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November 16, 2008
Finance & Economics, Financial Crisis, History & Society, In Other Words
(”Despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression…” These words of misguided wisdom from the Harvard Economic Society on November 2, 1929 illustrate once again that optimism in the strength and resilience of the capital markets among its academic and professional clergy was just as dangerous 80 years ago as it is today.
Modern financial crises aren’t simply failures of regulatory oversight or inherent structural weakness. They’re a combination of the cyclicality of human behavior, the dangers of unbridled leverage, increased speculation by unsophisticated investors, and our complete lack of financial memory beyond 20 or 30 years.
The following compilation from The Atlantic’s impressive archives serves as a painful reminder that, much like the “Great War” that preceded it, The Great Depression was never destined to be one-of-a-kind…)
The Great Depression
by Theodore Kahn and Laura Brunts
In recent weeks, our mounting economic woes have sent financial experts, journalists, and average citizens running to the history books in search of clues about the causes and potential fixes for our present mess. Many are seeing disturbing parallels between today’s state of affairs and the period that preceded the Great Depression of the 1930s. Not surprisingly, the onset of the Great Depression provoked a similar spate of economic soul searching. A series of Atlantic articles published in the aftermath of the 1929 stock market crash captures that era’s collective grappling with the situation—and reflects a broad range of thinking on the future of our economy, politics, and society.
In a February 1930 article entitled “The Revolution in Banking Theory,” Bernhard Ostrolenk sought to explain the forces at work behind the failure of so many banks during the previous decade. For the first century and a half of our history, he explained, the federal government, and most of the states, had prohibited “branch banking”—the ownership of one bank by another—instead fostering a system of small, independent “unit banks.” It was felt, Ostrolenk noted, that “each bank should be a local institution, locally financed and managed, drawing funds from local depositors and using its financial resources for the development of local business enterprises.”
The unit bank was well suited to financing the small, independent businesses that had dominated the American economic landscape throughout the 19th Century. But the trend toward centralization of the economy, set in motion during the Industrial Revolution, called for banks with far greater resources.
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Filed by The Editor on November 16th, 2008
November 10, 2008
Financial Crisis, History & Society, In Other Words
(As institutions around the world tighten their belts in response to the coming economic storm, we can only glimpse from their preparations the full breadth and depth of of “The Great Correction” and the many ways capital markets dictate the rules in our daily lives…)
To Harvard Faculty, Students, and Staff:
I write today about the global economic crisis and its implications for us at Harvard.
We all know of the extraordinary turbulence still roiling the world’s financial markets and the broader economy. The downturn is widely seen as the most serious in decades, and each day’s headlines remind us that heightened volatility and persisting uncertainty have become our new economic reality.
For all the challenges such circumstances present, we are fortunate to be part of an institution remarkable for its resilience. Over centuries, Harvard has weathered many storms and sustained its strength through difficult times. We have done so by staying true to our academic values and our long-term ambitions, by carefully stewarding our resources and thoughtfully adapting to change. We will do so again.
But we must recognize that Harvard is not invulnerable to the seismic financial shocks in the larger world. Our own economic landscape has been significantly altered. We will need to plan and act in ways that reflect that reality, to assure that we continue to advance our priorities for teaching, research, and service.
Our principal sources of revenue are all likely to be affected by these new economic forces. Consider, first, the endowment. (more…)
Filed by The Editor on November 10th, 2008
November 5, 2008
Finance & Economics, Financial Crisis, History & Society, In Other Words, Politics & World Affairs
(While the world comes to terms with yesterday’s historic call for change, Nouriel Roubini and his team have pulled together a laundry list of the many great challenges that lie ahead…)
Barack Obama, the 44th President of the United States
RGE Monitor
The 2008 U.S. Presidential election was historic itself owing to the candidates’ profile. But the timing of the elections as the U.S. and global economy are in the midst of the worst financial crisis and recession in decades reminds us of the Great Depression era and the 1980s recession when incoming Presidents Roosevelt and Reagan faced immense challenges to cure the economy’s woes.
By the time Obama takes his oath in January 2009, he will face an economy which is still in a middle of a severe and prolonged recession where households will continue to face unaffordable mortgage and other debt, declining value of homes (that financed their consumption all these years), risk of debt default or foreclosure, tight access to credit with stringent borrowing conditions, erosion of their retirement savings amid the bearish stock market, over a million lay-offs taking the unemployment rate to 7-8% and critical foreign policy challenges.
