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Friday, October 17, 2008

Is The Economy Ruled by the God of Fate?

HISTORY IN THE NEWS:

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History never dies. It is reborn every minute of every day.

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DEVOTED TO THE DEEP ORIGINS OF CONTEMPORARY EVENTS AROUND THE WORLD.

"Without possessing shares, or even a desire to acquire any, one can carry on a business in them...The seller, so to speak, sells nothing but wind and the buyer receives only wind."
-an observer during the stock craze in late 17th century England, quoted by Hugh Thomas in his 'History of the World.'

IS THE ECONOMY RULED BY FATE?


Hugh Graham, Oct. 20, 2008

As Washington calls for a world economic summit, one senses an international community driven to desperation. Since no single decision or error caused our economic world to be turned upside down in a matter weeks, one asks, what was behind it all? And we are left with the usual answers to such dead-end, primordial questions: Fate and Chaos.

After the recent economic maelstrom, what had seemed an eternal debate- whether governments should intervene in the economy- is suddenly breathing its last. Almost everyone now believes that in dire cases they should. Near-absolute laisser faire, as we have known it, ay be on its deah bed, never to revive. From the wreckage a new question has arisen and that's about where the state should lend a hand- at the top or at the bottom of society. It should be borne in mind, however, that the two styles of government meddling were alive seventy-odd years ago. And for that alone we shoud be wary.

President Herbert Hoover, who served from March, 1929 to Novermber 1932, presided over the the Wall Street Crash. Hoover was a firm believer in a sort of "corporatism", the belief that big, grand institutions like government, business and the unions, should guarantee society's economic safety and that the government should inject money at the top, into banks and corporations, to keep everything afloat. He was an engineer and saw the economy as a steam engine that could run smoothly with constant tinkering.


But Hooever was only carrying on the policy allowed by his cool and detached predecessor, Calvin Coolidge. In 1927, at a secret meeting on Long Island, Britain, the United States and American big business agreed to inject large amounts of cash into the international economy to keep the Anglo-American powers dominant in world trade. The measure became famously known, in the words of Benjamin Strong, head of the New York Federal Rerve Bank, as a "little coup de whiskey". Eighty years later, our own banking systems have had their own "little coup de whiskey" and we are waiting, uneasily, to see the results.

Hoover carried on the same sort of thing, pumping liquidity into the banks and other financial institutions to keep credit flowing freely- the very credit which became overextended and worthless, the very liquidity that was gobbled up by the only big institution which Hoover himself abhored- Wall Street- and failed to trickle down to the single great entity which would have saved America- the consumer. This was Hoover' policy on the eve of Wall Street Cash, an eerie foreshadowing of Treasure Secretary Hank Paulson's 700 billion solution to the recent liquidity crisis- which poses the yet eerier question: have we already seen our Wall Sttreet Crash or is it, like Hoover's, yet to come?

Whistling in the dark and dismissing the Crash as a downturn in the business cycle, Hoover foreshadowed another bit of present hubris, declaring the "market fundamentals" to be fine. Using his Reconstruction Finance Corporation to prop up anything sufficiently corporate, like banks and railways, he relentlessly pursued the same policies, using the floods of cash that had helped sink the economy, to revive it. And, as with present US policy, he continued to keep interest rates artificially low. The result was the Great Depression.

The only available cure was the other kind of intervention -intervention at the boottom- that arrived in the form of the New Deal cobbled together by Hoover's successor, Franklin D. Roosevelt. Massive public works projects, bringing employment to millions, finally put money in the hands of consumers.


Today, we are learning that pouring in liquidity at the top, along with tax breaks for the rich, remains, like the stock the market, a gamble: the rich may or may not be productive; it was the rich after all, who just sunk Wall Street or were victims of the calamity; even then, the main trickle-down effect of Wall Street's massive winnings of the last few years was in the form of worthless sub-prime mortgages.


If people cannot always be relied upon to lend honestly or to run a solvent enterprise, they can at least be counted on to spend money. A new New Deal of jobs and tax breaks for consumers may turn out to be America's new old policy. In the near and perilous furure it may indeed be safer to put money directly into the hands of consumers rather then into the hands of lenders.

