The Financial Crisis. Is it really different this time..?

There’s no shortage of people who proclaim that we’re facing economic armageddon, because this time it’s global and the entire financial system is on the brink of collapse, but is it really all that different?

“The most unnerving stock market reports since the 1930s Depression become daily more dismal.”

Time Magazine “The Economy: Crisis of Confidence,” 1 June 1970

“Falling real estate prices and the fragile state of the banking system make this recession unlike any other and extremely difficult to forecast.”

The Wall Street Journal, article by John R Dorfman Quote attributed to Carmine Grigoli, chief investment strategist, First Boston Group 7 February 1991

“Investors have been frightened of an economy that seems out of control…. A Gallup poll published last month found that 46% of adults feared a depression similar to the classic one of the 1930s.”

Time Magazine, “Seeking Relief from a Massive Migraine,” 9 September 1974

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62 Responses

  1. Relatively positive post, John. Pointing out that we’ve been through all these things before – several times – and lived to tell the tale, helps put things back into perspective. The more things change, the more they stay the same.

  2. Don’t blame me Tony, this is reb’s doing.

    “facing economic armageddon” Of course not, however, the fragility of the system indicates so very painful adjustments.

  3. Oops, so it is. Sorry John, I did wonder about your sudden change of tone. 😉

    Nice Reb.

  4. It’s also important to point out that each financial crisis is unique and that this one isn’t just effecting an isolated part of the economy of financial system it’s effecting the entire globe as a result of extreme deregulation, financial innovation and globalisation.

  5. Tony

    I read it and thought it was John too, but it was a reb thread.

    And yeah – I think that although things are bad, we still have to remember that most people (although suffering) are still in work and will continue to be in work.

  6. I suggest that reb get himself a paper bag and breath into it so he doesn’t hyperventilate. Yesterday the whole thing was a hoax and today it’s a minor blimp. Denial is not healthy reb. (wink)

    Joni’s closer to the mark:

    “And yeah – I think that although things are bad, we still have to remember that most people (although suffering) are still in work and will continue to be in work.”

  7. Before you say it reb “bollocks to you to’ Lol

  8. I think on the one hand, as far as financial crises go, this is pretty bad, though it needn’t be as bad as it’s going to get, but I won’t play politics.

    Having said that, whilst I acknowledge that financial stress is a pretty ordinary stress to have, there’s a whole lot worse that could be happening, and a bunch of social positives that may arise from the situation if the right attitude is adopted.

  9. James

    “Having said that, whilst I acknowledge that financial stress is a pretty ordinary stress to have, there’s a whole lot worse that could be happening, and a bunch of social positives that may arise from the situation if the right attitude is adopted.”

    I agree, we need to carefully and completely understand what went wrong and how to fix it so this doesn’t happen again. My concern is that politics, locally and internationally, will make the crisis even worse than it needs to be.

  10. I think I heard yesterday that the CIA is worried that the GFC could cause a lot of civil unrest around the world that will not be very nice.

    Will try and find more on this later.

  11. joni, on March 3rd, 2009 at 12:04 pm Said:

    I think I heard yesterday that the CIA is worried that the GFC could cause a lot of civil unrest around the world that will not be very nice.”

    I know China’s a concern which I indicated in a previous blog.

  12. James of North Melbourne, on March 3rd, 2009 at 11:59 am

    Ah! Found you, James! (Tony, suggested I talk to you…) just looking for a bit of free advice…

    Any knowledge of SSgA Fixed Income, (eg risks) the returns are pretty good with my super fund compared to cash…

  13. Unfortunately, TB, the answer is that I don’t know, and can’t know. State Street are a massive player with a largely pretty good reputation. That said, they haven’t been immune from the GFC. Fixed income funds are basically debt funds, where you lend money to them and they lend it on to someone else, and make a margin. Now if you’re getting better rates with them than cash, then they must by definition be charging better rates at the other end. They only get to charge better rates if the debts are higher risk. That’s a massive oversimplification of what goes on but it’s the best I can do. As advisers, we were told many many fixed interest type funds were “safe” and highly rated by the research companies. Turns out they (we) were wrong. In some cases, it was easy to see, but in others, not so obvious. I don’t know where the money is being specifically invested with State Street, but I do know that where there is a higher return, there must MUST be a greater risk. Vague enough for you?

  14. By the way, it’s a bloody cyclone in Melbourne, I hope the firies are ok.

  15. I think you could get a few polls to suggest that more than 46% of adults are scared of a number of things – getting robbed, their kids using drugs, a car accident, scared of that movie on the other thread 😉

    We’ve become a nation of bed wetters. We live in fear of fear itself. Adult fears are contagious and their scared little kids are turning into anxiety ridden, neurotic adults who are demanding more and more of our services and supports so that they may feel secure.

