History Does Not Repeat Itself, But It Rhymes

We compare the financial crises of 1929 and 2008, the lessons learnt and our current outlook

Mark Twain is widely attributed as saying that “history does not repeat itself, but it rhymes”.  There are undeniable similarities between the 1929 and 2008 Financial Crises, and the echoes remain loud and poignant, even 8 years into the recovery.

The Great Depression began in 1929, sparked by a crash in the American stock market after a period of euphoric optimism. The Great Recession of 2008 began following an extended period of “but-the-property-market-never-goes-down” assurance. The 1929 stock market crash saw a complete loss of confidence in the banking system, leading to a run on the banks and ultimately their failure. Banks in 2008 suffered a similar fate. The socioeconomic effect of the global depression was to increase the number of disaffected and frustrated, resulting in the election of more extreme political views, as well as a protectionist economic mind-set. Today we see Trump as front runner for the Republican Party in America, touting the protectionist propaganda that his perceived voters demand, while far-left and far-right parties gain popularity and, in some cases, power in Europe. Indeed, it is not just a developed market phenomenon: Duterte, a right wing “alternative” candidate, has just won the presidency in Philippines.

However, it is not all bad. As a student of the Great Depression, Ben Bernanke (chairman of the Federal Reserve from 2006 to 2014) learnt from the error of inaction by the Fed in 1929/30, and was quick to implement an extremely loose monetary policy in the midst of the financial crisis. The actions of the Fed in the wake of the 2008 crisis likely led to the downturn being much shorter in duration and depth, as opposed to the global depression seen in the 1930s.

We are, however, suffering from sluggish growth the world over, and while extremely loose monetary policy has buoyed the global economy and markets to date, it appears that we are seeing its limits. Recent additions to QE programs and further cuts in interest rates are having a notably smaller impact on markets and currencies than they did when first used, and there remains only spotty evidence that such programs are actually reaching the real economy. At the same time, markets are displaying dependence on monetary policy, behaving in a manner that can only be described as addictive. As a result, central bankers the world over have been calling on fiscal authorities to loosen policy and governments to implement structural reform.

A true recovery must depend on a revival of animal spirits that in turn lead to private investment, higher employment and incomes, and hence consumption. This will require more than just monetary policy (which has to date largely inflated asset prices rather than drive economic growth hence no rise in animal spirits); indeed the kick-start may need to come from central governments themselves[1].

We are of the view that monetary policy cannot fix the economy’s problems alone, and that governments must shoulder some of the responsibility. It is by learning from the mistakes made in the 1930s that we have avoided a depression. However, there is more work ahead if policy makers truly intend on generating decent, sustainable growth. Our hope is that they will seize the day.

By James Mee

[1] Keynes believed that in times of economic stress, governments must run fiscal deficits in order to keep investment and production at a level such that individuals remain employed and thus go out and spend, in turn resulting in a self-reinforcing and virtuous circle of private investment and spending. Roosevelt did indeed buy into this mantra, enacting the New Deal, however he still had one eye on balancing the “non-emergency” budget, and hence never spent enough to pull the economy out of recession. It was only the onset of WWII that necessitated such a high level of spending that the economy was kick-started into growth again.

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