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Filed by The Editor on November 5th, 2008
October 6, 2008
Finance & Economics, Financial Crisis, History & Society, In Other Words
(”Spectacular episodes in financial history” come about more often than we might expect, and certainly more often than we remember. Harvard economist John Kenneth Galbraith wrote a brilliant primer on financial speculation in the early 1990s, suggesting that our memory for financial disaster was far more limited than our intelligence might otherwise suggest:
“Built into the speculative episode is the euphoria, the mass escape from reality, that excludes any serious contemplation of the true nature of what is taking place….Contributing to and supporting this euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten…”
While speculation was only the trigger in this broader financial collapse, perhaps the more important lesson will come from how we institutionalize the memory of this “mass escape from reality” and carry these lessons forward into a more stable global economy. Unfortunately, as this Economist article from 1929 points out, history is not on our side…)
Reactions of the Wall Street slump
Nov 23rd 1929 in The Economist
IT’S an ill wind that blows nobody any good. The fall of Bank rate on Thursday by another half per cent is an outward and visible sign that the dramatic and precipitous slump of the last three weeks in Wall Street has definitely relieved the pressure on the world’s money markets which the New York situation has been exerting so continuously for the last two years. Very few could have dared to hope, when Bank rate was raised to 6½ per cent on September 26th, that it would be back again at 5½ per cent in less than two months. That advance, indeed, was a by no means negligible factor in turning into the opposite direction the tide of funds which had been flowing so strongly towards New York, and in causing the edifice of American speculation to totter. But that it would collapse so completely was hardly to be expected.
The slump on the New York Stock Exchange, which has resulted in this great change in the monetary outlook, is one of the spectacular episodes of financial history. A prolonged upward movement, the extent of which is illustrated by some graphs which we print in a later column, has been built up over a series of years on the amazing and unexampled prosperity of America. But some two years ago the speculative movement seemed to lose all touch with reality; and in spite of occasionally vigorous but more often half-hearted, measures by the banking authorities of the United States, speculative fever spread throughout the nation and carried prices, mainly with the aid of borrowed money, to fantastic heights. Writing of the efforts made to check the movement, a high authority observes:
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Filed by The Editor on October 6th, 2008
September 16, 2008
Financial Crisis, History & Society, In Other Words
(Reflections on the first era of true globalization, complete with bountiful trade, unparalleled upward mobility, liquid labor markets, secure international travel, and a blissful ignorance of the fragility of this new 20th Century World Order…)
Excerpt from Economic Consequences of the Peace by John Maynard Keynes, 1919
What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages.
The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend.
He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference.
But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.
The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalisation of which was nearly complete in practice.
It will assist us to appreciate the character and consequences of the peace which we have imposed on our enemies, if I elucidate a little further some of the chief unstable elements, already present when war broke out, in the economic life of Europe.
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Filed by The Editor on September 16th, 2008
July 5, 2008
History & Society, In Other Words
(See below for yet another in a series of elaborate digital frauds. Somewhat surprising is the considerable improvement in grammar and argument – it may even have been written by a native English speaker. Not surprising is the use of a decade old framework – the Nigerian 419 scheme – to lure unsuspecting Westerners into providing key banking information in exchange for a share in a large and unattributed overseas estate. The “four one nine” comes from the section in the Nigerian penal code which deals with such frauds. To hear Der Spiegel tell it: “A 419 is a mass crime, a money generator, and could aptly be described as the use of globalized methods as revenge by the losers of globalization.” Most worrisome is that the crime’s virtual beginnings take on a pseudo-realistic “Truman Show” flair, as victims are eventually flown to Lagos in person and introduced to limo drivers, hotel staff, and bank workers who carry the scam to its logical conclusion. This isn’t a miracle cure for erectile deficiency or a $100,000 qualified student loan, but a fully-integrated bricks and clicks criminal network operating within the borders of a Western resource ally, suggesting that the real “losers of globalization” might not be confined to developing states alone…)
———- Forwarded message ———-
From: Benjamin Ghanemy
Date: Sat, Jul 5, 2008 at 8:11 AM
Subject: A TRUE STORY/READ UNDERSTAND AND GET BACK TO ME
Hello,
I am Benjamin Ghanemy, British citizen and Principal assurance manager for the HSBC in London. A staff of Yokozona consultancy firm got in touch with me regarding the estate of Simeon Arag. And an investment placed under our banks management 3 years ago. I would respectfully request that you keep the contents of this mail confidential and respect the integrity of the information you come by as a result of this mail. I contact you independently of our investigation and no one is informed of this communication. I would like to intimate you with certain facts that I believe would be of interest to you.
In 1997, the subject matter; Simeon Arag came to our bank to engage in business discussions with our private banking division. He informed us that he had a financial portfolio of 8.35 million United States dollars, which he wished to have us turn over (invest) on his behalf. I was the officer assigned to his case; I made numerous suggestions in line with my duties as the de-facto chief operations officer, especially given the volume of funds he wished to put into our bank. We met on numerous occasions prior to any investments being placed. I encouraged him to consider various growth funds with prime ratings.
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Filed by The Editor on July 5th, 2008