If President Bush has been an echo of Hoover, Barak Obama, if he wins the election, may, with his own new Deal, evoke Roosevelt. If he does, it will be through pragmatism and not through any thunderbolt of genius. Even then, it is doubtful that even a happy ending will improve the overall picture. It will only be another economic rescue- a rescue of one kind rather than the other. In the end, the panorama will remain a dark one: human history's tragic tendency to repeat itself in ever new forms.

The business cycle, after all, has become a broken circle and Adam Smith's Invisible Hand of the market has become a grasping fist. Our old gods, it seems, are fading before something mightier. In antiquity, even the great monarchs of the heavens, Zeus, Jupiter and the Persian sun god were subject to the Chronos, Fortuna or Zurvan, the often obscure and less-mentioned Gods of Fate. Whether or not Washington's world economic summit might find a way through the darkness, the old certainties of unfettered capitalism have been replaced with a new certainty- the Visible Hand of Government- whether at the top or at the bottom. Not something anyone wanted. But something Fate has decided.


TIMELINE OF THE HISTORY OF BUSINESS, BANKING, CREDIT, SPECULATION, BUBBLES, RECESSION AND DEPRESSION.

Business spawned in Europe by the Crusades.

-business ventures in the form of companies are begun in Italy to outfit the crusades.

1200-1300- increased contacts with Christian and Jewish moneylenders in the Middle east, during the crusades leads to the development of three kinds of money-management in Italy:1) petty money-lenders; 2) money changers dedicated to currency exchange, precious stones, and bullion; 3) bankers who were at the same time merchants. The Amalfians, Pisans and Venetians were the earliest, followed by the Florentines.

Birth of the Stock Market.

1300-1400 (circa) concepts of the company, the share, the capital market and the stock market develop in Italy.

1500-1600- immense influx in Europe of precious metals, extracted by Spain from Latin America allows most countries to have a gold standard.

-Dutch develop prices, stocks, commodities and shares, learned from Venice and Florence. They develop speculation of commodities like herring and whale oil.

1550-(circa) Dutch are the first to discover financial speculation in shares or companies.

1551- bank of Palermo founded.

1554- the tulip arrives from Turkey into Europe.

1587- Banco de La Piazza Rialto founded.

1593- Banco di San Ambrogio founded at Milan.

The Tulip Bubble: Speculation Becomes a Reason for the Declines in the Business Cycle.

-before the 17th century, depressions and recessions are usually caused by non-economic circumstances such as wars, crop failures and environmental disasters. In the 17th and 18th century- large economic disruptions begin to be caused by financial speculation.

17th century- in Holland, overheated speculation on tulip bulbs, still believed to be rare, leads to a bubble followed by collapse.

1609- Exchange bank of Amsterdam founded.

-Banco Santo Spirito founded at Rome.


England is a Late Comer to Stocks and Banking.

1690s- with enthusiasm, the English launch into speculation in shares and companies- founded by the Dutch over a century earlier. Stock brokers appear.

-1694- Bank of England founded when a group of people agrees to lend 1,200,199 pounds to William III atb 8%. In return they got the title of corporation, the right to receive deposits and socount commercial bills as the Dutch and Italian banks had already been doing for some time.

The South Sea Bubble and Missippi Bubbles

1711- Robert Harley founds the South Sea Company. Holders of $6 million worth of government bonds are allowed to convert them into stock for Harley’s company which is given a monopoly on British trade among the islands of the south Pacific. The entire enterprise is predicated on concessions from Spain after the end of the War of the Spanish Succession.

1717- in France, financial adventurer John Law converts Antione Crozat’s commercial privileges in Louisianna into a La Compagnie de L’Occident, a trading company intended to handle all French colonial commercial ventures in Africa, the Indies and China. It soon becomes the Compagnie des Indes.

1720- the ‘Mississippi Bubble’ France allows Law’s Compagnie des Indes to assume the national debt, merge with the royal bank and collect taxes. Stories circulating about fabulous riches in Mississippi and Arkansas lead to massive public speculation. In October, the bubble bursts and everyone but a canny few loses their money.

1720- Britain (like France with the Compagnie des Indes) agrees that the South Sea Company should finance the national debt. A massive rush to invest results in an overextension of credit which inflates share value. Banks fail, unable to collect loans on inflated stock. Thousands of investors are ruined.

