History repeated: the worst of the 2008 crisis is yet to come
The solution put forward by governments to the financial meltdown – ‘quantitative easing’ – will eventually come back to haunt the world economy
On September 2 in the year 1929, the New York Stock Exchange was on holiday. When it opened the next day, the Dow Jones Index hit a record high of 381. At the time, none of the investors realised that the record index would not be seen again for a quarter of a century.
Between 1921 and 1929, in the “Roaring Twenties”, the Dow Jones Index increased fivefold.
It was a decade of fast economic growth and widespread prosperity. Mass production of popular consumer goods such as automobiles and refrigerators made them affordable to the lay workers. Banks introduced mortgage payments, ensuring that most households could spend ahead of what they had earned.
Those were the happy years, and many in the developed world thought they would never end.
The stock market took a sharp turn after September 3, until it hit its bottom in July 1932. By then, the market had lost 90 per cent of its value. The gains in the previous three decades had been totally wiped out. The Great Depression that followed put 12 million American workers out of work. It quickly spread to the rest of the world. The worst hit among them was Germany.
The then Weimar Republic had borrowed heavily from the United States to help rebuild its economy in the aftermath of the first world war. As failing US banks urgently recalled their loans, the young democracy’s economy crashed. The unemployment rate rose to 34 per cent in 1932. The Nazi Party won the election in that same year. The resulting turmoil was many times worse than the Great Depression itself.
The 2008 financial crisis is considered to be the worst global recession since the Great Depression. Having learned the lessons of 1929, governments adopted massive “quantitative easing” to jack up their failing economies. Yet, eight years on, the recovery remains feeble, and large chunks of the world economy are still struggling to stay afloat.
The end of the crisis is far from being in sight. The year 2008 might be very different from 1929, but the fundamental cause of the two crises is similar: a period of loose credit and easy growth bred complacency and reckless risk-taking in the financial markets. Exuberant consumption led to excess production capacity. An unchecked surge in debts loomed until they became unmanageable.
Most governments seem pretty helpless now, since neither the monetary nor the fiscal tools seem to be working. And no economist of any fame seems capable of prescribing a quick fix either.
At least one thing is clear: if the root problem for the world economy now is excess production capacity brought about by misguided demand, the problem is not going to be resolved by throwing good money after bad.
Indiscriminate money creation through “quantitative easing” will come back to haunt the world economy some time down the road. The consequences could be dire. We may not have seen the worst of the crisis yet.
Lam Woon-kwong is convenor of the Executive Council