This week marks the one year anniversary of the acceleration of America’s latest economic meltdown. As we debrief the (ongoing) disaster and figure out how to respond, job losses have mounted, compensation has flattened, and retirement accounts have taken a beating. There are signs of a turnaround, or at least of a bottoming out, but as for a true jobs recovery, well…
As a visit to the bookstore, newsstand, or popular news websites will confirm, there is no shortage of books and articles analyzing what happened. This includes thick tomes tracing the seeds of the subprime lending market for real estate, the corporate corruption, and the government’s inaction or bad actions during the looming crisis.
Especially if your reading time is limited, skip that pile and take a look at John Kenneth Galbraith’s A Short History of Financial Euphoria (1993, rev. ed.). It’ll give you a broader historical view of boom and bust economic cycles, written with wit and insight in a little over 100 pages.
Galbraith passed away in 2006, but he would not have been shocked at the events of 2008 and beyond. This slim volume traces some of history’s biggest market collapses, starting with the remarkable Dutch tulip mania during the 17th century (he’s not making this up), and quickly moving to America’s big crashes of the 20th century.
Galbraith identified several common denominators in “speculative episodes” that lead to market implosions. It starts with “an element of pride in discovering what is seemingly new and greatly rewarding in the way of financial instrument or investment opportunity.” Those advancing the idea, at least at the outset, are praised for their vision, as others join in exploiting the riches that await them. In reality, however, there is very little innovation: “All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.”
In some instances, a few voices in the wilderness will be questioning the speculation and predicting a day of reckoning. They will be criticized, even shouted down, by the mob rushing to cash in on the moment.
At some point, economic gravity weighs in and the inevitable crash occurs, followed by “a time of anger and recrimination and also of profoundly unsubtle introspection.” Much of the anger will be directed towards those celebrated “for their financial imagination and acuity” during the boom period. Some will go off to prison. There will be much “talk of regulation and reform,” but little discussion of “the speculation itself or the aberrant optimism that lay behind it.”
Galbraith concluded his extended essay by saying that no one could predict what “the next great speculative episode” would involve, but the one certain thing is “there will be another of these episodes and yet more beyond.”
How familiar! And how sad for all the rank-and-file workers and their families who pay a huge price for this irresponsibility. There are a lot of things on my Labor Day wish list, but let me use this opportunity to pine for a sound, stable economy that doesn’t use workers like chips at a rigged casino game.
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