1) The global financial system is on the brink of a systemic meltdown according to the IMF director, as measures taken so far have failed to stabilize markets or bolster confidence.
2) Parallels are drawn between the current situation and the lead up to the Great Depression, particularly the heavy reliance on debt outside traditional banking as described by former Federal Reserve chairman Marriner Eccles.
3) While it is believed we can avoid the worst consequences of the 1930s through not allowing banks to fail and avoiding protectionism, the question remains if policymakers truly know how to respond effectively to prevent a prolonged global recession.
1) The global financial system is on the brink of a systemic meltdown according to the IMF director, as measures taken so far have failed to stabilize markets or bolster confidence.
2) Parallels are drawn between the current situation and the lead up to the Great Depression, particularly the heavy reliance on debt outside traditional banking as described by former Federal Reserve chairman Marriner Eccles.
3) While it is believed we can avoid the worst consequences of the 1930s through not allowing banks to fail and avoiding protectionism, the question remains if policymakers truly know how to respond effectively to prevent a prolonged global recession.
1) The global financial system is on the brink of a systemic meltdown according to the IMF director, as measures taken so far have failed to stabilize markets or bolster confidence.
2) Parallels are drawn between the current situation and the lead up to the Great Depression, particularly the heavy reliance on debt outside traditional banking as described by former Federal Reserve chairman Marriner Eccles.
3) While it is believed we can avoid the worst consequences of the 1930s through not allowing banks to fail and avoiding protectionism, the question remains if policymakers truly know how to respond effectively to prevent a prolonged global recession.
Andreas Whittam Smith: we could be on published in 1951.
He had led the Federal Reserve
the brink of a great depression from 1934 to 1948 and seen everything. I quote The Independent – 13th October him extensively because of his sudden relevance: "This is what happened to us in the Twenties," Mr As we return to work this Monday morning, let the Eccles wrote, "We sustained high levels of words of the director general of the International employment in that period with the aid of an Monetary Fund, Dominique Strauss-Kahn, ring in exceptional expansion of debt outside of the our ears. Mr Strauss-Kahn, having spent all banking system (which) increased about 50 per Saturday with finance ministers in Washington , cent. This debt, at high interest rates, largely took warned that the global financial system has been the form of mortgage debt on housing, office, and pushed "to the brink of a systemic meltdown". And hotel structures, consumer instalment debt, he added that the measures taken thus far to deal brokers' loans, and foreign debt." with the financial crisis "have not yet achieved the Before going further, notice the similarities goal of stabilising markets and bolstering between then and now – the presence of mortgage confidence". debt and of shadow banking – what Mr Eccles I stretch "systemic" to mean that we are all called debt outside the banking system. Mr Eccles affected by what has begun to happen – the went on: "The stimulation to spend by debt shrinking of bank credit. Banks won't even lend to creation of this sort was short-lived and could not each other, let alone to the rest of us. In a sense, be counted on to sustain high levels of they know too much. Grimly aware of the employment for long periods of time ... The time substantial amounts of dud loans on their own came when there were no more poker chips to be books, following a prolonged period of over- loaned on credit. Debtors thereupon were forced to optimistic lending, they assume the worst of each curtail their consumption in an effort to create a other. They also turn down highly respectable margin that could be applied to the reduction of companies, the mainstays of the economy, when outstanding debts. This naturally reduced the they come to them for credit. For as the banks' demand for goods of all kinds and brought on what mistakes return to haunt them, they feel compelled seemed to be overproduction, but was in reality to hoard cash. under consumption when judged in terms of the Two weeks ago, for instance, I was on the real world instead of the money world. This, in executive floor of a large company, a household turn, brought about a fall in prices and name for generations. Decent people run it. It employment ... (finally) the vicious circle of makes substantial profits. I found the directors deflation was closed (with) one-third of the entire stunned to discover that they could no longer go on working population unemployed. This then, was raising short-term loans from time to time to my reading of what brought on the depression." balance out the ebbs and flows of their cash flows. It has long been fashionable to say that this can This was a "first" in the company's long history. never happen again because this time we know From now onwards, the directors would have to better than to let banks actually crash – that is, run their business more cautiously. They will apart from Lehman Brothers a few weeks ago, provide less employment and reduce the orders whose collapse had had such serious they place with outside suppliers. consequences. Nor would governments savagely Systemic, because virtually all businesses have hack into public spending as they did in the early some borrowing. Credit is the oxygen in the 1930s – though there are plenty of reasons in 2008 system. Take it away and businesses begin to to cut back. Nor would we lapse into protectionism falter. They become like climbers at high altitudes. again – in spite of increasing temptation to move An example is the plight of local authorities and in that direction. We know what not to do. But do charities whose funds have been trapped in we know what to do? insolvent Icelandic banks. Some of these lenders "On the brink," observed Mr Strauss-Kahn, a clear will have difficulty in paying their bills and so they reference to the failure of the Group of Seven will unwittingly harm others who know nothing of industrialised nations to decide anything definite at Icelandic banks. their meeting on Saturday. But since then, I am Systemic, seeing that the United States , Germany , glad to say, the pace has quickened. There are Japan and most large economies are feeling the three encouraging developments. This morning, effects. Last week, for instance, shares in General we are likely to learn which British banks are to Motors crashed to their lowest level since 1950. get money under the UK Government's £50bn Yes, since just before the company launched the bank rescue. These may well be HBOS and Royal first ever "American" sports car, the Chevrolet Bank of Scotland . Corvette, with its white paintwork and red The Bush administration has quickly embarked on upholstery. Over 50 years later, General Motors' an overhaul of its own strategy for rescuing the customers are having increasing difficulty in foundering financial system. Having two weeks obtaining car finance. And the stock market was ago persuaded Congress to let it spend $700bn to spooked by the fact that loans raised by General buy distressed securities tied to mortgages, the Motors itself, already classified as "junk" debt, are White House has decided in addition to follow to be down-rated even further – to sub-junk, I Britain's approach. The US government would suppose. In these circumstances, virtually nobody inject capital directly into the nation's banks. will lend to this giant. Finally, the French government also appears to be "Meltdown," in Mr Strauss-Kahn's phrase, is not moving towards the British solution, expressing a an exaggeration because depriving the economic willingness to guarantee banks' short-term system of credit would quickly result in prolonged borrowings as well as their deposits. recession, or depression, call it what you will. As an international civil servant rather than a Stock markets suddenly began to sense this finance minister with daily politics to consider, Mr possibility last week. That is why investors rushed Strauss-Kahn may have felt that he should issue for the exit. the dreadful warnings that others dare not Indeed, it is not fanciful to make comparisons with proclaim. Governments won't even use the word the Great Depression, which started with the stock "recession" when it is staring them in the face. market crash of 29 October 1929 and ended some And while the weekend's developments have by no time in the late 1930s. President Roosevelt's means achieved "the goal of stabilising markets chairman of the Federal Reserve, Marriner Eccles, and bolstering confidence", they do represent tried to sum up its essence in his memoirs progress of a kind.
The Wall Street Journal Guide to the End of Wall Street as We Know It: What You Need to Know About the Greatest Financial Crisis of Our Time—and How to Survive It