I'm not sure how many of you caught this excellent documentary[Link] which was shown on the History Channel yesterday night (14 June 2009) at 8pm. The documentary will be repeated on 15 June (1pm) and 20 June (6am).
The documentary compares and contrast the current crisis with the 1930s. The similarities between the 1920s and the period leading to the current meltdown are striking:
1. Market deregulation. Faith in the free market became blind faith and govts deregulated markets to the point they couldn't understand what was going on. In the 1920s there was frequent illegal stock market manipulation and the US govt had no means to stop it because the SEC didn't exist. Today we have the shadow banking system which has grown into a dangerous monster.
2. Rising income inequality. The only period that had comparable income inequality compared with today was the period before the Great Depression.
The US govt of 1920s like George Bush kept reducing the marginal tax rate even as the income gap ballooned (In Singapore, the govt said they increased the GST to help the poor...but they used the GST hike to lower corporate tax rate and to lower the marginal income tax of high income earners).
3. Overvalued asset bubble funded by easy credit. In 1929, they had rampant stock market speculation fuel by easy credit such as margin loans and in 2006 there was a housing bubble fueled by mortgage securitization which led to subprime loans.
The differences between now and the 1930s hopefully will lead to a better outcome. In the 1930s, the govt response to the crisis was to tighten credit and implement protectionist policies. Today we see Bernanke, the world's foremost expert in The Great Depression, and Geithner doing almost everything to ease the flow of credit. Their actions appeared to have limited the downside of the crisis but leaves the US with an unprecedented level of debt relative to its GDP. In the 30s, there was no FDIC to prevent bank runs, no SEC and no safety nets for the people. It was Roosvelt who put in place the social safety nets as part of the New Deal and the documentary explain why this was important - the crisis had affected families straining marriages, children were not properly nourished, crime rate rose and the people became increasingly desperate. The safety net help to prevent long term damage to the society and helped the people cope with the hard times. Even with The New Deal and massive govt spending in the 30s, the economy remained sluggish and sub par. What brought the US economy back on path of vigorous growth was World War 2 - it was only because of the war, the US govt could spend $3.7 trillion, a figure so large that it would be seen imprudent during peace time.
You will also notice from the graph I put up that the periods of sustainable high growth is correlated with the periods when the income gap is low. History tells us that economic growth won't last without bring down the income inequality. We cannot just focus on economic growth and allow the income gap to balloon - solving the problem of high income disparity is equally important.
It is hard to say what is going to happen in the coming years. While many people are saying green shoots are here, the recession will be over soon and the stock market and housing market are on the path to recovery, it is hard to see the economy going back to where it was before the crisis. The main source of demand for goods - credit driven American consumers - is gone and the financial sector which fuelled growth in developed countries has been devastated and will be re-regulated. We may have recovery, there is also a chance we may slip into stagflation ...there is also a chance the economy remains weak and we slip in and out of recession in the coming years. We cannot just position ourselves for good times and pretend that good times will always come back. This is our 3rd recession in 10 years and yet govt have no game plan for the people except retraining and more retraining. It is not enough for the govt to prepare for only the best case scenario - they have to take care of the plausible worst case. We do not know how long these bad times will last but we know that no reason for Singaporean families to suffer unnecessarily when they lose their jobs through no fault of their own. The S. Koreans, Hong Kong and Taiwan have learnt from the Asian crisis and put in place safety nets, healthcare programmes and financial support for the old.