"This too shall pass."
Note: I wrote this back in December and then carefully squirreled it away. With a deadline every Saturday and my day job taking most of my time, I like to have a few articles "in the can" so I can plug one in in case I'm really busy (transparency in real estate!) and I figured that anything with" this too shall pass" as a title would be timely for months to come. Now, with the news suddenly suggesting an improving economy and housing market (although both have a long way to go) this article may seem like the answer to yesterday's question or, worse, prescience after the fact. However, "this too shall pass" is a great message in any market and, besides, I'm frugal and hate to ashcan a perfectly good article (and suddenly I'm busy). So sit back and marvel at my prescience. No, it wasn't prescience, of course, or I wouldn't have made my IRA contribution in October 2008. No, just call it the naive optimism you need to stay in real estate sales. No, don't call it that, please. Call it the conviction that very few crises are as insolvable as they're made out to be.
As we sink more deeply into a quagmire of bad economic news and fearful uncertainty, it may help to remember that we've been down this road before. Sure, each time the road looks different, just to rattle us, but it's basically the same road leading to basically the same place. The scary place we've been—and safely left behind—many times before.
So pass up that permission and open invitation to panic, "this time it's different", because invariably those who say this don't know much about this time or last time. And stop fixating on the unnerving realization that very few saw this collapse coming and even fewer know any quick and easy fixes, because even a brief overview of economic history shows that that's always the case. But never forget that a hundred years ago this debacle would have been called a "panic", and then, in a steady and unfortunate debasing of the language, a "depression", then "recession", then "downturn", with each word more euphemistic and shot with Novocain than the last. And each successive de-fanging of the language is more and more counter-productive, because "panic" is a more honest and instructive description of how John Q. Public reacts when the economy goes south.
For confirmation, listen to someone who saw every panic/depression/recession/downturn from the early 1920s to the early 1990s: no, not me, but economist John Kenneth Galbraith. His message is, in so many words: "this too shall pass".
In the penultimate chapter of Galbraith's A Journey Through Economic Time, written in 1993 near the end of his very long life, this intimate participant in the history of the twentieth century (and no, I didn't steal that from the book jacket) surveys the contemporary economic scene. He sees a three-year-old recession that's gone global, spreading from the U.S. to Western Europe and Japan. He sees un- and underemployment and a recent record of economic under-performance (anyone remember "stagflation"?) that keeps alive the alarming question John Maynard Keynes asked in the middle of the Great Depression (and note that in 1993, as in 2009, the Great Depression is the monster in the closet). In 1936 Keynes wondered out loud whether conventional economic thinking might be wrong: was panic/depression/recession/downturn just an abnormality, a temporary detour from the normalcy of prosperity, as economists had claimed, or could an economy settle indefinitely, even permanently if not gracefully, in the deep rut of depression? Is the natural economic equilibrium always full employment and full utilization of capital, or can an economy (if not its participants) be comfortable in a grim equilibrium of underemployment and under-utilization?
In other words, folks, does a really lousy economy have to get better? Maybe not, said Keynes (and Marx, for that matter). Maybe hard times aren't necessarily a temporary detour. Maybe they can be a more-or-less permanent destination, and maybe we ought to forget the "more-or-less", and maybe it's the end of capitalism as we know it and the expropriators will be expropriated or at least serve brief prison terms. You may recognize these cheerful thoughts as the heavy blunt instruments the doom-sayers drag out and beat us with whenever the GNP declines for two successive quarters.
When analyzing the condition of an economy at any one moment, it's helpful to see it within its historical context—as one still in a very long movie—rather than as a solitary snap shot. We rarely do, however, because while few of us know economic history, all of us know—or think we know—the conditions of the moment, and most of us seem to think they're permanent. But by studying and living it, Galbraith knew 20th century economic history. From his 1993 vantage point, Galbraith looks back on the "economic legacies" of the 1980s. "The decade was a period of massive speculation in the financial markets, and especially in real estate."
Hmm. You don't say?
He compares the speculation of the 1980s to the Florida land boom of the 1920s, "with the banks, small, large and very large, joining in to finance it". In both instances, the result is bust and "empty office buildings, an idled construction industry, banks replete with bad collateral and newly discovered executive error, a sharp restriction on new bank lending".
Hmm. You don't say?
Galbraith mentions the "infamous S&Ls", the recently-unregulated saving and loan associations, which "added even more visibly...to the depressive effect". Just substitute "subprime lenders" for "S&Ls" while Galbraith tells us that S&Ls "went on an unparalleled speculative spree, which was laced with a far from subtle admixture of both mental delinquency and forthright larceny".
Hmm. You don't say?
Oh, and by the way, proposals to rein in this spree "were righteously rejected by Reagan administration officials". Plug in "Bush" for "Reagan" and you've updated Galbraith for the 21st century.
The inevitable result? "Not only diminished lending for new construction and home purchases but also a heavy market overhang of real estate belonging to [busted institutions]".
Imagine that!
But it's all good, says Galbraith, or at least reversible. "With time, the depressive effect of the real estate speculation, the banking troubles and the S&L disaster will come to an end. A new confidence leading on to the next episode of speculative euphoria will arrive."
He was right, of course, back in 1993: we were in for not one but two more "episodes" (and their corresponding busts). Because, as Galbraith says, "So it has been, so it will be. Thus does time work its therapy".
In other words, "This too shall pass".
Note: And it did, and they all lived happily ever after. Or at least until the next time.