Repairing the Damage — After the Global Firestorm

(This blog was previously published at The Huffington Post on October 30, 2008)

My father often told me the story of going into Tessmer’s General Store in Hartville, Ohio one day in1929, when he was 23 years old. Old Mr. Tessmer looked up at him from reading the financial pages of the newspaper and said: “Young man, you don’t understand yet what this stock market collapse means. But next year you will understand it.”

The jury is still out on how big the current financial firestorm will become. Is it a prelude to a deep recession? Is it the onslaught of an actual depression? With the unpredictable swings in the stock market, some people think that a recovery may already be starting.

I don’t have a crystal ball, even though I anticipated this crisis in various blog posts . On March 8, 2007, I wrote:

“Sooner or later, we will see fierce worldwide economic storms that make the Indonesian Tsunami and Hurricane Katrina seem like small local incidents. At some point in the coming years or decades, stock markets will likely plunge around the world in dismaying amounts. Potentially we could see 20%, 40% or even 60% of equity values wiped out in a very short time.”

I became increasingly apprehensive that soaring market exuberance would give way to severe financial disintegration. Opinions vary whether this was an inevitable long cycle wave as opposed to just poor management by government combined with new heights of corporate greed, or perhaps both.

It started out seemingly as an American crisis, but the infection is now truly global. The 35% drop in American stock prices is not as severe as the plunge in Europe and Asia. Foreign currencies have taken a battering not seen in 70 years. We are beyond doubt in global financial chaos.

Global commodity markets have participated in this pandemonium. After a market run-up larger than any seen in 50 years, we are now seeing a colossal commodity slump. Energy, metals, agricultural products, building and industrial supplies are now in massive oversupply.

What started in the financial sector has broadened quickly to most other industries, particularly automotive. Early indicators show consumers are dramatically curtailing purchases of nonessentials.

We are in a tailspin of historic proportions which cannot be sorted out with a few global meetings of world leaders. Regrettably, Humpty Dumpty cannot be put back together again by “all the king’s horses and all the king’s men”.

Hopefully, we will elect President Obama, not President McCain. But even Obama will not be able to fix this mess any time soon. Perhaps Joe Biden was politically naïve in acknowledging an inevitable crisis of confidence – but I for one agree with every word he said. People like me who supported Obama from the beginning will have our faith severely tested. Franklin D. Roosevelt was perhaps the greatest President of the 20^th Century, but he was unable to fully fix the economy in the 1930’s, even though anyone else would have surely done worse. And like Roosevelt, Obama is bringing hope and vision when these are in short supply.

Governments around the world need to provide emergency relief – to their financial institutions, to major industries, and to their poorest citizens. But the well of government resources is not infinite. Essentially, government can only provide credit or subsidy, whether to home owners or to businesses and financial institutions. These require government borrowing, which will ultimately be offset by either increased taxes, or by resurgent inflation; neither is desirable.

There is no magic cure for a situation that was built up by many years of bad decisions by most of us. Consumers took on too much debt to finance homes and cars. Companies paid extravagant bonuses for very short term growth, which should have been retained as equity for future development. Governments opened the monetary and fiscal floodgates in foolish spending that did not address the most important needs like healthcare, energy conservation, and industrial restructuring.

So now, many people are on the ropes. Seniors about to retire have lost up to half of their retirement funds. More and more people are losing jobs, whether white collar or blue collar, so they will be unable to service their debt loads.

Digging ourselves out of this deep crater will require our combined efforts at every level: by individuals, families, companies, schools, and governments.

I wish I knew how much longer the stock market gyrations will last; perhaps another few weeks or for several more months? But I expect that in the aftermath of the financial storm, the needed economic restructuring and full recovery will take quite a long while.