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Five Things You Need to Know: The Lingering Stealth Depression

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Our declining standards of living pass by virtually unnoticed.

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1. The Lingering Stealth Depression

Despite the seeming enormity of it in retrospect, the stock market crash of 1929 barely even registered for most Americans. The day before the crash, Time Magazine's Oct. 28, 1929 issue was business as usual; national stories, Washington stories, a review of the newest plays opening in Manhattan, a piece on a cat washing contest in Kingston, NC.

A week later, in the wake of the stock plunge, the cover story was as far from a piece on crashing share prices as you could get - a profile of a man named Samuel Insull, the "financial father of the Chicago opera." The crash did make the magazine, of course, second billing in the Business section in a piece titled, "Bankers v. Panic." The next piece, however, was about a $2.5 million investment by a Wall Street investment bank in orchids: "Last week, however, to the orchid industry went 2,500,000 Wall Street dollars, not squandered, but carefully invested."

Heh. Yes, the dream dies hard, doesn't it?

It took a little more than two full years -- Dec. 11, 1931 -- before the New York Bank of the United States would collapse. Surely that would rattle a few cages? Well, thre no magazine cover play. The cover was reserved for Dr. James Henry Breasted, "foremost Egyptologist of the U.S.", but the bank collapse did garner a story in the Business section, below a piece on Lorillard Co., then in the news as "the only major industrial concern in the U.S. to resume dividends in 1931."

I obsessively read archived issues of Time Magazine and the New Yorker. I want to understand how the Great Depression resonated among those who were living and, occasionally, working in it. If our modern stealth depression continues, with looking concerns over the debt ceiling, Greece, PIIGS, war, and terrorism, frequently interrupted by tech-driven sex scandals, what were their concerns?

One thing that stands out is that our present depression is a bizarro mashup of 1930's America, punctuated with iPods and cheap consumer goods; one in which declining standards of living pass by virtually unnoticed because the fall is so abrupt, so scattered, a truly stealth economy with few visceral effects. These effects hover near the financial elite but at a relative distance. The microwave is the new bread line, our Hoovervilles replaced by people squatting in foreclosed homes watching Netflix, which is simultaneously both an achievement and a horror.

Economically, things are going to get worse, the political upheaval more intense. This stealth depression is not yet over.


2. Why We Must Destroy Our Pathological Financial System

If you can find the time, I urge you to watch this rather long video presentation by Amar Bhide, a founding member of the Center on Capitalism and Society and noted writer and author. In the video , (H/T: new deal 2.0 blog), Bhide makes the following point: ""Technological innovation does not require financial innovation," he notes. It needs lending that's based on financiers who have actual conversations with borrowers." That may seem to be a rather obvious point today, but it only a few years ago that we considered face-to-face interactions between borrowers and lenders to be a quaint relic of the pre-financial innovation age. Bhide's larger point is that we are mired in a system of "pathological finance," a diseased system which must be replaced with something more like the real economy; decentralization, dialogue, and relationships involving real responsibility.

The obvious question then is this: Could we have the current level of lending if we made those changes? But there's actually a prior question -- not even a question, an assumption: Is the current level of lending about driving technological innovation, or is it about servicing existing debt loads and maintaining the present financial system's churn? As Bhide observes, "Technological innovation does not require financial innovation." The answer is clearly the latter, and we are transitioning from operating with that as an assumption to questioning it.

Bhide's primary point, that we must reset system and begin again, is crucial to understanding where we are moving financially, socially and politically. Essentially, this is a backdoor entry into opening up the conversation to what is really at stake, jubilee, reset, debt discharge and renewal, establishing a new system with different lending parameters, where lending supports innovation, versus maintaining a system where lending supports the present financial system at the expense of the former, which is pretty much his argument when he states that "We have a great innovation system in spite of the financial sector, not because of the financial sector."

Currently, this idea of the financial system vs. jubilee are not yet being formally connected. They eventually will be, for jubilee, income inequality, "too-big-to-fail" and reform are all part of the same conversation. It is possible, perhaps even likely given current levels of corporate debt issuance, that it will take the next debt crisis to formalize the conversation along those lines.

(via new deal 2.0)

Amar Bhidé :: Next American Economy Breakfast Roundtable from Roosevelt Institute on Vimeo.

3. What Happens When Your Declining Standard of Living Plunges You Into the Third World?

Our present social mood views our microwave bread lines and foreclosed Hooverville Netflix entertainment shelters as a horror. When social mood resets, that view will instead see the relative standard of living compared to the depressions in the 1900s as an achievement. But we're not ready for that. Not yet. Even so, and perhaps because of the fact I can sense what an achievement our base standard of living is in this country, I am not in the camp that refers to the United States with popular derogatory phrases, such as Banana Republic. There are doubtless harsh, impoverished living conditions for many in America, but this is not even close to what is referred to as the Third World. Not even close. It's inarguable. I was reminded of this when I read a piece in the Financial Times on Saturday by Simon Kuper in which he writes about real examples of societies plunging from the middle class into the "third world."

Kuper writes:

"In 2002 I visited Argentina during its freefall. The country had just devalued and defaulted, and the latest president, instead of merely resigning, had fled in a helicopter. Yet Buenos Aires – like Athens today – still looked like a middle-class city. People lived in apartment blocks with doormen and drove to restaurants in imported cars. At dinner one night, a photographer told me that just that day he had realised he'd dropped into the third world. When had it dawned? "When Amazon refused my credit card," he said."


4. Marc Andreesen on the '99 Bubble's Psychological Scars

From the New York Times Magazine, Andrew Goldman's interview with Marc Andreesen, a former Netscape founder: "If you compare how big industrial companies like G.E. (GE) are valued compared with big tech companies like Microsoft (MSFT), Cisco (CSCO), Google (GOOG) and Apple (AAPL), tech stocks have never been valued more poorly in comparison. So not only is there no bubble - these prices are reflective of the fact that the market still hates tech. This bubble talk is about everybody being unbelievably psychologically scarred from 10 years ago."

If you find yourself struggling with the intensity of our asymmetric economy and this stealth depression, give the Andreesen interview a quick read. Near the end, pressed by Goldman to be more specific in how technological improvements rooted in the prior tech bubble are only now beginning to emerge, Andreesen makes the following prediction: "Ten to 20 years out, driving your car will be viewed as equivalently immoral as smoking cigarettes around other people is today." There is so much packed into that statement.


5. This Is What a Bubble Looks Like

Speaking of bubbles, this 1985 advertisement from Lamar Financial Group proudly proclaims its status as the first American financial institution to apply for a lunar branch. The ad appeared in TexasMonthly magazine (via Liberty Street Economics blog of the New York Fed).

CLICK TO ENLARGE

Lamar Financial Group was a Texas-based finance company that operated two savings and loan organizations. Both institutions failed. Stanley Adams Jr., the former chairman and main shareholder in Lamar, was indicted in 1990, accused with other officers of looting Lamar of more than $121 million. The Lamar S&Ls were acquired in 1988 by Southwest Savings Association in Dallas with the help of a $2 billion loan provided by the government in what was then the largest bailout ever by the Federal Savings and Loan Insurance Corporation. Adams was convicted and served some time in prison for his role at Lamar.

Position in CSCO

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