The above link was copied and pasted from a Real Time Economics Wall Street Journal tweet yesterday, after Gentle Ben testified in the AIG litigation recently.
I think former Fed Chair Bernanke was right in concluding that 2008’s recession, if left to run its course, would have been a far greater calamity for the US economy than the Great Depression, but for different reasons:
1.) The money markets and the commercial paper market was at real risk of failure, which means SP 500 companies couldn’t have rolled short-term high quality CP;
2.) Far more Americans through 401(k)’s and pensions, had exposure to the stock and bond markets than Americans had in the late 1920’s and early 1930’s;
3.) A 70 year bull market in home prices came to a crashing halt, the first national real estate depressions since the 1930’s. While the US economy was thought to be a primarily agrarian economy during the Great Depression, single-family homes as a percentage of household net worth, would have been far greater in 2007 – 2008 than in the 1930’s;
4.) The truly shocking action for me wasn’t the Lehman default or even the Bear Stearns default, but the drop in Northern Trust’s and State Street’s stock in late September, early October, 2008. Northern Trust traded up to $88 in September ’08 only to collapse to $33 within a two week time frame. NTRS and STT are “global custodian” banks and thus are huge custodians (recordkeepers) for corporate pension plans and such, with far bigger assets in custody and administration than assets under management. If The Reserve Fund had broken the buck, there would be have been true calamity in the Street and although it is simply a guess, I would have thought that the US unemployment rate would have seen 50% easily, at least over the near term;
5.) The Reserve Fund was, at that time (I believe) in 2008, one of the world’s largest money market funds, and if the Reserve Fund had “broken the buck” which means that if the Reserve Fund’s NAV had moved below $1 per share, it could have resulted in a run on money markets that would have made the bank run and the Bailey Building & Loan run (“It’s A Wonderful Life”) look like a day in the park. (The aftermath of what happened with the Reserve Fund in 2008 is that today, the SEC is contemplating and is close to letting money market fund NAV’s (net asset values) float. The thought is that the $1 money market price creates a “moral hazard” and what I told a client recently is that what retail investors will likely wind up with is whole array of “ultra-short” bond funds as money market funds, which do fluctuate minimally in price.)
6.) Although some of the fiscal policy has been horrid since 2008, I do think that one of the root issues in the economic recovery following 2008 has been the true “shock” of the drop in real estate and household wealth. Remember consumption is 2/3rd’s of GDP and with the capital markets and the real estate markets, being two of the greatest wealth-creation vehicles post WWII (not to mention the value of an education), it is taking years for the consumer to restore their savings and confidence.
7.) The fact that “disinflation” (a declining rate of inflation) and deflation continue to be an issue 5 years after the stock market low and the substantial economic recovery, is indicative of lingering overcapacity. Part of that is due to the life-cycle of technology which has dramatically accelerated productivity and shortened tech product cycles (not to mention kept a lid on inflation) and part could be demographics and the Aging of America (it is a bigger debate);
8.) The Great Mistake in the 1930’s by the Federal Reserve is that they actually withdrew liquidity sometime in 1935 – 1936, which resulted in another downturn in the US economy in the late 1930’s just prior to WW II. In other words, Fed policy errors actually exacerbated the Great Depression, rather than shorten it. Both Janet Yellen (I’m sure), just like Ben Bernanke are / were both aware of the Fed’s policy mistakes and are obviously loathe to make the same mistake. The fact that there isn’t an meaningful inflation today just makes the Fed’s ability to maintain ZIRP (zero interest rate policy) and low rates that much easier. However it will end at some point, and we will get some inflation, I would suspect.
Most intelligent investors blame leverage on the 2008 collapse, but I think it was far more involved than that. It just wasn’t that simple.
In client meetings the last few years, Ive been telling clients that there is less than a 5% chance that they will see the 2008 confluence of events happen again in their lifetime (probably less).
Certainly I could be wrong, but I continue to think the US economy, and the US stock market, particularly the SP 500 is in a perfect glide slope of healthy, albeit subdued growth, low inflation, and a healthy respect for stock volatility and negative sentiment on the part of retail investors.
One commentator from PIMCO called it the “Goldilocks economy” and the metaphor seems appropriate.
We will see SP 500 corrections over time, but I will bet in 10 years that we will look back and see this period of time as similar to post WW II economic stability and growth. Perhaps that conclusion is somewhat of a stretch given the demographics of the US economy today, but we’ll see.
Thanks for reading today. We’ve been contemplating this commentary on 2008 for some time. Watching NTRS and STT trade in late September, early October, 2008 was one of the few times, I’ve felt true fear watching the stock market. The potential collapse of the money market as was being telegraphed by the global custodian banks, would have been a horrific scenario to conceive, let along experience.
When all the books are written about the “near Great Collapse of 2008” after 20 – 30 years of hindsight, I do think Ben Bernanke, then Treasury-Secretary Hank Paulson, and Tim Geithner will be due a huge debt of gratitude.
For a few days/weeks, educated American’s had a brief look into the abyss. It wont be forgotten by those of us that sat through it.
Trinity Asset Management, Inc. by:
Brian Gilmartin, CFA