-stock brokers gradually becoming respectable in England.

1762- London stock exchange founded in a coffee house by brokers of commodities such as cotton, wool and corn.

The New York Stock Exchange,

1790- New York Stock Exchange is founded.

-limitied liability appears, by which a company's stockholders could not be held responsible for debts owed to creditors, should the company go broke.

1819- economic crisis.

1820- the London stock exchange is officially recognized.

Beginning of International Banking.

-international banking begins in England. London banks, such as the Rothschild fund foreign countries to back the coalitions against Napoleon.

1825- economic collapses begin to be caused by industrial problems and not just commercial speculation.

-Britain and Europe, sharing similar economic circumstances and counting on trade from the U.S., form the heart and centre of a maritime world economy.

Economic Downturns of the Late 19th Century.

1857- economic crisis.

1873-1896- world economic depression results in a massive drop in prices.

1893- U.S. Financial Panic. Stock market crashes along with thousands of businesses and financial institutions. A depression ensues, setting off violent conflicts between capital and labour.

1901- the creation of positive wealth has begun in the international economy and will continue, interrupted only by the Depression and recessions.




1907- economic crisis.

1914-1918- with World War One- the US becomes the world's leading manufacturer and leading exporter.

World War I results in A Reckless U.S. Boom in Production and International lending.

1919- European economies battered by World War I. The response to rocketing inflation and exhaustion from austerity is almost universal protectionism. Immense war reparations discourage Germany from economic growth. The. U.S. lends out money to solve these problems, creating a dangerous dependence on US prosperity.

-the US, starting as supplier of the allied nations before joining the war in 1917, goes from being a debtor nation in 1914 to a major lender, a ceditor nation, by 1919.

1919-1929- rampant stock speculation in the U.S.. Increase in international, inter-state indebtedness and war-time state intervention in the economy may have contributed to the crash of 1929.

Reckless extension of credit nationally and internationally by the U.S government.

1921- US embarks on a policy of heavy government subsidizing of the economy, by extending credit nationally internationally from the Federal Reserve, giving artificial support to exporters and to selected foreign loans and bond issues to keep the international economy healthy and of benefit to the US. Many of these will turn out to be bad loans.

-this massive extension of credit, internationally, is adopted in the name of "price stabilization."

The U.S. becomes Protectionist.

1922- the Fordney-MacCumber Tarriff Act starts a US-led trend in protectionism.

1925- Europe recovers from the war; Germany receives an international loan to help it with its reparations.

1926 -deflation as commodity prices fall. But stock prices rise relentlessly.

-US holds massive internatioal debts, accumulating since 1914.

"Buying on Margin" with borrowed money allows for massive investment in market
by many ordinary Americans who will be unable to repay their loans.

-promiscuous lending by brokerages as myriad investors borrow money to buy stocks- otherwise known as "buying on margin". Sometimes the borrowed money would account for five to ten times the amount they'd invested of their own money. Gains could be made, strictly on paper, by bidding against other stock holders. But losses would force those who had bought on margin to sell their stock to pay back their lender.

-with stabilization by means of credit, prices of manufactured goods, like cars, are not stable but keep on rising- while wages fail to keep up, so consumer spending begins to decline.

The Norman-Strong meeting: Secret Injection of Credit by US Government and Big Business.

1927- July- in response to the decline in spending, Montagu Norman, governor of the bank of England and Benjamin Strong, governor of the New York federal reserve Bank meet at Ogden Mills, Long island, with Standard Oil's Ruth Pratt. Together, they secretly add more credit to the international system. The Fed reduces its lending rate by a half percentage to 3.5. This sets in motion the final tidal wave of speculation. Strong's "little coup de whiskey" benefits the rich but does little for ordinary consumers.

-foreign governments will see the Odgen Mills meeting as a political strategy: an Anglo-American attempt to dominate the international economy by holding other nations in debt.

-for four years, 1926-29, the Norman-Strong policy of 'price stabilization' bolsters the world economy.

1928- short-term loans in US become more expensive.

-a huge increase in buying on margin is accompanied by patched-togethert investment trusts.


U.S. Continues to keep interest Rates Low.

-the U.S. keeps its interest rates artificially low.

