This Time it’s Not Different

Friday calls for lighter fare, so today I thought I would present evidence that this financial crisis we are now living through is not particularly unique. Realizing that some may find the idea that we are doomed to go through this 1884 every few decades less than cheering, I will present it in the form of a quiz.  As I’ve said before, everybody likes a quiz.

Question 1: The Buildup

In what year did BusinessWeek editorialize as follows about the stock market?

For five years at least American business has been in the grips of an apocalyptic, holy rolling exaltation over the unparalleled prosperity of the "new era" upon which we, or it, or somebody has entered.

Stock prices are generally out of line with safe earnings expectations, and the market is now almost wholly "psychological."

1999 or 2000 are good guesses.  Sounds like the top of the dot-com bubble doesn’t it? Remember all that talk about how the web had ushered in a new paradigm of business and how three digit multiples for internet stocks made perfect sense?  And all the hand-wringing that went with it?

It’s not from the turn of the millennium.  Here’s another quote from around the same time, this from a well-known (but often ignored) economist speaking at 1907 an annual conference:

I repeat what I said at this time last year and the year before that sooner or later a crash is coming…. The Federal Reserve System has put banks in a strong position, but it has not changed human nature.

The word “crash” gives it away. Both quotes are from 1929.

Question 2: The Crisis

This one is harder.  Try to guess the year. At the height of this fiasco, things got a little out of hand in lower Manhattan.  This is from the excellent book Every Man a Speculator

Five thousand of the unemployed demonstrated on Wall Street chanting "We want work," and demanding that banks open up credit lines to businesses promising work. … Populist mayor ____ demagogically denounced Wall Street, declaiming that “those who produce everything get nothing and those that produce nothing get everything.”  He was instantly abandoned by his onetime conservative backers in the business community. The New York Times accused him of raising the banner of “the most fiery communism.” … When ____ was unceremoniously dumped from the Democratic Party ticket, his friends blamed it on “Wall Street Democrats” who were more than ready to see the government bail out failing banks, but not destitute workers.

Some of the politics may sound familiar today, although it is hard to imagine the Times complaining about fiery communism or a New York mayor being dumped because of it.

You might have guessed the 1930s, when mass protests, communism, and the justice of government bailouts were in the news.  But you would have been off by 73 years.  This was a description of the panic of 1857.

Question 3: The Aftermath

One more.  After this stock market disaster, it did not take long for the media 1929to develop the theme of how shocking the new economic reality was going to be for those recently rich Wall Street types.  From the New York Times:

"People who have had such faith in the stability of those markets are going to be forced to evaluate what they consider stable, predictable and important in life." said Dr. Steven Berglas, a Boston psychologist. "Their sense that the more they made, the more control they had over life is going to be totally ripped from their psyches, and for a lot of people it’s going to  be very stressful."

"You get security from a friend, from a family, from a network, from community," he said. "People are going to be looking around and seeing how vulnerable they are, how they have no one to turn to, that they have no one comforting them over the prize bottle of Margaux.  Those are the people who are going to get hurt."

____, the venerable Wall Street analyst, said "these yuppies are unprepared and unconditioned" for a bear market. "They’ve greeted every one of these bad days as buying opportunities and as quasi corrections."

This pseudo sympathy for the traumas of formerly well paid young people sounds familiar, doesn’t it?  But it’s not that recent.  This is from October 21, 1987, two days after what is still the worst single day in stock market history, in which the S&P 500 lost 20.4%.

Long term effects of Black Monday were possibly less traumatic than anticipated.  The S&P would end 1987 down slightly less than 2% for the year.  Over the next 12 years it would average 19.06% return annually.

One of my favorite bits of wisdom is the quip, attributed to John Templeton, that "The four most dangerous words in investing are ‘This time it’s different.’"  To be sure, the details really are different.  But the big picture stuff, the parts we care about, are pretty much always the same.  Because even though the names of the companies may change, and the technology may progress, what drives the market is people, and we haven’t changed at all.

[Pictures show Wall Street on very bad days in 1884, 1907, and 1929.]

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