    Can we just calm down a bit?

    I blame the media and the pollies for the fearmongering, a scared population is a compliant population.

  16. John McPhilbin:

    “I suggest that reb get himself a paper bag and breath into it so he doesn’t hyperventilate.”

    Actually I was on a Virgin domestic flight a few weeks ago, and was rumbling through the seat pocket in front of (as you do) when I found this plain white bag which simply said “If you are feeling the effects of air sickness, please use this bag.”

    “For what?” I thought, waving to get the attention of the cabin crew?

  17. Reb

    “For what?” I thought, waving to get the attention of the cabin crew?

    Lol, at least you’ve still got your sense of humour reb, sometimes all we can do is laugh despite how dire things seem to be. In the end, we get through it.

  18. “despite how dire things seem to be. In the end, we get through it.”

    OMG!!! Surely you’re not suggesting that GASP “we’re going to live??!!”

  19. Reb, get your little bag out and breath

  20. No, many people will die as a consequence. Some will blow their brains out or walk under trains. Others will starve. Yet others will die from preventable disease; and others again from reduced standards in healthcare. To pretend things are all rosy is to mistake what is occurring. We’re not all going to live, many of those who do live will live reduced lives, and some won’t even notice those occurrences whether that’s by dint of wearing rose-tinted glasses or living in ivory palaces.

  21. joni, on March 3rd, 2009 at 12:04 pm

    Oops, ommited that one…people being shot for complaining about dying or being left to die.

  22. We’re not all going to live

    No, no we’re not. In fact – and I hate to be the bearer of bad tidings – we’re all going to die – eventually, from some cause or another. Somehow, though, I don’t think anyone’s ’cause of death’ will be registered as ‘GFC’.

  23. Actually Tony,

    I think that’s what I’ll have as an epitath on my tombstone:

    “If only he had had more money”.

  24. We’re all going to live? That’s fine if you call this living.

    That’s an old joke by the way. So please don’t take it as a suggestion that we’d all be better off dead.

    Only some would.

    Personally things have never been better. And in my case it’s not due to short selling.

  25. I actually do intend to go out with a GFC. Great Final Celebration.

    I want to arrive at the end of my life going “Wow! What a ride.”

  26. Legion

    I agree. And psychological impact of this crisis can’t be brushed under the carpet.

    Hitting home: human face of world gloom

    Jessica Irvine and John Huxley
    January 11, 2009
    http://www.smh.com.au/news/national/the-human-face-of-world-gloom/2009/01/10/1231004355061.html
    MENTAL health services are experiencing a surge in demand, particularly from Sydney’s North Shore, as the financial crisis rips through life savings, destroys careers and drives victims to the brink.

    And the services are braced for worse to come, with February shaping up as a crunch month for many families as Christmas credit card bills fall due.

    Laura Kennan, general manager of clinical support at Mensline Australia, a support line for men, said there had been a 34percent rise in suicide-related calls between October and December, and that rise appeared to be caused by greater financial pressure.

    “We’re expecting that that’s actually going to increase over the next couple of months, and particularly February, when people’s credit card statements come in and families go back to work,” she said.

    “People have felt that pressure, particularly leading up to Christmas, where they’re under pressure to buy presents for people, Christmas lunch and travel to visit family and not being able to do it.”

  27. That “Wow! What a ride” end-of-life imagery is sooooo American joni…

    I think my last thoughts will probably be something along the lines of “what was all the fuss about…”

  28. I’ve said it many times, given the the right type of circumstances everyone has a breaking point. In short, everyone has a breaking point, even the powerful and super-wealthy.

    Executives end their lives as human toll of financial crisis hits – January 7, 2009
    http://www.smh.com.au/news/world/two-tycoons-kill-themselves-within-hours/2009/01/07/1231004078888.html

    US real-estate auction house chief found dead hours after German billionaire killed himself.

    His spirit broken by financial fears, German billionaire Adolf Merckle took his own life this week – becoming the latest high-profile casualty of a global economic crisis that has claimed the lives of executives in Europe and the US. Just a few hours after, Steven Good, the head of one of the largest US real-estate auction houses, was found dead of an apparently self-inflicted gunshot wound, US officials said.

    Mr Good’s body was found in his red Jaguar that was parked in a forest preserve near Chicago on Monday morning, the Kane County Sheriff’s Department said.
    No note was found indicating a motive and it was unclear whether his death was related to his work.

