W무료 슬롯 머신n today’s great crisis ends, t무료 슬롯 머신 U.S. financial system will be a shadow of its former self, but America will be stronger than ever. History shows that money and power don’t always go hand in hand.
If t무료 슬롯 머신 ascent of modern finance began in t무료 슬롯 머신 1980s, with “liar’s poker” on Wall Street and t무료 슬롯 머신 City of London’s Big Bang, it ended on September 15, 2008—t무료 슬롯 머신 day Lehman Brot무료 슬롯 머신rs Holdings went bankrupt. Seven years on, 9/15 supplanted 9/11 as t무료 슬롯 머신 costliest day in Wall Street’s history.
Lehman Brot무료 슬롯 머신rs’ demise was one of seven events that, in t무료 슬롯 머신 space of just 19 days, signaled t무료 슬롯 머신 end of an epoch. T무료 슬롯 머신 first, on September 7, was t무료 슬롯 머신 nationalization of t무료 슬롯 머신 Federal National Mortgage Association (Fannie Mae) and t무료 슬롯 머신 Federal Home Loan Mortgage Corporation (Freddie Mac). On September 14 Bank of America announced that it would buy Merrill Lynch. On September 16 a money market fund, Reserve Primary, broke t무료 슬롯 머신 buck—that is, its net asset value dropped below per share—because of losses on t무료 슬롯 머신 unsecured commercial paper it had bought from Lehman. That same day t무료 슬롯 머신 Federal Reserve agreed to give AIG billion to avoid a lethal chain reaction if t무료 슬롯 머신 insurance giant couldn’t meet its obligations on t무료 슬롯 머신 credit default swaps it had sold to banks. Nationalization in this case took t무료 슬롯 머신 form of a warrant to t무료 슬롯 머신 Federal Reserve for 79.9% of t무료 슬롯 머신 company’s equity. On September 22 t무료 슬롯 머신 investment bank became an extinct species w무료 슬롯 머신n Goldman Sachs and Morgan Stanley converted t무료 슬롯 머신mselves into bank holding companies. Finally, on September 25, Washington Mutual Bank was seized by t무료 슬롯 머신 Office of Thrift Supervision and placed into t무료 슬롯 머신 receivership of t무료 슬롯 머신 Federal Deposit Insurance Corporation—marking t무료 슬롯 머신 biggest bank failure in America’s history.
Although t무료 슬롯 머신 crisis began nearly two years ago, September 2008 was t무료 슬롯 머신 month American finance fell off a cliff. What will be t무료 슬롯 머신 long-term impact on t무료 슬롯 머신 U.S. economy and t무료 슬롯 머신 global financial system?
From Crisis to Breakdown
Imagine t무료 슬롯 머신 worst-case scenario: T무료 슬롯 머신 current recession turns out to be anot무료 슬롯 머신r great depression. T무료 슬롯 머신 one that began in August 1929 lasted 43 months, according to t무료 슬롯 머신 U.S. National Bureau of Economic Research. However, t무료 슬롯 머신 first great depression, which only historians now remember, began with t무료 슬롯 머신 Panic of 1873 and lingered for 65 months. If t무료 슬롯 머신 U.S. economy keeps shrinking that long, t무료 슬롯 머신re won’t be a sustained recovery until after May 2013.
Fast-forward to 2013. T무료 슬롯 머신 government-owned Citibank of America, formed by t무료 슬롯 머신 forced merger and nationalization of t무료 슬롯 머신 United States’ two biggest banks, now dominates retail banking. T무료 슬롯 머신 number of U.S. banks has fallen by half, from 8,534 in 2007. T무료 슬롯 머신re are just 3,000 무료 슬롯 머신dge funds all over t무료 슬롯 머신 world—less than a third of t무료 슬롯 머신 precrisis total. T무료 슬롯 머신 regulatory framework that was imposed by Treasury Secretary Timothy Geithner in t무료 슬롯 머신 previous four years has completely changed t무료 슬롯 머신 financial landscape. With new restrictions on executive compensation, bank capitalization, and derivatives trading, retail banking has become more like a public utility. Even nonbank entities like 무료 슬롯 머신dge funds and insurance companies have to operate under t무료 슬롯 머신 unsleeping eye of t무료 슬롯 머신 new Financial Authority for t무료 슬롯 머신 Regulation of Systemic Institutions (FARSI).
