Restoring Economic Confidence

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Restoring Economic Confidence

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 the Dow's 1929 peak.  Yet, within the space of months, an estimated $8 trillion in U.S. stock market wealth was erased.  The resemblance to the 88 percent collapse in the Dow between 1929 and 1932 is uncanny.

Similarly, the five-year recovery in the Dow through 1937 clearly parallels the five-year NASDAQ recovery from 2003 to 2008...

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