Ironically, the Dow Jones hit its all-time high of 14,164 on this date last year. It fetched up today at 8,579.19, That came on the heels of another sickening plunge of nearly 680 points, most of which occurred in the final 15 minutes of trade. That is, in technical terms, a fair chunk of change. Five trillion dollars, according to one economist on NPR today. To paraphrase a 1960s Republican Senator, Everett Dirkson, “It adds up. A trillion here, a trillion there. Pretty soon you’re talking about some real money.” Of course, when Dirkson said it, he said “millions”, a term that is regarded as pocket change in Washington these days. Some people are comparing the present market crash to 1929. It’s far larger in sheer size, but then, so is the economy. So I went looking. In the month following the October 1929 crash, the Dow went from 341 to 220, about 35%. It then rallied over the next few months, back up to about 290. However, by 1932 it was down to 125. Factoring in inflation, that meant it lost nearly 80% of its value. Since September 10th, the Dow has lost nearly 25% of its value. That’s bad, but not quite as severe as November 1929. Of course, we don’t know where the bottom lies. People think of the Crash as a single day event that led promptly to the Great Depression, but that’s not quite true. The original crash occurred in two stages about a week apart, followed by a fairly steep decline for three more weeks. It made a partial recovery, and then went into an extended 26 month decline. It was during that time that banks began failing, factories closed, and unemployment started climbing. It wasn’t until 1931 that the crash translated into a depression, and another year before it became known as the Great Depression. Free market optimists on the web have been making hopeful noises, noting, accurately, that the market suffered even bigger declines in single DAYS in 1987 and in the wake of 9/11 in 2001, and recovered in fairly quick order, with no depression, or even recession hitting main street. Those claims are accurate, but in both instances, they were rogue events that rattled the economy, but the economy was basically sound. That isn’t the case here. This is a serial crash following two months of general decline, and it’s happened despite a mind boggling $3.5 trillion in bailouts from governments around the world, and a worldwide concerted effort to staunch the bloodletting. Obviously, basic conditions are not fundamentally sound, and despite what John McCain opined three weeks ago, the economy is not strong. (That may have been the remark that cost him the election). More realistic market advocates are noting that busts come and go, and eventually a boom cycle comes around, and the smart investors will make their money back, and more. This too, is true, and I even entertain some hope that it will pertain in this case. But I’m not counting on it, and here’s why: December 29th, 1989 is an interesting date in Japanese history. It was on that day that their stock exchange, the Nikkei 225, hit a peak of 38915.87. It was fueled by a monumental run-up in corporate debt and property values. A penthouse apartment in Tokyo might rent for ten million dollars –dollars, not yen–a month. In a drive for ever greater productivity, wages had stagnated and workers will routinely putting in 15 hour days just to keep pace with their income of three years earlier. Japan was a huge fad among capitalists here in America, with the smartest guys in the room all chorusing that we needed to adopt and emulate the Japanese model, and that it would make everyone unimaginably wealthy, except of course for the 95% of Americans who are just workers and thus don’t count. (They were similarly enthused by the German “economic miracle” that seemingly beat the Great Depression in the mid to late 30s). Then the Nikkei crashed, and it was a gigantic crash, as bad for Japan as 1929 was for America. It lost 2/3rds of its value over the following eight months, fetching up at about 14,000. It was a speculative bubble popping that fueled the crash. If you compare the rate of growth of the Nikkei from 1975, when it stood at 5,000, to where it was in August of 1990, it was actually above what a straight line progression would have made it going by the pre-bubble rate of growth. So the crash corrected the anomaly of the bubble, and the market came out of it basically healthy, right? Wrong. The Nikkei stayed essentially flat for the next EIGHTEEN YEARS, hovering around 14,000. The economy slumped in the wake of the bubble bursting, and never recovered. Now the events of the fallout from the vast American derivatives bubble has impacted Japan, and as of this hour, the Nikkei crashing again today and down nearly 10% in the session, is just below 8,000. That would be the 80% loss that the Dow experienced between 1929 and 1932. It just took six times as long for the bottom to arrive this time. Still, despite the vicissitudes the Tokyo stock market has faced and is facing, the Japanese economy, while subdued, it in some ways prepared to weather the financial storm better than America’s will. Japan, in the wake of the bubble and growing social discontent, pushed for higher wages and stronger control of companies. CEOs only make about 22 times what an average worker makes, compared with something like 450 times here. The result is that while the markets haven’t made a killing, the economy has been generally healthier. For us here in America, it could be as long term, and with harsher consequences, because America, intent on staving off even a mild recession, has played out most of the tools they have to level out the bumps in the economy. Everyone is leveraged (Wall Street talk for “in debt”) to the teeth, including the country itself. The US was already hemorrhaging money before the crisis began, corporations were deep in the red from “leveraged buyouts” and the citizenry carried a mountain of personal debt, something not helped when the crash in property values wiped out their equity. The market advocates are right: there is a bottom at some point, an area where the market must simply stop dropping because it does have intrinsic value that underpins the false values given to it by speculators with far too much money and greed, and phony “securitized” loans. Nobody’s quite sure where that bottom is. Henry Paulson warned that if the Congress didn’t act to pass the bailout bill, we could be at 8,500 in a few weeks. It passed it, and we’ve wound up there anyway. I’ve heard guesses of 7,500, 5,000, and even 2,500. I suspect people live those numbers because they are benchmarks, nothing more. If you look at the market from the time the last recession ended in the Carter years and the beginning of the bubble in the third year of Clinton’s presidency, you can straight line it out, factor in inflation, and come up with a hypothetical value of around 6,500, which is where it would be now if the big boom of the nineties hadn’t occurred. I suspect that’s about where it will end up, and that’s where it will hover while the economy at large stagnates into another major depression. But the Japanese were smart, and put the population ahead of the market, and as a result, they kept a decent standard of living and a good safety net at the expense of the idle rich. If we’re very, very lucky, America’s next government that comes to power in January of 2009 will look at the Japanese response to their great crash, and work along similar lines.
