Monday, October 27, 2008

The End Is Not Here

The End Is Not Here

How does today's financial crisis compare with the beginning of the Great Depression and the 1930s? — Landon Romano, Johannesburg

Without doubt, you can pick a statistic here and a data point there, lump them together, and cook up a case that it's 1929 all over again.

But you shouldn't.

Yes, the current crisis is dire and will certainly worsen. In previous columns, we've predicted tough economic conditions for the next several quarters as the financial system's deleveraging is followed by a consumer deleveraging. But for many reasons, we don't see a second Great Depression looming. To paraphrase Franklin Delano Roosevelt, we believe the main thing to be pessimistic about today is pessimism itself.

To repeat: We know that real pain lies ahead. But we believe that when the pain eases—and it will—the global economy will be stronger and sounder than ever. We just have to get there—and we will—provided we stop fixating on, well, the exact question you pose.

Not to criticize you for asking! You're not alone, and we appreciate the chance to counter some financial journalists and all-purpose pundits who, like weather forecasters in a hurricane, are becoming giddy as they describe the biggest "storm" of their careers. Their excitement is understandable, but some perspective has been lost in the fray.

Let's start with the comparisons to the conditions that surrounded the decade-long collapse some 80 years ago. Sure, current times hold similarities to this period, but they're dwarfed by the differences. In 1930 the protectionist Smoot-Hawley Tariff Act ushered in years of international retaliation and discord. Today's crisis is marked by a high degree of free trade and global cooperation. In 1933 the National Industrial Recovery Act encouraged labor and industry cartels. The result was a decline in U.S. competitiveness—again, hardly the current case: American companies have never been in better fighting form. Finally, a second Great Depression is unlikely because of the institutions created to prevent one, foremost being the Federal Deposit Insurance Corp., with its authority to insure deposits, critical to stabilizing the banking system.

Instead of another Depression, some doomsayers predict a deep recession like in the early '80s, when U.S. GDP shrank in five quarters over a two-year span, with the worst quarter posting a 7.8% slide. Inflation neared 15%, the prime rate was at 21.5%, and unemployment hit 11%. Our indicators will worsen, but such numbers are miles from where we stand.

Others say we're marching into French-style socialism. Au contraire. The U.S. government has a century-long history of handling interventions with a fast-in, fast-out approach. In 1984, to take a recent example, it bought 80% of Continental Illinois National Bank but sold it just 10 years later to Bank of America. In 1989 it created the Resolution Trust Corp., which cleaned up the savings and loan crisis, then quickly packed up. TARP, the federal bailout plan, looks to be no exception, as its loan terms give banks flexibility and strong incentives to pay off the government within five years.

Our bottom line is this: Managers should stop looking back in search of the future. It's counterproductive, if not dangerous. To get through this crisis, leaders need to talk about reasons for confidence. America is loaded with energy and creativity; it's a culture that exalts entrepreneurs, who drive every recovery. Its system of higher education is envied worldwide. The country is brimming with strong companies with sustainable cash flows. And as daunting as the downturn is sure to be, it will also create vast opportunity as people heed Warren Buffet's advice: "Be fearful when others are greedy, and greedy when others are fearful."

Look, we're not Pollyannas. It's human to view your own difficulties as "the worst of times." But this painful but necessary correction will result in a healthier, deleveraged society with a renewed focus on productivity, innovation, and better governance. The end is not here. A new beginning awaits.

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