Why Not a Great Recovery?
There was much talk about the Great Depression on Meet the Press this morning. Since the Depression, we’ve created nuclear energy, solar energy, lunar travel, Internet technology, and a global economy, so today’s crisis needn’t resemble the Depression. In fact, there’s a great lesson to learn from the 1920s and 1930s.
In the 20s, the development of tractors and other mechanization let farming produce far more output at far lower apparent cost, and the new pricing structure enabled by these developments soon made underlying weaknesses in the farm financing system far more obvious.
In the current decade, computer hardware and software let financial institutions create far more financing at far lower apparent cost, and the new pricing structure enabled by these developments soon made underlying weaknesses in the debt financing system far more obvious.
In the 30s, we failed to understand how accelerating a capital markets structural revolution could have accelerated recovery. As capital market transparency was slowly phased from the mid 30s to the mid 40s, trust in debt and equity markets was slowly restored.
Today, with the right leadership, the features at the root of the current crisis — particularly the financial engineering that outran economic reality — could be re-targeted toward a solution considerably more quickly than was possible seven decades ago.
The solution, as explained previously, is to create structure for debt financing that approaches the transparency and trustworthiness of equity financing.
The debt financing clan won’t like it, because transparency destroys opportunities for relatively obscene profits. The big government clan won’t like it because it means markets must be allowed to operate, and “forcing” people who thought they were being smart by accepting apparently favorable loan terms to downgrade to less expensive housing doesn’t seem fair. (Framing the process as “allowing” instead of “forcing” people to find housing that matches their income and wealth may be more palatable since better housing — thanks to the miracle of the market — is more affordable now than at any time in recent memory.)
“Making markets work” worked in the 40s and 50s, after a great deal of pain and suffering. “Making markets work” can work now, too, and without the intermediate pain and suffering — if we act now.
As Nassim Nicholas Taleb wrote in The Black Swan
, black swans can be good or bad. The credit crisis was a bad black swan; Internet technology was a good black swan.
The human and technology resources needed to make markets work are ready. With leadership to apply those resources, we could move quickly from the black swan of the current crisis to a black swan of a Great Recovery.
The contingency is leadership. Today’s prices show that today’s equity markets don’t anticipate that leadership, but market prices also failed to anticipate the crisis in the first place, as evidenced by the bubble in financial sector stocks. We can hope that leadership to surprise us with the infrastructure to support a Great Recovery is on its way. What else can we do?
