Thursday, November 20, 2008

The Worst Year Ever

A Crisis of Confidence

The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.
Alexis de Tocqueville

People can debate the long-term effects of the Financial Panic of 2008 but it certainly doesn't feel like the worst economy ever. It's bad but we've gone through worse before and not that long ago.

And yet, with barely six weeks to go in 2008, the stock market could be heading for its worst year ever. Worse than during the Crash of '87, worse than after 9/11, worse than during the Cuban Missile Crisis, the Tet Offensive, the oil embargo of the 1970s, Pearl Harbor. Worse even than the Great Depression.

The two worst years on record for the broad U.S. stock market were 1931 and 1937, in the middle of the Depression. In 1931, the stock market was down 43.3 percent and in 1937 it was down 35 percent. Those were huge declines and misery was everywhere.

As of Nov. 19, the S&P is down 45.07 -- the worst year ever. Last night a friend told me that the $32 trillion lost is just paper money. Well, all of our money now is paper money and our modern economy is highly abstract. But the losses are real and the effects are real and the economic collapse is real.

As FDR said when he took office, "There is nothing to fear but fear itself." There are real problems in 2008 but nowhere near enough to justify this level of panic. But the panic feeds on itself and sows real problems in its wake. Left unchecked, the problems will increase until they justify this decline in stock prices.

Why is the stock market such an important indicator? The stock market is like a very sophisticated series of medical tests and right now it is saying the patient -- the economy -- is very sickly. It's also saying that investors have lost all confidence. To invest in the financial markets and to invest in new plants and equipment and employees takes confidence that the economy will be strong in the future.

Does all of this mean the patient can't recover? Of course not. While the patient feels sick and he is miserable, a healthy future can seem a long way off and a return to health a chimera. But most patients recover in time and the right medicine helps.

What's needed urgently is the boost of confidence that can restore the essential optimism of Americans. I was talking to a European ex-pat last week and he said President-elect Obama's speech are nice, but what do they accomplish? In fact, soothing words may be just what we need. If in fact he can convey a sense that someone is in charge  and cares and knows what he is doing could be critical. The transition from a lame-duck administration has been a terrible time to have a financial crisis.

Right now our economy certainly needs more than speeches and the government has been doing quite a lot. These measure such as interest rate cuts, infusing money into the economy and propping up financial institutions will work over time. What's important is how much damage and suffering occurs in the meantime and how long the recession lasts. Anything that can restore confidence to businessmen and investors in America is urgently needed and will help us on the road to recovery.