    Mr Merckle, a respected businessmen with a wife and four children, jumped in front of a train in the town of Blaubeuren in south-western Germany, officials said.

  29. John McPH:

    “I agree. And psychological impact of this crisis can’t be brushed under the carpet. Hitting home: human face of world gloom”

    Yes the human toll is gradually mounting.

    Personally I blame “The Christians.” Especially that upper middle-class Hillsong Mob.

  30. At the end of my life I hope to have 2 mistresses and current wife exchanging bitter words about my lack of fidelity (to the very end). Hopefully over my casket.

  31. My headstone will say:

    He drank heartily from the cup of life. Often.

  32. oh John,

    You are a laff! So we’re expected to pour tears of sympathy because a couple of European billionares lost billions…?

    Oh the shame and humility of it all…having to sell the private jet and fly commercial.

    I note the article continues…

    “Dr John J. Lucas, assistant clinical professor at New York-Presbyterian Hospital/Weill Cornell Medical College, said that the men might have “considered themselves to be worth as a human being what they were worth at the bank”.

  33. By the way the RBA has left the cash rate unchanged at 3.25%.

  34. Reb

    “You are a laff! So we’re expected to pour tears of sympathy because a couple of European billionares lost billions…?”

    Actually thought it was a good laff myself, especially where the German guy threw himself in front of a train. Now that would have been a real winner of FHV

  35. In all seriousness, if anyone is losing sleep worrying about it all, and if you only ever read one so-called ‘self-help’ book in your life, read this:

    How to Stop Worrying and Start Living, by Dale Carnegie.

    Without wanting to sound evangelical about it, that book could change your life.

  36. James of North Melbourne, on March 3rd, 2009 at 12:33 pm Said:

    James, thanks for that…more than “vague” enough 😀

    The Minister and I have been researching all morning and your post helped to clarify our own thoughts…we have a saying – “If in doubt…don’t” – only one of us has to have doubts and that’s it…its worked for over 40 years for us.

    The Minister has some doubts – so we’ll stick with cash…

    …and Wayne Swan said he’ll look after us SFR… (guffaw, guffaw)

    (BTW Sunsuper gave us pretty much the same “advice”)

    Thanks again!

    ++++++++++++++++++++++++++++
    Thanks, sreb, for some of us that’s a bit of relief…

    Didn’t the recession that PJK resided over have interest rates going up? (the famous 22%)

  37. joni, on March 3rd, 2009 at 12:04 pm Said:

    “I think I heard yesterday that the CIA is worried that the GFC could cause a lot of civil unrest around the world that will not be very nice.”

    Of course, the CIA have a strong interest in saying that – it justifies their existence in a time when Obama might be looking for some places to redirect government spending away from their line of business.

  38. Andre Sammartino,

    You look like a double agent.

  39. Andre

    True – but countries like Egypt, The Philippines, and Haiti have already had food riots. And if this downturn results in massive job losses in the countries that manufacture the things that we buy from them then those civil disturbances could get worse.

    Then again – it could be the CIA stirring up unrest to justify their existence. I would not put it past them.

  40. reb, on March 3rd, 2009 at 2:32 pm

    No, you’re meant to be crying for the millions and billions shifted into monocultural agriculture or manufacturing jobs in reliance of ‘the system’ to meet and exceed subsistence needs. Or the millions nearer to home who are having the surplus-value, purchased with actual labour, which was sequestered in pension funds and intended to support them in older age, being annihilated.

    Tony, on March 3rd, 2009 at 2:38 pm

    And, yeah, I do worry about stuff like this. If I wanted the Mad version of the world, I’d run with Alfred E. Neuman’s, “Me worry?”.

  41. Oh no, as if things couldn’t get any worse – my work email inbox has reached full capacity!

    That means I’ll have to start deleting stuff….

    gggrrrrrrrrrrr….

  42. Maybe start with John’s emails (hehe).

  43. joni, on March 3rd, 2009 at 5:07 pm Said:

    Maybe start with John’s emails (hehe).”

    By all means feel free you bastards.

  44. Legion,

    If I wanted the Mad version of the world, I’d run with Alfred E. Neuman’s, “Me worry?”.

    You might be on to something.

  45. hehe

    it made me laugh John…

  46. You’ll note that my new avatar is that of a Wall St trader watching the market crash!!! Sorry reb couldn’t help myself.

    And keep out of it joni, Miller boy or not , I’ll whoop yo ass (wink)

  47. OMD. Turnbull really is worried. He is on air now with Jono and Dano on WSFM. What’s next – Play School?

    And he is repeating his bring the tax cuts forward ignoring the admin costs and complications that come with that option.

