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A historical perspective on financial disasters

September 16th, 2008 · No Comments

Sometimes the U.S. financial markets give the appearance of complete and utter disaster.  Of course, the media has accurately predicted 27 of the last two recessions. :)  As with all media, the bigger the story the more viewers watching that story.  Over the last decade or two the media began to report only major index point-drops on Wall Street, not the percentage of the drop.  When the market indexes were smaller this made for a big story.  Some examples:

Black Thursday  (1929-1932)  340 point drop or 89% of the Dow over three years

Black Monday (1987) 508 point drop in the Dow or 22.6% in one day

September 11 (2001) 684 point drop or 7.1% the week after the attacks

As shown above, three of the largest financial crashes over the past 80 years have become less and less damaging to the U.S. economy.  Each one has become diminishingly less destructive to the overall market.  With the advent of halt-trading systems and the advancement of overreaction mitigators, the U.S. remains a very robust economy.  With some estimates at 20 million illegal immigrants, can any other country claim the long waiting list to share this great wealth?

Most economists would agree that the best politicians propose economics that are best long-term for the country, not the politician’s political party or personal career.  It is unfortunate that the U.S. is less than 50 days from a presidential election now because the politicians are spinning the causes of this economy more than a merry-go-round.  When these supposed financial disasters occur, lawmakers will throw out knee-jerk reactions such as bailouts or more regulation.  What did America’s financial system get from the September 11 attacks and a few scandal-ridden companies?  Sarbanes-Oxley financial “safeguard” legislation that arguably emasculated New York City as the world’s financial capital and transferred that title to London.

I have several thoughts about politicians who choose the bailout option for self-inflicted ill companies.  I think of judges giving multiple-DUI offenders their driver’s license back.  I think of a parent letting a child off the hook for misbehaving when he or she absolutely knew better.  How can a CEO, upper management or the board possibly learn any lesson if they are granted a “do-over” when the company implodes?  Capitalism flourishes in its purist form for one basic reason:  free markets work.  Communist and socialist economies will always fail over time because the government cannot permanently “prop up” businesses that should not be strung along.

Failure is part of the natural cycle of business.  Companies are born, companies die, capitalism moves forward. -Fortune Magazine

If I haven’t put you to sleep on this financial and economics topic, I highly suggest you check out Thomas Sowell’s Basic Economics which is the best book on economics I’ve ever read.

Tags: Money

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