Learning History's Lessons

"Despite the fact that the media would have you believe that we've never been in such a tough spot before and the current financial crisis is completely unique, that's actually not true. In fact, financial crises of equal or even greater magnitude have appeared many times throughout history and with much more alarming frequency than we'd care to admit.

The reason it feels different this time around is that three of the most severe - the financial crisis of 1871, the liquidity crisis of 1914 and the banking crisis of 1931 - are simply beyond living memory for 99.9% of the population.

To be fair, if there is a difference, it's that most of the toxic debt back then was public. Now it's private - although at the rate the Fed is "stimulating" the economy, it'll all probably be public again soon. And that's as much part of the problem as it is the solution. One hundred years ago, nations were comparatively isolated and so was the trade between them. This meant that the stimulus actions in Bernanke's depression-era playbook stood a better chance of working then because the money would stay where it was intended...at home.

At present, however, we've got a different problem. Thanks largely to international trade and globalization, our government can no more keep our money home than it can stop people from buying foreign goods even if it wanted to. So it's completely illogical to assume the trillions of dollars that the Fed is pumping into the system via tax cuts and handouts is going to have anywhere close to the effect our leaders think it is.

And that suggests we need to look beyond our borders as a means of drawing economic strength that will ultimately aid in our own recovery. For millions of people in nations around the world, this is going to be bitter pill to swallow particularly since we are hard wired to want to protect our own backyards first. But history is very clear on this matter and has been for several millennia. Excessive governmental regulation over economies including wage and price controls smothers economic progress and free trade.

And that's the real risk in today's crisis particularly when framed against the possibility of a Greater Depression. When you study the last one carefully, what made it so terrible was not the banking crisis or the stock market collapse, but rather the breakdown in global trade following both events."

Keith Fitz-Gerald, Money Morning 21-Mar-2009