    (Yes – I listen to WSFM at work! so what if I do, reb)

  48. LOl my emails – hey, I’ve got Barry O’Farrel writing me offering his assistance. The old email campaigns have caused quite a stir on a number of occasions.

  49. John

    I was a cheap shot by me… sorry.

  50. That’s okay then Joni, just as long as it was a cheap shot…I can’t afford expensive ones since the market tanked.

  51. Johnno and Danno? FMD, are they still alive? They used to be on EonFM (I think) about 20 years ago.

  52. joni, on March 3rd, 2009 at 5:21 pm

    Cheap? Bloody accurate I reckon… 😉

    I can’t post here ’cause I’m too busy reading JMc’s 16 page emails!

    Maybe its a JMc plan? 😆

  53. Perhaps you are right Tony “The more things change, the more they stay the same.”

    I was just looking at something I copied from lecture notes on financial planning some years ago. It seemed like a useful summary at the time, so it got added to the list of notes-to-self at the back of my diary. It was a “clock” showing the pattern of events in an economic cycle.

    On the upswing, we get rising commodity prices, causing rising stockmarket prices. The affluence caused from increased exports flows on to rising real estate prices and then rising salaries and inflation. Everything is on the up!!!

    The result is then increasing interest rates (RBA doing its job, trying to stop bubbles), causing pain to overleveraged households and businesses. Economic activity slows, commodity prices tank (less demand) causing decreases in stockmarket prices, and less easy money causes real estate prices to plateau or fall. Interest rates then start falling. Everything is on the down…doom, gloom, armageddon…

    If my little note-to-self “clock” is still working, then interest rates are at all time lows so we are at the bottom of the cycle.

    Investments in fixed interest (term deposits, bonds, etc) are now abysmal investments that don’t even keep up with inflation. They do even less for financial analysts and fund managers who are all adrenaline junkies (by my naturally unbiased reckoning!).

    These guys are already saying (with some justification) that stock prices are at record low prices relative to earnings, and thus good value for investors with the countercyclical nerve to trade again. Having been burned badly and “once bitten twice shy”, etc…

    Cue the start of rising share prices again, as people creep back into the market, then others notice and decide to dip their toes back in again. Blimey, the stockmarket comes good, and the wheel turns again!

    Could be wrong this time, of course. Anyway, for those that are interested, the time lag between the bottom of the interest rate cycle and the transition was 1Q on average. I’m watching this cycle with great interest!

  54. Hi Elise,

    Welcome back.

    These guys are already saying (with some justification) that stock prices are at record low prices relative to earnings, and thus good value for investors with the countercyclical nerve to trade again.

    I’m in the shares-are-cheap school. If a company has a strong balance sheet and a history of consistent – and preferably increasing – profits, and provided – this is where investor attitude is important – you are prepared to bet that general economic conditions won’t deteriorate to a point where profits are unachievable, I believe there are plenty of bargains available.

    Personally, I haven’t stopped buying, but only time will tell whether I’m a fool who is heading for an unhappy break-up from my money. We shall see. BTW, I sleep like a baby. (No John, I don’t mean I wake up every half-hour crying for my Mummy.) 😉

  55. …you are prepared to bet that general economic…

    Bet!

    Just go to the races on Saturday, Tony…

    The odds are so much better!

    …but then, along with JMC, I am a doom a gloomer…

    …history tells us that this is not a normal “recession” – its not just “local” its “global” – we are up the proverbial creek without a paddle…soon politicians and experts will be mumbling the word “depression”…this one’s different…wanna bet?

    I should warn you that

    1. I thought all this s#it was behind us.
    2. A hobby of mine is military history {always instigated by politicians}
    3. I’ve been around for six decades and seen a few recessions…

    …that said, I do tell my kids that it’s not a real problem for them – they have 20/25 years before they need super and it will recover (see I do have some “faith”)…I also have shares (check out Metalstorm – sorry, awful balance sheet – but I am an ex-digger – my break-even is 15 cents – I’ll sell at $10 – the more civil unrest the better, I reckon!)…and the world, will be better place, for you and me…speaking of songs…

    …here’s a song for those of you who think you live in a “changing (real) world” …

    …and as my Egyptian friend keeps telling me -“…nothing is new…”

    I sleep well…and enjoy every day…

  56. Bet!

    Just go to the races on Saturday, Tony…

    The odds are so much better!

    LOL TB,

    I’m no stranger to the sport of kings. My bets, however – on and off the track – are informed by a thorough knowledge of the form.

