Comments on James Quinn's 'What Will This Crisis Lead to?'

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by: John Lounsbury

James Quinn has written an excellent description of current crisis and future opportunity in this article. As with all good essays, he has offered points that can be discussed and ideas that are worth amplifying. Highlights that stimulated me are as follows:

The crisis which appears most analogous to this one is the Great Depression, which lasted 16 years. In both cases, the Federal Reserve pumped too much credit into the financial system. The only contemporary innovation: Politicians now hastened the fall by eliminating all financial regulation. What we have is the Greater Depression - which we’re likely only halfway through.

1. There is serious debate among economists about whether the Federal Reserve pumped too much credit into the financial system during the Great Depression. Most economists feel that the Fed was way too restrictive going into the depression, 1928-32. From 1933 on, there is more diversity in the debate between those who feel that monetary policy was correct or too loose vs. those who felt the Fed was too tight through most of the 1930s. There are many who feel the biggest mistake in the Great Depression was not made by the Fed but by income tax increases. Some of the thinking at that time can be read here.

Bottom and top tax rates from wikipedia:
1925-31: 0.375-1.125%; 24-25%
1932-35: 4%; 63%
1936-39: 4%; 79%
Note: Personal exemption lowered 20% in 1937 further raising taxes on middle and lower incomes (although effects on the lowest incomes were offset with increased earned income credits).

2. It is an interesting question whether we had actually undone all the regulation established following the 1928-33 collapse by the 2006-07 top. I have not read a careful analysis of this.

The perceived success of the War on Terror has convinced a majority of the population that government can solve all of their financial troubles better than the free market. America has thus become a minimum monthly payment nation. As long as they can make the minimum monthly payment, they can lease a BMW, buy the best furniture today and worry about the bill in 2013, and buy electronic gadgets and bling on their Capital One (COF) credit card. The American sheeple are being led to slaughter by shepherds (Obama, Geithner, Bernanke) who have convinced them that borrowing and spending at malls will save the country.

1. I don’t think the War on Terror has anything to do with public attitude about the government role in solving financial troubles. I think it is more associated with public disillusion with financial institutions.

2. How can one isolate the current administration for promoting the concept that “borrowing and spending at malls will save the country”? It is clear that the Obama administration has not changed the existing philosophy in this regard after the first 91 days in office, but it is a little hasty to single Obama out for blame. I hope that the recognition of the structural problem (and solvency issues) will come to the fore and push the liquidity issue into lower priority, but I fail to see how that could have been done without undue collateral damage in just 91 days.

As I stated in a recent article:

We are being seduced to believe that we can solve the crisis with “easy money” and do not need to address the systemic defects that caused the current crisis. The good news: It is not too late to change course.

One hope I have is that Obama views the initial actions (continuing the Bush policies) as triage and that future actions will be directed at the systemic structural issues (recovery and rehabilitation).

How can one isolate the current administration for promoting the concept that “borrowing and spending at malls will save the country”? It is clear that the Obama administration has not changed the existing philosophy in this regard after the first 91 days in office, but it is a little hasty to single Obama out for blame. I hope that the recognition of the structural problem (and solvency issues) will come to the fore and push the liquidity issue into lower priority, but I fail to see how that could have been done without undue collateral damage in just 91 days.

The three previous crisis periods in US history were dominated by the prophetic leadership of George Washington, Abraham Lincoln, and Franklin Roosevelt. George Bush led us through the first half of this crisis; Barack Obama will lead us through the second. I don’t think George Bush will ever be revered for being cerebral or inspiring - though he did wage his own righteous war. Barack Obama is cerebral and principled. He’s waging a righteous war in Afghanistan, though he has never seen combat. He’s already known for his inspiring speeches. But will he rise to the level of Lincoln?

1. Very apt summary. I might include Thomas Jefferson on equal footing with George Washington, although I think there is no doubt that Washington was the most important stability anchor for the new emerging and early country from 1783 to 1796. The future effects of Jefferson, along with Franklin, Adams and Hamilton, on the course of the country were more important.

2. Your final question is huge. He needs to rise to that level or he can not be successful. Prediction is too risky and hope is also fragile – we’ll just have to see what happens.

With so many out of work, civil unrest could begin to rear its ugly head. and Worldwide economic turmoil will result in protests and anger in many countries. and … there will be 20 to 25 million people out of work by the end of this year. and. But the current crisis doesn’t have to end this way. If the American people can wake up from their materialistic stupor in time, this crisis could lead to a new beginning for this great American republic. If we permit the country to re-balance to a sustainable level of spending, address our future liabilities, and develop an energy plan, there is hope.

1. If you want to know the potential of the combination of high unemployment among youthful men and hopelessness, just look at the Middle East.
2. I totally agree with the assessment that this is a time when there could be a new beginning.
3. If just 2% of those 20 - 25 million unemployed embark on some successful entrepreneurial effort that otherwise would not have been pursued, that is 400,000 to 500,000 new ventures resulting from the crisis. If 1% of those turn out to be like Hewlett-Packard (NYSE:HPQ), Dell (DELL), Oracle (NYSE:ORCL), Microsoft (NASDAQ:MSFT), IBM, Ford (NYSE:F), etc that were born and had early growth in previous downturns, that is 4,000 to 5,000 new major corporations. If these average 10,000 employees each, that is 40 to 50 million jobs that do not exist today. Obviously, the companies cited above have averaged many times 10,000 employees over the past decade, so 40 million new jobs is a low estimate.
James Quinn has written a masterful essay. The future is ours to realize. We must simply get there. A journey of a thousand miles begins with one step. Let’s keep pushing the ideas forward to make those first steps productive.
Disclosure: No positions in any stocks or companies mention in this article.