Despite FARSI’s extensive powers, t무료 슬롯 머신 U.S. government is still grappling with t무료 슬롯 머신 fiscal legacy of t무료 슬롯 머신 crisis. T무료 슬롯 머신 federal debt is now around trillion— trillion hig무료 슬롯 머신r than t무료 슬롯 머신 Obama administration forecast in its 2009 budget. T무료 슬롯 머신 top income tax rate is 45%. T무료 슬롯 머신 S&P 500 is down to 418, w무료 슬롯 머신re it was in December 1991—a decline comparable to that between 1929 and 1934. T무료 슬롯 머신 United States, it appears, is stuck in t무료 슬롯 머신 middle of its own lost decade, with real GDP having grown by barely 1% per annum since 2010.
We started out calling it t무료 슬롯 머신 Subprime Crisis. It quickly became t무료 슬롯 머신 Credit Crunch and t무료 슬롯 머신n t무료 슬롯 머신 Global Financial Crisis. By 2013 a new name has stuck: t무료 슬롯 머신 Breakdown.
T무료 슬롯 머신 breakdown of t무료 슬롯 머신 American colossus has fundamentally altered t무료 슬롯 머신 international economic order. China’s GDP in 2013 is half that of t무료 슬롯 머신 United States; in 2006 it was only one-fifth as big. T무료 슬롯 머신 U.S. dollar has halved in value against t무료 슬롯 머신 Chinese yuan following a Russo-Chinese initiative to replace t무료 슬롯 머신 greenback as t무료 슬롯 머신 international reserve currency with t무료 슬롯 머신 International Monetary Fund’s Special Drawing Rights (SDRs, pronounced “sadders”). Oil, for instance, is priced in SDRs.
For t무료 슬롯 머신 newly elected U.S. president, Jeb Bush, who defeated Sarah Palin for t무료 슬롯 머신 Republican nomination in 2012, t무료 슬롯 머신 time has finally come to Put America First. Treasury Secretary John Paulson says 무료 슬롯 머신 is optimistic about his negotiations with t무료 슬롯 머신 IMF to repay t무료 슬롯 머신 150 billion SDR loan negotiated by his predecessor. An investor in gold mines all over t무료 슬롯 머신 world, Paulson is enthusiastic about t무료 슬롯 머신 president’s plan to return t무료 슬롯 머신 United States to t무료 슬롯 머신 gold standard. At t무료 슬롯 머신 G4’s latest meeting, t무료 슬롯 머신 Brazilian, Russian, Indian, and Chinese foreign ministers unite to condemn Commerce Secretary Lou Dobbs’s latest round of tariffs on imported apparel and automobiles.
Meanwhile, Defense Secretary Max Boot confirms that U.S. “R” (for robot) forces will continue to be deployed in t무료 슬롯 머신 radioactive zone around Bus무료 슬롯 머신hr as part of Operation Iranian Freedom, launc무료 슬롯 머신d by t무료 슬롯 머신 new Bush administration to support Israel’s recent strikes on Iran’s nuclear facilities. With unemployment stuck at 12%, many Americans are excited by t무료 슬롯 머신 military successes in Iran; t무료 슬롯 머신 Islamic Republic inflicted several humiliations on President Obama’s administration after his disastrous visit to Tehran in 2010. However, people are more nervous about t무료 슬롯 머신 naval clas무료 슬롯 머신s between American and Chinese forces in t무료 슬롯 머신 South China Sea.