  57. Tony, on March 3rd, 2009 at 8:33 pm

    I bet they are! 😆

    If you want to see the odds that some people deal with every day may I suggest – SBS @ 10:00pm…

  58. Thanks TB,

    Full Battle Rattle – sounds interesting. Will check it out.

    (Right after I watch True Blood on Showcase.)

  59. Tony

    “No John, I don’t mean I wake up every half-hour crying for my Mummy”

    Damn your quick to cover yourself Tony, how did you know that was going to be my response? (Lol)

    Very glad to have Elise back by the way.

    Tony and Elise,

    In fact, it seems, going by the US markets drastic fall that many investors may have capitulated. You can take only so much.

    Tony pointed out an interesting statistics just recently:

    Average length of a recession in the US: 11 months

    Average length of an expansion: 6 years”

    These statistics will be interesting to watch as to whether they will play out now. I have my doubts given the magnitude of current problems. I’ve had a few friends who have been quoting similar statistics. I’m betting there could be a lengthy delay on this occasion. However, the fact remains, it’s not the end of the world just because some painful adjustments need to be made.

    We’ve had a long period of expansion which is likely now to be counter-balanced.

    I tend to think that there will be a rather large blow-out in recovery time against the historical average, so much so that it will create a new average.

    Also the stock market recovery full recovery from 1929 took roughly 25 years to reach its previous record high of 1929 after the market bottomed in 1932 – in 1954 the market broke even. Can we expect a similar recovery period? I certainly hope not.

    Also consider this

    DOW JONES INDUSTRIAL AVERAGE:

    December 31, 1964 (874.12)
    December 31, 1981 (875.00)

    And according to Warren Buffett, during this period the economy grew fivefold, yet the stock market went nowhere.

  60. Tonight I had the dubious pleasure of listening to a lecture on the crisis from some analyst honcho from Credit Suisse as part of a continuing professional education thingie.

    He really didn’t have a clue as to where we’re going from here and some of the data was truly frightening.

    On a lighter note, the audio-visual stuff included lots of graphs with pictures of Herbert Hoover in the margins.

    Just the sort of thing to fill you with confidence.

    And surprising, given that most of these guys seem to adopt a standard talk-up-the-market-for-the-suckers approach.

    It’s a reverse of the old “when the bus-boys get in it’s time to get out” adage. Now we’ve got the Gordon Gekkos running for the bomb-shelter and laying-in provisions, so things must be pretty rum.

  61. Evan

    “And surprising, given that most of these guys seem to adopt a standard talk-up-the-market-for-the-suckers approach.

    It’s a reverse of the old “when the bus-boys get in it’s time to get out” adage. Now we’ve got the Gordon Gekkos running for the bomb-shelter and laying-in provisions, so things must be pretty rum”

    Lol Talk the market up and everyone loves you. Talk it down and you’re one the bastard that’s spoiling it for everyone. It’s interesting though that many of those who did all the talking up we’re also the first out.

    Here’s a cracker

    Former bosses back to make a killing
    http://www.theaustralian.news.com.au/business/story/0,,25117261-20501,00.html
    FLUSH with funding from redundancy deals and golden parachute payouts, former business high-flyers are returning as corporate undertakers, using the skills and networks honed during the boom years to profit from the bust.

    Mr Moss, who left Macquarie in March 2007, just before the sub-prime crisis wreaked havoc on property markets, is now chairman of insolvency practitioners PPB, which is overseeing the administration of companies including ABC Learning, Allco Principals Investment Group, digital media group Destra Corporation and Lehman Brothers.

    PPB and other insolvency specialists stand to pocket hundreds of millions of dollars from the collapse of companies, while the shareholders of these listed entities have been told to expect little or nothing.

    When Mr Moss left Macquarie, he took a package of more than $30million, and hired James Keeran, a former executive at Macquarie Real Estate, to run PPB’s real estate consultancy business nationally. Mr Moss told The Weekend Australian he was glad he retired a year ago when Macquarie’s share price was $96, compared with the closing price yesterday of $16.98. “I think the highest and best use for a few of the investment bankers around town is probably selling secondhand cars,” he said. “Not all of them, but a few. There are a lot of people out there not adding any value at the moment, and what normally happens in a cycle is a lot of investment bankers in a cycle end up driving taxis.”

    Mr Moss said he decided to join an insolvency business because he could see more than a year ago that things would start to fall apart. Mr Moss said he was surprised more people from investment banking had not gone into insolvency

  62. …don’t the shareholders of Macquarie feel silly!

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