This Is Not "the Big One"

This week’s turmoil in the world’s stock markets has investors in a panic. On the surface it appears as if we are in the midst of a financial meltdown. In less than a week the financial landscape of America has changed more than it has in years.

Pillars of finance like Lehman Brothers (LEH), Merrill Lynch (MER), AIG Insurance (AIG), and Morgan Stanley (MS) have gone bankrupt, been acquired or bailed out and the week is not over. Yet, nothing I’ve seen thus far indicates to me that we are in anything more than the last stages of a global stock market correction. “But this time it’s different,” protested a client on her cell phone yesterday, “even money markets are going under.”

In the thirty-plus corrections I have seen in my career, each one has been different. Yet time and again investors caught up in the frenzy of the moment declare that this one is “the Big One” meaning a crash with the proportions of the 1929 sell-off which ushered in the Great Depression.

Unfortunately I hate to disappoint the doomsayers. This is not the crash you are looking for. The federal government has done more in 2008 to avoid and prevent a crash than was done in the entire four-year period of the Great Depression. The safety net they have spread under this current three-ring circus of calamity is vast and wide. Both the thinking about, as well as the role of, government has changed dramatically since the 1930s.

That’s not to say the markets won’t go lower. If you have been reading my @theMarket columns you know I expect new lows in the stock markets. We are in what I call the capitulation stage of the markets. That’s when investors begin to discount the hard facts that they have been denying up until now. It was precipitated by the government’s refusal to bail out Lehman Brothers.

Although the government may still bail out some firms that are deemed to be too big to fail like AIG Insurance, regulators are putting the financial community on notice that they need to sort out their own problems.This message precipitated immediate action among the financial community, thus the sudden whirlwind of change among the players.

Without the government to back-stop them, banks and brokers finally have to get serious about addressing their balance sheets. If they can’t figure a way out on their own then in free market economies you go broke or find someone in the private sector to bail you out.

Naturally this will frighten -- even panic -- investors but the point to remember is that this has happened before and is a necessary part of the economic cycle. In the 1990s Japan faced similar problems as their real estate and stock market bubble burst. Like our own government, the Japanese government provided a safety net to prevent a systemic collapse of the economy and markets.

Unfortunately, they never drew a line in the sand when it came time to allowing companies in real trouble to die or be taken over. Instead, the government continued to fund them and their debts creating an economy that struggles to this day to regain momentum.

Ben Bernanke, the Chairman of the Federal Reserve Bank, understands this intimately well. He established his economic credentials by writing papers on how not to end up like Japan, as well as on the topics of the Great Depression and inflation.

I am convinced that our government will be there to insure that a financial meltdown will not occur. Your money market accounts are safe. Your FDIC bank deposits are safe. However that does not give you or me a free pass in the stock, bond and commodities markets. What you make or lose is up to you.

Disclosure: None

Comments

[chrisbax:]

another case of poor reporting

MS has not been aquired, bailed out, nor gone bankrupt as you state

Do your homework buddy

2008 Sep 19 07:00 AM

[1worldcurrency:]

Uh, what? Do you follow the news?
Oh, and add 800 billion and 50 billion (at 10 am) to 10 ten thousand billion, then tell this one is no different.

2008 Sep 19 07:35 AM

[hilde:]

Indeed shamefull in any perspective, such a mistake on MS....

2008 Sep 19 07:37 AM

[CLH:]

Comments are from dumb nit pickers. Good post Bill.

2008 Sep 19 07:41 AM

[veeblefetzer:]

Not all of your money market accounts are safe....

2008 Sep 19 07:46 AM

[tifft:]

They are still bailing them out..180 billion pleasemm

2008 Sep 19 08:15 AM

[css1971:]

The FED has an essentially infinite supply of paper. You will all be trillionaires before there is another "Big One".

2008 Sep 19 08:15 AM

[xxx54xxx3:]

Their is clearly no vetting done for these stories. This is random opinions from a guy who obviously hasn't been following the news. Please attempt to take some pride in your work and check facts before disseminating information.

2008 Sep 19 08:27 AM

[Chuck:]

Well, I AM GLAD that President Bush has had our Social Security Privatized so I could invest my money my self !
I put it in those solid rocks of Wall Street and didn't take any chances.
I put it in Goldman Sacks, Merril Lynch, Wachovia, AIG Insurance to let my retirement grow and live my last few years in peace and security!
I really love the President. He's the Best Ever.
Right After Hoover !

2008 Sep 19 08:32 AM

[Chuck:]

Sorry... My wife forget to give me my meds.

OOP's on Bush being better than Hoover... He's Worse.

2008 Sep 19 08:33 AM

[udman007:]

Notwithstanding the error in naming the "pillars", Schmick's assessment is based on a realistic view of broad economic theory - which is generally lacking in most of the analyses I have read lately. There is much truth in what he is saying. Very good article.

2008 Sep 19 08:44 AM

[normthefedup:]

Years ago in my youth, I had an elderly neighbor who was a steadfast democrat. Being a young Republican, I couldn't understand his philosophy about politics, the country, the economy, etc. When I sat and spoke with him one day to get a little benefit of his years, he summed up his entire dissertation with one phrase: "I remember Hoover."