-the US begins to call in European loans which borrowers have had trouble repaying.

-demand slackens in US as consumers prepare for a slow-down.

1929- in Europe and the West, manufacturing returns to 1913 levels. 1929 is a record year for European trade.

Herbert Hoover's Government-Business 'Corporatist' interventionism foreshadows 2008.

March, 1929-1933- Herbert Hoover president of the US. His 'corporatism', the belief that America's well-being should be entrusted to an alliance of big business, the state and the unions, is said to have led to the state interventionism that fueled the 1929 market crash and the depression that followed. His failure to allow interest rates to rise is also said to have been responsible.

-spring- prices on European exchanges weaken.

-June- US economy stops expanding. Shares begin earning less than they cost.

-July- US inflation is not caused by currency but by credit augmented by the White House, Treasury, Congress, government and private banks. The injection reaches $73 billion, up from $45 billion in 1921. Meanwhile, interest rates are kept artificially low.

-Sept 3- US bull market comes to an end.

Stock Market Crash of 1929.

1929- Oct. 29th- black tuesday- US stock market crash triggers the Great Depression which will last until 1940.

-declining values on the market trigger waves of selling as stocks, even strong ones, are cashed for liquidity.

November- stock values have declined by 40%.

-US bankers rally to support the stock market.

1929-1932- the average value of 50 US industrial stocks drops from 252 t0 61. 5,000 banks fail. World industrial production declines 38%. International trade falls by 2/3. US national income falls by more than half.

1929-1933- prices drop 24%

-President Herbert Hoover dismisses the crisis as 'a low point' in the business cycle.

1930 -the market recovers only briefly.

1930: The Market Crash Spreads to Europe.

-Austria and Germany consider a customs union to fight their own debt crisis. France considers this a violation of agreements preventing any political union of Germany and Austria and refuses to extend credit to Austrian banks. Austrian bank failures lead to a run onGerman and then British banks.

-U.S. government institutions maintain a laissez faire attitude and avoids intervention, believing, erroneously, that the economy will correct itself through natural market forces.

-world trade collapses. Coffee, copper and sugar cane hit bottom. All manufacturing countries have unemployment over 10%

1930: Smoot-Hawley: the US Furthers its Protectionism.

1930- with the Smoot-Hawley act, the US imposes tarriffs on imports which will worsen the effects of the Depression.

-Americans cease to invest in foreign countries or to buy their goods. The post war revival of the European economy stalls.

1931- Reserve Bank of New York raises interest rates in order to stem the outflow of gold and prop up the dollar.

-the failure of Vienna's Creditanstalt Bank sends waves of financial collapse across Europe.

1932: The End of the Gold Standard. Increased Economics Nationalism and Protectionism.

1932- with currencies convertible to gold (according to the gold dtandard), nations fear capital flight. Led by Britain, which stops making payments in gold, 12 European nations go off the gold standard.

-countries whose exports fail to bring in needed imports allow declines in their currencies, hoping that a cheaper currency will increase their exports. But since so many countries are competing the result is a race to the bottom and international financial chaos.

-Britain is forced to pay for imports with gold.

-Britain signs the Ottawa agreements with British dominions like Canada, to lower tariffs for one another's goods but not for the rest of the world.

-30 million unemployed around the world.

-as demand slackens, manufacturing diminishes internationally.

1932- price index of industrial shares has fallen to 1/8 of what it had been before the crash. The U.S. GNP is down to half of what it had been. Unemployment is at 25%.

1932: Hoover starts Programs which will continue as the New Deal.

-President Hoover founds the Reconstruction Finance Corp. enabling the government to lend money to banks, railways and other major institutions. The Corporation will fund public works under Roosevelt.

-lower costs result in a modest increase in industrial output.

-the Senate Committee on Banking and the Currency investigates wrong-doing on Wall Street.

Roosevelt Elected President at Nadir of Depression.

Nov.- Roosevelt elected president.

-myriad bank failures at end of 1932 and in early 1933.

-the stock exchange closes its doors as do most banks.

1933- March 4- Roosevelt takes office and is immediately granted great presidential powers over banking.

- the US quits the gold standard.