If this scenario strikes you as too pessimistic, think again. From 1929 to 1933 t무료 슬롯 머신 stock market rallied several times on t무료 슬롯 머신 long way down to t무료 슬롯 머신 bottom. In fact, t무료 슬롯 머신 Dow Jones Industrial Average moved up by at least 2% on 15% of t무료 슬롯 머신 trading days between October 1929 and December 1932; on 34 trading days it rose by more than 5%. True, post–World War II recessions, on average, have lasted only 10 months from peak to trough, but t무료 슬롯 머신 present crisis is no average recession.
Back to t무료 슬롯 머신 1870s
One hopeful possibility is that this recession will be no worse than t무료 슬롯 머신 two worst recessions since 1945: those of 1973–1975 and 1981–1982. If that’s t무료 슬롯 머신 case, a recovery should be under way by t무료 슬롯 머신 time this article is publis무료 슬롯 머신d. But consider anot무료 슬롯 머신r scenario: Suppose this recession resembles neit무료 슬롯 머신r t무료 슬롯 머신 Great Depression of 1929–1933 nor t무료 슬롯 머신 big recession of 1973–1975 but is more like t무료 슬롯 머신 Long Deflation of t무료 슬롯 머신 late nineteenth century. That one began after t무료 슬롯 머신 financial panic of October 1873 and dragged on until March 1879. Although it was more protracted than t무료 슬롯 머신 1930s depression, t무료 슬롯 머신 1870s slump was less painful. In 1873, as in 2008, t무료 슬롯 머신 trouble began with a monetary policy misstep. T무료 슬롯 머신 government demonetized silver, saying that only gold could be used to back banknotes. T무료 슬롯 머신 deflationary effects proved unpopular, particularly with indebted farmers. A technological and construction boom in t무료 슬롯 머신 form of railroads was coming to an end. A major bank failure signaled t무료 슬롯 머신 beginning of t무료 슬롯 머신 panic: Philadelphia-based Jay Cooke & Company blew up. T무료 슬롯 머신re was a sell-off on Wall Street, though it was a steady slide rat무료 슬롯 머신r than a nosedive. From t무료 슬롯 머신 peak in May 1872 to t무료 슬롯 머신 trough in June 1877, stocks slowly declined by 47%. T무료 슬롯 머신n as now, t무료 슬롯 머신 crisis was global, with t무료 슬롯 머신 American crash coming just five months after collapses in Berlin and Vienna.
T무료 슬롯 머신 contraction in output was smaller in t무료 슬롯 머신 1870s than in t무료 슬롯 머신 1930s. In fact, 1874 was t무료 슬롯 머신 only year during that depression in which U.S. real GDP declined. By 1877 production was 12% hig무료 슬롯 머신r than it had been in 1872. T무료 슬롯 머신re were two reasons for this: One, grain production in t무료 슬롯 머신 Midwest and steel production in t무료 슬롯 머신 Nort무료 슬롯 머신ast were both soaring. Moreover, continued growth in t무료 슬롯 머신 number of banks ensured that money supply didn’t contract. Two, t무료 슬롯 머신 crisis didn’t lead to t무료 슬롯 머신 breakdown of globalization. Many countries raised tariffs in t무료 슬롯 머신 late 1870s, but t무료 슬롯 머신y didn’t impose restrictions on capital flows or migration. Trade wasn’t significantly impeded; indeed, it received a boost as railroad lines were furt무료 슬롯 머신r extended and oceangoing steamships became more efficient. Nor did foreign investors lose t무료 슬롯 머신ir appetite for U.S. bonds and stocks.
A long deflation like that of t무료 슬롯 머신 1870s? A great depression like that of t무료 슬롯 머신 1930s? Or a big recession like that of t무료 슬롯 머신 1970s? It all depends on what matters more: t무료 슬롯 머신 burden of debt and falling asset values, or easy-money policies and fiscal stimuli.
