The Wall Street business model that just
collapsed was based on assumptions that led individuals and institutions to
make irrational assumptions about whom and what they could trust. In September
and October 2008, we saw the logical end result, as trust collapsed.
Those who three years ago were willing to
trust nearly anyone are now willing to trust no one. Carried to
its limits, such a crisis of confidence can lead to a global depression. In
fact, that’s precisely what happened as the Great Depression gripped the world
in the 1930s.
Since many pundits are now drawing
parallels between the depression era and the present, we’ll start by debunking
that analogy. After the stock market crash of 1929, the U.S. unemployment rate
rose to 25 percent; today, it’s roughly 6 percent. By 1934, about one-half of
all mortgages were in default; today that number is only 6 percent.
More importantly, America’s economy is
far bigger, more diversified, more productive, more innovative, and more
resilient than it was the 1930s or even the 1990s. Unlike the “tight money”
and protectionist policies of the depression era, the government’s current Wall
Street rescue efforts are helping to stabilize our credit system and economy.
As a result, the prices of oil and other commodities have topped, interest
rates are being lowered, and efforts are being made to reinvigorate consumer
and investor confidence.
Nevertheless, pundits still attempt to
cite similarities between the stock market crash of 1929 and the market’s
recent slide. In one sense, they have a point: There was a “recent
stock market crash” that eerily parallels the one that started in 1929 and
lasted until 1932. However, that crash actually started in 2000 and lasted
until 2002.
Psychologically, the “roaring ‘20s” were
much like the 1990s. In the ‘20s, America had just won World War I. It was
the age of the automobile, the airplane, and the radio. In the ‘90s, America
had just won the Cold War and the “peace dividend” resulting from sharp cuts in
defense spending helped Bill Clinton achieve a balanced budget. It was the age
of the Internet, biotech, and high-tech stocks.
Prices on the NASDAQ soared, with its
2000 top far outstripping...
