I have been reading ‘The Great Crash 1929′ by J K Galbraith – (the 1961 edition from Pelican Books: I like to keep up to date).
I thought Galbraith’s conclusion on what he called 5 weaknesses which contributed to the causes worth repeating here as the parallels with the current Great Recession are interesting if not uncanny.
1. The bad distribution of income: Galbraith says that definite figures are hard to come by but it seems certain that in 1929 5% of the population with the highest incomes received approximately 33% of all personal income. The proportion of personal income received in the form of interest, dividends and rent – the income broadly speaking of the well to do, was about twice as great as in the years following the Second World War.
This reminds me of the extend to which since the 1980s most of the increase in wealth has accrued to the top few per-cent of the population in the UK and the USA with the middle classes not better off in real terms, and the rise of the super-rich, and a general increase in income inequaity.
2. Bad Corporate Structure: Galbraith says that ‘American enterprises in the 1920 had opened its arms to an exceptional number of promoters, grafters, imposters, and frauds. This, in the long history of such activities, was a kind of flood tide of corporate larceny’.
He goes to to talk about inherent weaknesses in vast new structures of holding companies, and large amounts of the economy controlled by a few large companies which were over-geared and had complicated cross-holdings, the profits of which were dependent on each other.
Does this sound like the banks and other investment organisations having lending arrangements and models which were so complicated and inter-related that no one could actually understand their real exposure and risk? And, our high streets do seem to be dominated by the same few large companies, some of which are actually part of the same group.
And, how about all of the scandals which have now come to light about ‘miss-selling’ of payment protection insurance, and of interest rate swaps to small businesses; LIBOR rate manipulation; blind-eyes being cocked to traders acting beyond their remits and authority; High Risk products being labeled Low Risk; and some high level frauds by traders, etc.
3. The Bad Banking Structure: Galbraith says that the bankers were no more foolish than the rest of the population, and that many foolish loans only appeared foolish once the crash hit. But, he says, the banking structure was inherently weak because once one bank had problems they spilled over to all other banks because the interrelatationships were impossible to understand. Bad banks destroyed the confidence in the good banks.
Again, this sounds familier with the multiple re-packaging of loans and products with, in some cases, circular relationships with banks underwriting products which they thought they had paid someone else to underwrite and take the risk.
4. The dubious state of the foreign balance: Basically the amount owned to the USA by other countries, and the difficulty in these countries selling enough to the USA to earn the funds to pay off their debts contributed to the asset price bubble in the USA which eventually burst.
In recent times the nature of the inbalances have been different, with countries other than the USA being the one with the money which is seaking a home, and not importing enough from others, but it contributed to the same end result.
Galbraith also says that many loans should not have been made but they attracted good interest rates, and high fees to those that arranged them, and there was even corrucption: ‘In contemplating these loans, there was a tendency to pass quickly over anything that might appear to the disadvantage of the creditor’. Does this sound like the lending to troubled Euro Zone countries, and the fiddelling of the entry critiea?
5. The poor state of economic intelligence: Galbraith says that it seems certain that economists and those who offered economic council in the late 1920s and early 1930s were almost uniquely perverse. In the months and years following the 1929 stock market crash the burden of economic advice was on the side of measures which made things worse.
‘Hoover did cut some taxes (November 1929) but these were negligible except to to higher income bracket, and got big business to promise to invest and maintain wages – but they only did this when it was to their own financial benefit – so quickly these promises were not kept.
At least this was policy in the right direction but after this nearly every policy was almost entirely on the side of making things worse. ‘Everyone’ agreed that the budget must be balanced (including both main political parties) on an annual basis not just over time.
The ‘need’ for a balanced budget was not a subject of thought. Nor was it, as is often asserted, a precise matter of faith. Rather it was a matter of formula. Mass unemployment had altered the ‘rules’ of spending less than your level of income but almost no one tried to think out the problem anew.
The balanced budget was not the only straight-jacket on policy. There was the bogey of ‘going off’ the gold-standard and ‘risking inflation’. In 1931 or 32 there was no danger of inflation (in fact the opposite) but the advisers and counselors were not analyzing the danger or possibility of an inflation boom – they were serving only as the custodians of bad memories. Other possible actions such as low interest rates, easy credit and borrowing were also not pursued robustly through fear of inflation. In any event in such times monetary policy is ‘as feeble reed on which to lean’. Again both parties concurred on this view on the fear of inflation.
There was a triumph of dogma over thought. The consequences were profound.’
Does this sound familer? Where is, and was, the real argument over policy? Who is really offering an alternative? Where is the intellectual thought rather than the repeating of dogma which is based on prejudice, and the interests of the few, rather than evidence? Instead everyone just repeats the mantra without question. Some universities are not even telling their economics students about all of the economic theories, and are not teaching economic history.
Galbraith says that the attitude of the time prevented anything being done about it. ‘This, perhaps, was the most disconcerting feature of it all. Some people were hungry in 1930 and 1931 and 1932. Others were tortured by the fear that they might go hungry. Yet others suffered the agony of the decent from the honour and respectability that go with income into poverty. And still others feared that they would be next. Meanwhile everyone suffered from a sense of utter hopelessness. Nothing, it seemed, could be done. And given the ideas of the time which controlled policy, nothing could be done’. Does this sound like parts of the Euro Zone?
Galbraith ends by saying that since the end of WW II measures had been put in place to learn from these times.
However, since the 1980s many of these measures, and policies, have been removed. The lessons are, and were, there for us to learn from – so what went wrong?
I think Galbraith is right when he talks about the triumph of dogma over thought.
Let’s get thinking again.
This big, national and international, picture is important for local regeneration and growth as it is much, much, easier to make local improvements when you are swimming with the tide rather than against it.
