“We’re in the most serious economic problem we’ve been in in a very long time, much worse than 2001,” US Democratic Senator Charles Schumer said over the weekend. “The president’s hands-off attitude is reminiscent of Herbert Hoover in 1929, in 1930.”
With a presidential election looming, is Schumer raising the spectre of a depression merely to exaggerate the economic mistakes of his political opponents? Or with Bear Stearns joining the list of major financial services companies on life support, is Schumer right in suggesting the US is heading towards something more serious than a recession?
Crikey asked three leading Australian economists what the lessons of 1929 teach us about 2008. Is it time for the economic lifeboats? Or is it time to be even more sceptical about the warnings of finance journalists and politicians?
Greg Patmore, Director of the Business and Labour History Group, University of Sydney. There are some differences between now and 1929, chief among the institutions we have in place to try and address these problems. But the real problem we have now is the complexity of the debt. There’s lots of debt floating around and nobody is quite sure what’s in it. But there are precedents for what we’re seeing today, in particular the property crisis we saw in Australia in the 1970s. We had massive property speculation and all sorts of money pouring into that sector of the economy. We are looking at a problem, a recession issue possibly, but there are institutions which can help to avoid it. There’s more a view of intervention now. You’ve got the case in Britain where a bank, Northern Rock, was nationalised, which shows a willingness to intervene. There were all sorts of rallies in 1929 to keep the market afloat, but if you’re not fundamentally aware of the nature of the debt or the nature of the liability you are carrying, which is true of today, then I think there is some cause for concern when you compare us to the 1929 situation. We don’t know how it is going to unravel, but we do know there are more institutional forces in place to do something.
Michael O’Neill, Director of South Australian Centre for Economic Studies at the University of Adelaide. I think what we’re seeing is the end product of a very deregulated market without sufficient government controls, with lending that hasn’t been secured properly by assets. Banks’ standards in terms of lending have probably dropped. It’s not an easy question to answer, but the general concern is about a lot of finance jockeys. This has been coming for a while. We saw with the NAB two or three years ago, with a couple of their foreign exchange traders getting into serious trouble. They were not managed properly, basically. That was the tip of the iceberg of what we are now seeing with a drop in prudential standards. Banks have always believed you can just lend to anybody, and if it falls over what have you put at risk? You can just reclaim their property. In the 1930s there was not a developed role for government in intervening in the market. Nor were there very good prudential systems. When the whole thing collapsed in 1929/1930, there was no understanding of how government could intervene in the market to generate economic activity. We had a situation in Japan through the 1990s with interest rates basically 0%, but their economy didn’t collapse. Why? Good strong Reserve Bank systems. You’ve got mechanisms for government to intervene in the market. They know not to let financial institutions collapse. So it really is a different environment in terms of financial systems, and the role of government to make sure that you don’t get the same sort of stagnation that happened in the depression.
Selwyn Cornish, economic historian, University of New England. Back in 1929, the US Fed made the mistake of tightening when it should have been easing, but that’s not what the Fed is doing at the moment. Ben Bernanke is an expert on US monetary policy in the depression. If anyone knows the mistakes of 1929 to 1931 and what should be done to avoid them, it’s him. One big differences between then and now is that policy is more flexible these days. Countries are not on the gold standard or fixed exchange rates any longer. The expansion of exports consequent upon the falling US dollar also has a cushioning effect on the US economy. But back in 1929, the US was sticking very firmly to the fixed rate of exchange. The other thing is that, thanks to Keynes, countries are no longer fixed on balancing their budgets. There’s also a fiscal stimulus package being injected into the US economy, which illustrates the fundamental institutional differences between then and now. Bernanke put his finger on the essence of this whole mess — it’s overlending by financial institutions. Isn’t this the source of all these crises? Every time there’s an international recession looming, people go back and compare it with 1929. The 1981 recession was the worst recession in Australia and the US since the 1930s, but it was only a 2-3% decline in output compared with 10% or more. One has to be a bit careful about making comparisons with 1929. I can’t see anything like 1929 on the horizon.