2008 Not As Bleak As It Seemed
Recession is necessary for real growth.
Good riddance to 2008 - that's the theme on Wall Street this week.
On November 21st, the S&P 500 was down 50% - its worst levels for the year. Despite the 22% rally from those lows to yesterday's year-end, 2008 (-38.5%) was still the worst performance in 7 decades - and only yesterday's small rally kept this year from being worse than 1937 (-38.6%) and 1931 (-47.1%). Going one step further, and using the Cowles Commission historic stock price data since 1872, 2008 still ranks as the third worst performance for the 136 years of data currently available in the US.
One could argue that a great deal of government support enabled the market to close 2008 with only a 38.5% loss. There's no denying that's true - but the government should have been forcing institutions to clean up their books well over a year ago, when the asset-backed commercial paper market imploded and companies were still healthy enough to take action. The first loss would undoubtedly have been the best loss.
Instead, the government, erroneously believing the crisis was "contained," enabled institutions to carry bad positions. In September, the nature and extent of the crisis became apparent, and the government had no choice but to increase its intervention exponentially.
While I disagreed with government policy up through September, I now think they had no choice but to do what was promised at the December 16th FOMC meeting: "To support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. "
As much as I hate to say it -- and as much as people hate to hear it -- 2008 was necessary for financial markets. The US economy and financial system were employing notably higher amounts of leverage in order to achieve marginal gains. As usually happens in such an environment, especially if they last for extended periods of time, prudent, risk-averse actors lose market share and credibility, and find themselves derided as "obsolete."
Perhaps this crisis has finally taught policymakers that the business cycle -- and recessions -- are necessary. These events clear out marginal and leveraged players and simultaneously sow the seeds for new growth.
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