When queried about why I became a steadfast Democrat, I hope I have the same conversation with a young Republican neighbor, just so I can make the statement: "I remember Bush."

God bless you Louie, and please forgive me my past sins and doubting you.

Author, I sincerely hope you're holding Morgan Stanley stock. A friggin pile of it. Errors like yours just add gasoline (even at $4 a gallon) to this flaming market. I can forgive mistakes.....not this one.

2008 Sep 19 09:01 AM

[ali k:]

Boy there are some real critics on this board. I fully agree with Schmick. This is one of many downturns or correction we see, and this is a serious one. But to call for a Depression like scenario isn't realistic and not based on fundamentals. Even if our dollar halves because the Fed is printing money in efforts to save everyone, oil reverses trend and doubles, and another four financials go under -- what will follow is business as usual. Americans will find jobs and will then find ways to spend that money. This is not the "end of it all", by no means.

2008 Sep 19 09:16 AM

[paulsjj:]

How does billions of dollars of mortages written against property become trillions of dollars of debt upstream to the big investment banks. No body is talking about t he leverage involved here from the base mortage to AIG's $trillions in liabilities that they cannot cover. I say let them fold. Soon the market on the ground will buy up the foreclosed properties and the paper will clear at various levels of loss. The leverage involved goes up in smoke.

2008 Sep 19 09:40 AM

[notsosmart:]

everyone should be able to express an opinion without insult on this site.if you dont like be the critic & correct it. spelling is really not the important as one can hit the wrong letter or some is lost in publishing(happens often)the politics are a waste of time as all this is g.washingtons or abe lincolns fault.LOL.

2008 Sep 19 10:15 AM

[anarchist:]

Regarding the political observations, hell yes they are relevant, incompetent people were placed in the regulatory agencies by politicians which exacerbated this crisis and perhaps even caused it-people SHOULD be pissed at the politicians and SHOULD voice their displeasure at these corporate bailouts.

2008 Sep 19 12:24 PM

[leh:]

I say we cap CEO salaries--or tax 90% above certain levels to help finance this corporate bailout. Also, substantially raise tax rates on profits of any financial companies engaging in leveraged derivative trading--or ban it altogether.

2008 Sep 19 01:23 PM

[Kelly Liebe...:]

Bailout will cost hundreds of billions of dollars!!! The Govt. is broke and in debt! How can a Govt. that is in debt bail anyone out? This is insane.

The trickle down will be a tsunami of debt on the taxpayer, a devalued dollar and higher prices...

2008 Sep 19 02:06 PM

[notsosmart:]

as long as the ide on all boats was rising the political appointees were great.(tide).within a few weeks they became dumb-dumbs.cant have it both ways,but most people would like to.

2008 Sep 19 04:11 PM

[Distressed ...:]

the printing presses need some wd-40 fast! Trickle down has yet to come like the earlier poster stated. Plus the mkts will turn illiquid with nobody allowed to take the other side of a trade, and probably just delay and impending crash. -distressedvolatility....

2008 Sep 19 05:24 PM

[etf reader:]

Great article and insight. Thank you for serving our country in Vietnam.

2008 Sep 19 05:33 PM

[1worldcurrency:]

Well, Bazooka hank convinced both houses and and both parties that this was the big one.

2008 Sep 19 06:27 PM

[surgcare:]

How could you support this massive bailout if you didn't think ,this was the big one . By the way , CHUCK , your SS checks are buying up bad debt .

2008 Sep 19 06:57 PM

[look closer:]

Unfortunately, they never drew a line in the sand when it came time to allowing companies in real trouble to die or be taken over. Instead, the government continued to fund them and their debts creating an economy that struggles to this day to regain momentum.
Well 'Hank" you sure are prepping this one to last FOREVER. Our kids kids will remember -- bush and paulson --- modern day criminals. Lining their pockets, their friends pockets till the day they have but two classes -- wealthy and poor.

2008 Sep 19 07:34 PM

[rcraig:]

Can't predict what a computer software program is going to do in a crissis.
In my opinion they should be banned from all markets untill we can sort through the chaft. Take a good look at the trends and remeber when the do all software programs were let to the thinking unattended.
Then apply the same logic to the over extention of credit in the housing market.
Software programs calculate odds and work with simple math. They do not think, they do not measure emotional distress, and they do not make mistakes untill they reach a memory overflow.
Good article, and some good coments bar the political bashing. I bet some of you people never make a mistake and have always been right all your life.
At least some steps in any direction away from total financial collaspe is better than standing still in a panic and not doing anything.
It sounds courageous and brave to bash on someone else for anothers mistakes but, what would you do in the same situation?
Some of the blogers give me the impression they skipped third grade when the teach was talking about the checks and balance system in our government.

2008 Sep 22 05:02 PM

[1worldcurrency:]

"Without the government to back-stop them, banks and brokers finally have to get serious about addressing their balance sheets. If they can’t figure a way out on their own then in free market economies you go broke or find someone in the private sector to bail you out."

So where is your outrage at the bailout?

2008 Sep 27 07:23 AM

[Kelly Liebe...:]

How wrong you were.

2008 Dec 28 06:16 AM