Wednesday, January 28, 2009

Will the speed of 2008 crash be met with a speedy recovery?

I was reading this article yesterday about Citibank, by Alice Schroeder, the author of the latest Warren Buffett biography, The Snowball: Warren Buffett and the Business of Life, and it got me thinking about the break neck speed in which the crash of the credit market led to a plunge in global stockmarkets, a collapse of the banking system in the US, Europe and other countries and then a massive banking rescue package-that didn't achieve its purpose, a global recession and then more recently a huge "stimulus" package pushed by Obama's democrats.

To be sure, you could see a "market correction" coming from a few years ago but the sheer pace of the economic structural collapse over the last 4 months or so has taken many peoples breath away and there will be more financial heartbreak to come.

The piece in Schroeder's article that really got my wheels turning was her retelling of a story about a man who wanted to withdraw $50,000.00 in cash from his local Citibank one Saturday morning, in November 2008. The fuss and flap that this caused the teller and the bank manager and then the queue of people in the bank paying closer attention as voices started getting raised because this chap was getting the run around.

“I want my fifty thousand dollars,” the man said to the teller. The subtlest nerve-twitch crossed her face, but she kept her gaze steady. "I'll have to call my manager," she said. Anyone who has seen "It’s a Wonderful Life" knows: That’s the wrong answer. “I want my money,” said the customer, in a voice audible throughout the lobby. “I don’t want your check!” Tiny gasps from the line. Somebody had said it aloud – Citi’s check might bounce...

It was a run on the bank!

On the Sunday the Treasury Department pulled a rescue plan out of the hat that stopped the run on banks when they opened Monday, that would have been reminiscent of the 1930s.

The world knew about the run the following day.

When we compare the 1929 crash to 2008, the speed of the 1929 one took longer to play out than the current one and it spread quicker around the globe because of global communications and media saturation.

The consequences of the collapse though will play out over years, and in that respect 1929 is no different to 2008.

This got me thinking even more.

If the speed of the collapse and reaction to it is so much quicker than previous financial calamities, then perhaps the recovery will come much quicker than the 20 or so years it took American to dig its way out of the 1929 crash?

To be sure, the stimulus of WW2 was the principle catalyst for America's 1950's recovery but governments around the world are busy getting their own stimulus packages together and while I don't have complete faith in Government its gotta have some positive stimulus, right?

A silver lining in every cloud and all that sort of baloney.

Don't get me wrong, I haven't turned into a Pollyanna-ish angel with blinkered eyes and my head up my lowest orifice. The recovery will be hard, it will take time and we are all going to have to save instead of spend for the next generation, and hopefully beyond, to get ourselves out of the bog.

The debt incurred for taxpayers worldwide via the massive corporate bailouts is going to be a rather big millstone.

The recovery of the global economy however maybe sooner than we think.

Fingers crossed.

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Recessions and Depressions: Understanding Business Cycles
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The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
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c Share Investor 2009

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