I have always wondered what the life and the business climate must have been during the Great Depression. Yes, I have read accounts and seen pictures but these probably do not convey the full picture. Now living through and observing this economic recession I am starting to get a feel for how it must have been then, atleast in the beginning stages of one.
There have always been boom and bust cycles in the American economy. A period of growth, topped off with rampant speculation, and then the comeuppance. Some say that this time it is going to be worse than the Great Depression, while many including myself believed otherwise. Regardless, we are now seeing companies like Dow Chemical that survived the Great Depression cutting its dividend for the first time ever in 97 years. Or think about the problems at one of the original Dow members, GE. Ballooning foreclosures and unemployment rates that are not likely to reverse anytime soon. May be the global economy is not in a depression now but this may be a beginning of one and if the governments are not careful in crafting their policy response, it is very likely that we may end up in a Great Depression.
The parallels between the Great Depression, Japan’s lost decade, and the present are at times quite stark. We have had policy makers remark many times that the policy mistakes of the Great Depression will never be repeated, or the Japanese experience will not occur in United States. “We have learnt from those mistakes” and “We will never let banks hide bad loans on their books for years as it happened in Japan”. However, if you look deeper, the government intervention in the markets were the main reasons why the depressionary period had such a long life. Populist policies may help people in the short term but they do not encourage long term wealth building and risk taking which is what is required in such situations. We need to be willing to kill the cancer and take extreme pain today if we want to come out stronger and have a good future rather than spend money to blunt the pain today and not really target the main problems. We may be heading the Japanese way according to an excellent editorial by James Quinn.
It was important for the government to act when the economy was just days away from complete meltdown, as it was in September 2008. The Reserve Fund broke the buck and in the resultant panic the money market accounts were getting drawn upon at an alarming and unsustainable rate. It was also prudent to let Lehman Brothers fail. But the subsequent Government actions appear to be trying to save large banks at all costs and this is completely against the capitalistic principles. No one company is too large to fail. Governments efforts would have been better directed at cushioning the blow to the consumers and protecting their accounts at these institutions if they failed and not try and prop up an institution that deserves to go out of business.
The best cure for recession is new business activity
Sounds very logical, doesn’t it. While the badly managed companies go bankrupt and restructure, new businesses should be given opportunity to start, grow and succeed. How can the government help? By implementing programs to ease credit for good businesses, and by becoming a source for debtor in possession financing for companies that are trying to restructure through bankruptcy process. This is crucial as the traditional sources of credit are struggling. And this is what Geithner’s new bank plan is trying to do by stress testing banks and by commiting vast funds to restart commercial lending to small businesses. And this is why I think the plan has a realistic chance of success.
American consumer lost its way
We find ourselves in this problem today because the american consumer got carried away. We were buying things we could not afford or need and credit was readily available to support our consumerism. We cannot spend our way out of this problem, so yes, wherever there is over-capacity in the market, those businesses will need to shrink. Starbucks is a luxury and we can probably do without one at every street corner. Consumers are already tightening their belts and the savings rate is going up and this is a rational response to the current situation and any calls for renewed spending is wrong. Consumers do not exist to serve businesses, businesses exist to serve consumers. American culture for entrepreneurship and innovation remains strong and given the opportunity it will be able to grow and create new jobs in new industries.
We just need to let the markets work
Shailesh Kumar is an Entrepreneur, investor and blogger. He writes about value investing at Value Stock Guide. Learn about the stock market and discover the techniques proven to work best for long term investors for finding appropriate stocks to buy in their portfolio to get superior risk adjusted returns.