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Holy Grail, Part Two?

By: Jeff Goble

As a general rule, the four most expensive words in investing have always been, “this time is different.” Because markets are generally made up of people with very good memories, it has been unwise in the past to bet too much against market history eventually repeating itself.

There are exceptions to every rule, however, and I would like to make the case that although we are currently witnessing the most dramatic economic dislocation since the Great Depression, this time is indeed different. Today’s markets only seem to be the worst ever experienced until you compare and contrast them with the economic conditions in the late 1920s and early 1930s. As Federal Reserve Chairman Ben Bernanke states in the first sentence of his book about the historic era, “To study the Great Depression is the Holy Grail of macroeconomics.”

It is generally accepted in the economics world that the Fed’s decision to temper the Roaring Twenties by raising interest rates in 1928 greatly contributed — perhaps even triggered — the dramatic downturn that is on record now as the worst period ever in our financial history. In addition, the protectionist Smoot–Hawley Tariff, passed in 1930 and placed on more than 20,000 imported goods, was not seen as neighborly by our foreign trading partners as U.S. exports and imports crashed almost 50 percent.

Another key difference between then and now is the existence of bank deposit insurance as well as unemployment insurance. More than 1,200 banks failed in the Great Depression (compared with 19 failures to date this year) and unemployment skyrocketed to 25 percent (versus 6.1 percent now). The Dow Jones Industrial Average bottomed at 33 in 1932 (down 90 percent) versus the low this year so far of 8,175 (down 40 percent from the recent high).

My research revealed that another unsettling issue of the times was President Franklin D. Roosevelt’s decision in 1933 to end the gold standard as he outlawed private ownership of the precious metal except for jewelry. Roosevelt’s timing, in retrospect, was probably not what the markets needed as it clearly added another confusing issue to the financial uncertainty.

If you like playing the blame game, numerous candidates need to be held accountable for their role in our current meltdown, including Congress, predatory lending practices, low interest rates, certain real estate appraisers, Wall Street firms, the Fed, and poor insurance and bond rating underwriting practices. Also on the list are insufficient regulatory oversight of credit default swaps and yield-hungry investors stretching for additional yield in paper they had been assured was AAA quality. At the core of the problem, though, is really only one thing: greed.

There is no doubt in my mind that many books will be written about this fascinating and tumultuous chapter in our economic history, as write-downs from financial firms now total $592 billion. We are watching history in the making as Americans have seen $5 trillion in stock market value vaporize and by my count eight new government assistance programs have been created. The Fed has lowered interest rates six times this year, totaling 325 basis points, in sharp (and much needed) contrast to the 1929–1933 period.

If Ben Bernanke writes a follow-up book about the historic financial meltdown of 2008, he could call it “In Search of the Economic Holy Grail, Part Two.” Let’s all hope he can start writing it soon.

(A variety of reference sources were used herein and are available on request.)

Jeff Goble is executive vice president and managing director, investment banking, at UMB Bank, n.a., Kansas City. His email address is Jeffrey.Goble(at)

Copyright © December 2008 BankNews Publications