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Once and Future Crash(es)
In 1954 John Kenneth Galbraith published The Great Crash: 1929, analyzing the stock market crash of late 1929, with suggestions about preventing its recurrence. [Quotes are from the 1961 Riverside Press edition.] It shows the high intelligence, serious economic analysis, and the touch of humor that is characteristic of his work.
He said that a new “speculative rampage” in the future (for example, now) would require some sort of rationalization. Since the results of the rampage of the 1920s were so horrendous, no one would want to be accused of setting us up for a replay. So they have to rationalize.
And part of that future rationalization will be to explain why we need less regulation and oversight of financial institutions and of the markets. (Here you should be thinking “Reagonomics.”)
The market will not go on a speculative rampage without some rationalization.
Fear not! Rationalization is something we can definitely provide!
But during the next boom some newly rediscovered virtuosity of the free enterprise system will be cited.
Remember the recent “new economy” in which not only the Dow Jones average but markets in general and the economy in general would just go up and up and up. EVERYBODY would get rich.
We had become so much wiser in the ways of economic life!
It embarrasses me every time I hear the market analysts on NPR. Though nowadays they are relatively sober and sensible, not many years ago they were whole-hog into that “new economy” hogwash. Galbraith warned us 50 years ago that we would easily come up with “some rationalization” when the lust got hot enough; and he was right.
Among the first to accept these rationalizations will be some of those responsible for invoking the controls. They will say firmly that controls are not needed. The newspapers, some of them, will agree and speak harshly of those who think action might be in order. They will be called men of little faith. [p195]
Pardon me if that brings to mind de-regulation, Reagan, Milton Friedman, and all the free market theorists (fantasists) of recent years. Remember radical tax cuts, radical borrowing patterns, “trickle down”? We don’t have to remember them – we’re living them.
A Cynical Preview of Days Ahead
Galbraith ends his book by pointing out that awareness of the errors of the 20’s and early ’30s could stimulate a much wiser approach in the future when the mood of some people waxes speculative again. Unfortunately,
This will not come to pass.
Because wisdom and power seldom walk hand in hand, perhaps least of all in such large scale financial matters. The driving force will be greed, growth-lust, and the feathering of one’s own nest(s). He doesn’t use those words. He uses more gentle terms like “orderly life and convenience in the present.”
Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present.
So we hear things like “the fundamentals are sound” – things will stabilize shortly – it’s the whiners and chicken little’s who undermine market confidence; if they would just be still the market would adjust itself nicely.
So inaction will be advocated in the present even though it means deep trouble in the future. Here, at least equally with communism [remember, this was written in the early 50’s], lies the threat to capitalism.
Communism is pretty much gone. That leaves us with this: the great threat to capitalism lies in the irresponsibility of the great capitalists. Imagine that. “Who could have known?”
Wow, is that ever a truth that is currently biting us in the behind! Greed-motivated irresponsibility and corruption do not take kindly to government interference, and they do not bode well for any us.
“Greed,” the apostle Paul wrote, “which is idolatry.” We need a bigger and better god than greed, or “Mammon.” It, after all
is what causes men who know that things are going quite wrong to say that things are fundamentally sound.
That sounds so familiar!
And that’s the last sentence of his book. A very timely warning from1954.
I’m glad that you’re blogging again. This whole melt-down of Wall Street might produce good. People are now saying that if Government can “nationalize” investment banks and such, the Rights argument against a national healthcare program will have lost its’ power.
Again, great post, Larry.
This is somewhat on topic… when I first became zealous for the word, just around 26 years ago, I fretted over the proscriptions on usury.
At the time I had some stocks, and I wanted to just sell them because I wanted nothing to do with the “debt/equity” markets which are so prized now as retirement sources by Americans.
Christians buttonholed me, adjuring me that “usury” meant lending at exhorbitant interest, but not all interest-bearing schemes (e.g. stock markets) were usury. I sold anyway, although I had next to none of the finance understanding I have now.
I read about money because economics are the precursor to all things international including war. War is the mere punctuation mark upon international economic rumblings. Watching money is, if you will, literally the way to watch “the devil” or “evil” as Jesus said… you can not serve money and God. But he also taught us to watch. And perhaps not watch the choir. Therefore I pay close attention to all the money business and the oppressive yoke the Wall Street/White House cartel ensnare the whole world, even though we have not a penny in those money markets.
In the end, anyone who puts money into those markets as “investment” is expecting a return with interest. And from whence does the interest come? Some poor schmoe in Asia who bought his first [fill in blank: car, tv, condo, seed, tractor] on credit. You basically are making a bet that some other entity on the other end of your “investment” is going to not only pay back, but with interest.
The reason it got so gross, as you say, is greed. Out of greed, bankers hypothecated returns long in advance. Accounting regulations were all but shredded, so that the greedy could hypothecate future returns (keep in mind, all those “emerging market” debtors who are in actuality the next “Ponzi units” on the debt procession). Then those hypothecations were entered on accountants’ books as assets, long before anything ever happened! Then those hypothecations were factored into greater systems of hypothecation (e.g., the toxic securities and derivatives that are taking the investment banks under today). Interest was hypothecated many times over.
If it sounds like fraud, before the year 2000 it certainly would have put them all in jail. Now? The taxpayer is being forced to eat this bill.
So much for a system of believing in debt… both in keeping an unpaid mortgage, hypothecating higher property values and using the imagined wealth as an ATM… as well as a way of life which fosters “investment” in other peoples’ debts as a means of “savings.”
It IS evil, it is coming down in shreds.
Now, as to those Christians who advised me that it is not all usury per se… where is the ceiling? When the “markets” become totally deregulated, when every broker and his cousin are hypothecating future interest returns from everyone on earth, where do you draw the line between “holy interest” and “usury,” if I may be so absurd?
Who’s going to come out on top? Millions of “subsistence farmers” who put money into buying and feeding livestock, among others. In Mexico, the middle class are called “the unbanked” because they will have nothing to do with debt/equity schemes, preferring to hold land, livestock and (albeit rustic) homes free and clear.
This turnaround is just what Jesus said. Behold, the meek will inherit the earth.