Paul A. Samuelson, who died December 13 at age 94, was rightly remembered as a brilliant educator, as author of the best-selling economics textbook ever, and as the second recipient of the Nobel Prize in Economic Sciences. Professor Samuelson, the Nobel committee wrote, “has done more than any other contemporary economist to raise the level of scientific analysis in economic theory.”
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I’ve had a hard time deciding which way the economic and investment winds are blowing, so I decided to make a list of the things I think have changed and those that haven’t.
Mark Hulbert (with some help from Jeremy Siegel) does a nice job correcting the record about how long it took for stock market investors to “recover” from the Great Depression.
While some are quick to point out that it wasn’t until 1954 that the Dow closed above its 1929 high, Hulbert argues that, in fact, adjusted for inflation and dividends, the Dow got back to its ‘29 level after 8 years—which is still a long time, but not forever.
Bubbles. We’ve just been through two of them in relatively short succession: the Internet bubble of the late 1990s, and the recent housing bubble.
Why do bubbles occur? The list of explanations includes shortsightedness, sheer stupidity, and greed. The history of bubbles is a story of excessive enthuasisms—for anything from tulip bulbs to subprime mortgages.
But is there something more fundamental at work? Something more innate and psychological? It seems to me there is. It arises from who we are as humans, and in how we think and behave, individually and as social animals.
Is it the 1930s all over again? If that were true, it would be one very good reason to panic, sell everything, and put your money in a mattress. But it turns out that the comparisons between today and the Great Depression are (mostly) bunk.
You should know by now (if you’ve been reading the papers or the blogs) that the stock market crash of 1929 did not cause the Great Depression. Instead, the Depression came about because of a flawed economic response in Washington. As the economy cooled in the early 1930s, rising bank failures led to sharp contraction in credit. Congress balanced the budget and imposed trade tariffs. The result was a downward spiral in the economy and massive unemployment. The economic collapse led to the failure of the financial system—notably, a surge in bank failures and collapsing stock prices.