The New Deal

1933- the New Deal- the Securities Act. Companies issuing stock must fully inform their investors of all facts concerning the offered shares by registering their stock with the Securities Commmission.

-as part of President Roosevelt’s New Deal, the following three acts, from 1933-1935, are passed by Congress in response to the crash of 1929, to better protect stock market investors against catastrophic declines in the values of securities.

-peak of US banking crisis.

-Roosevelt's 'big government' policy differs from Hoover's in its attention to 'direct relief' for the needy and unemployed as opposed to Hoover's government largess to banking institutions. Otherwise, Roosevelt's was an extension of Hoover's policies. Some feel that such measures only delayed the market's ability to correct itself, which it would otherwise have done much sooner.

-an International Monetary and Economic Conference meets in Londond to disentangle and free up international trade. It fails.

1934- the New Deal: Securities Exchange Commission created by the Securities Exchange Act to prevent unfair practices.

1935- the New Deal: the Public Utility Holding Company Act.

-Canada's Prime Minister RB Bennet brings in unemployment insurance, farm support and a pension plan in a Canadian 'New Deal".

-debtors to the United States default, causing the US to deny them access to loans boans and the US securities market- increasing world economic nationalism.

1939- the New Deal- the Trust Indenture Act..

-the Depression results in increased economic nationalism and self-sufficiency around the world. The international gold standard is abandoned. International financial chaos ensures with many governments almost embarking on state capitalism or govenrment control of imports and exports.

1940- the New Deal- the Investment Advisers Act.

1943- US deficit reaches $4 billion.

1944- July- Bretton Woods Agreement. The US dollar becomes the new standard of exchange; the International Monetary Fund (IMF) and the World Bank are founded to enable "capital-exporting" companies to invest in poor or developing countries. This, in effect is the extension of Keynesian economics from the national level to the world.

World War II ends the Depression, initiates a Boom.

post-1945- mass industrial production and consumption in Western Europe and North America.

1947- the General Agreement on tariffs and trade (GATT).

-free market policies begin to replace state intervention in the government.

1950-1970- unprecedented economic expansion.

1970-74- unprecedented economic competition.

Recessions of the 1970 and 1980s.

1973-74- recession is caused in the West by competitive Third World industries employing cheap labour, strong Japanese competition in the electronic market and a steep rise in imported commodities, especially oil. US suffers for having neglected oil investment and exploration. Economic slowdown and inflation leads to ‘stagflation’.

1982-83- severe global recession.

Reagan and Thatcher launch the conservative, Free-market revolution.

1983-1987 -rapid economic expansion.

1987- October- a loss of 500 points on the New York Stock Exchange triggers a recession that will last into the early 1990s.

New Heights of Fraud Emerge on Wall Street: Insider Trading.

1986-1988- the problem of Insider Trading raises its head in the United States.

1986- Dennis Levine is convicted of Insider Trading.

1988- Michael Milken is convicted of Insider Trading.

1990- NASDAQ accounts for the fifth greatest volume in stock trading in the world.

The Dot-Com Bust.

1991- economic recession.

1990s- the high tech boom, and the “irrational optimism” confessed to by Allan Greenspan leads to the “dot com” bust of the late 1990s.

2000- the US public debt is at $5.7 trillion.

The 9/11 Downturn.

2001- the terrorist attacks of 9/11 slow down a recovering market.

The Sub-Prime Mortgages Bust.

2007- a wave of sub-prime mortgages leads to an over-extension of credit to low-income borrowers who are unable to pay them back.

2008- under the weight of the sub-prime mortgage crisis, the post-9/11 market boom crumples leading to a probable recession.

Sept 15 -the failure of the Lehman Brothers investment bank due to massive investment in worthless sub prime mortgages, residuals and other obscure and risky banking products sparks a chain reaction in which banks tighten credit, refusing to lend to other banks for fear their loans will not be repaid.

Oct. 3- US treasury Secretary Hank Paulson releases $70 billion to buy up sub-prime mortgages. Many are angry that tax payers will foot the bill. But Paulson has faith that the bank will start to make the money back when the mortgages regain value with economic recovery.

-banks are nationalized around the world in order to prevent an international financial crash.

-US public debt has rfisen from $5.7 trillion under Clinton to $10.2 trillion under Bush.
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