and the public voted by closing its purse.
All of this is familiar in the current crisis, but the story only begins here. The most damaging outcome of the Great Depression was the collapse of investor confidence and its effect on raising new capital for corporations. No one was interested in investing in a new issue of stock or new bonds if the Wall Street underwriters could not be trusted.
As a result, capital investment flagged badly until the post-war revival. Even during World War II, the Roosevelt administration distrusted Wall Street so much that it effectively relegated it to a secondary role in financing the massive amount of war bonds necessary to conduct the war.
In the contemporary world, putting money under a mattress is not considered an investment option. But investor confidence in the stock market has been badly shaken while the market for quality bonds has benefited.
This is where the parallels between the 1930s crisis and today's crisis become unsettling. Future growth in all sectors of the economy ultimately depends on investors. Their opinions on the crisis can be seen in the high price of gold, a rapidly declining (and volatile) stock market, and declining bond yields. Market volatility impoverishes more investors than it enriches. Ultimately, it just scares them away when they are needed most.
Last week's downgrade of U.S. debt by Standard & Poor's pulls the rug out from under the last bastion of investor confidence...