Crash: ghosts and fears
Agence France-Presse
(as published in PDI, 10.9.08)
PARIS -- The "Crash of 2008" is a problem: economists can't define it, collective memories react with deep but differing emotions, and current values clash with what "crash" meant in 1929.
The current crisis is the worst since the great Wall Street collapse created a vortex from which emerged the Great Depression of the 1930s, economists agree in comments to AFP.
It qualifies as a "crash," but dictionaries too are shy of defining something so emotive, although there are some reference points.
In the worst two October days of the Crash of '29, US stocks fell by 25 percent, shedding about half their value by the end of November and 90 percent by 1932.
And in the "crash" of 1987, the London market fell by about 20 percent in two days. Wall Street fell about 30 percent in the last four months of that year.
So collective wisdom points to a scale at the lower end of the "crash" index: 10 percent in a day, 20 percent in two days, with little significant immediate rally, or 30 percent over weeks or months -- a figure in the realms of some stock falls earlier this year.
But the real significance of the word lies not so much in the measure it lacks, but in the fear it breeds.
In the United States, those fateful years before World War II are associated most clearly with bread queues, mass poverty and eventually the New Deal to kick-start the economy with the new-found accelerator of public spending.
In Europe, they most immediately revive images also of deprivation and desperation, but most vividly the rise of Adolf Hitler and Benito Mussolini.
There have been many other crashes, before and after '29, some of great severity, and "in Argentina, they think of 2001 when the middle classes were wiped out overnight," says Professor Jonathan Story at top European business school INSEAD near Paris.
A bank deposit guarantee at a fixed dollar exchange rate proved worthless when the currency fell 80 percent and the government defaulted on its obligations, destroying middle class savings.
So the term "crash," certainly means something in economics, the experts say.
German Interior Minister Wolfgang Schaeuble warned this week that this crisis could have political repercussions and expressed the collective memory that Adolf Hitler rose to power within a few years after 1929.
"We learned from the worldwide economic crisis of the 1920s (and 1930s) that an economic crisis can result in an incredible threat for all of society," he said.
Story said that such ghosts and emotions explain part of the modern impact of the word. "Crash: People think of 1929-30, Adolf, crystal glass (anti-Jew shop-breaking) marching, jackboots."
This was a false comparison because the forces which brought Hitler to power were far more complex.
There was also an implicit modern significance to the meaning of crash, in that it expressed what could happen when imbalances became unhinged, credit failed, and a public assumption that "pleasure is for ever" broke down.
Story, who also holds a chair at the Lally management school in upstate New York, said: "It's a problem of value systems."
A similar point was made by economist Dr. Jon Danielsson, an expert on financial crisis at the London School of Economics.
"There is no single definition of what a crash is," he said, offering: "A rapid onset of adverse, unforeseen price drops or events which may be a large drop in stock prices or drying up of inter-bank lending."
But: "We have got used to using the word 'crash' over increasingly trivial events in financial markets. If the word 'crash' is used to describe trivial events, it does not make us realize the importance of what is going on."
Emotional perceptions of the past and value systems of the present became confused.
"Changes in our comfort zone today get mixed up with historical sense of what 'The Crash' was.
"We are in the middle of a market crash .... At the moment the loss is serious but not catastrophic."
The 1929 crash was a benchmark because "the stock crash was transmitted from Wall Street to Main Street" owing to "the failure of governments to understand the seriousness of the situation, failure to take appropriate policy responses and failure to coordinate internationally."
Now, he said, "governments are being pro-active. They understand the seriousness and are cooperating admirably well."
Referring to the head of the US Federal Reserve central bank, Ben Bernanke, he said: "Bernanke is one of the world's experts on the Great Depression and it's a great aid to have him in charge at the moment."
The mistakes made then are well understood and economists remember "or are re-reading the history books."
Bank of America economist Gilles Moec in London said: "I don't know of any clear definition of 'crash'."
Referring also to deep German sensitivity to inflation owing to hyperinflation in the '20s and '30s, he said: "It is seen as having sown the seeds of the war and major disruptions globally. The particular sensitivity of the German people can be traced back to the 1920s.
"This has a bearing on the collective psyche .... There is a lot of emotion about the word crash because that crisis preceded bad things."
Stock markets now had fallen back only to levels at the end of the last mini-recession in 2001-2003. "We have to put things in perspective," he insisted.
Antoin Murphy, associate economics professor at Dublin University Trinity College who has written extensively on crashes, took the same broad view.
"I don't know of a ready definition."
The Depression was associated in the United States with unemployment of up to 25 percent. The US economy took eight years to recover and stock prices decades longer.
Crashes left "painful" and "psychological scars," wiping out people's wealth. And depressions put families into great hardship.
"I wouldn't call forth the forces of fascism, but I would say that this is the most serious financial crisis that the global economy has faced since the Great Depression," he said.
The surest way of knowing what a "crash" is, the economists said, is with the perspective of what it was: hindsight.#
