Jan. 23, 2009 – Way back in 1955 John Kenneth Galbraith published "The Great Crash" a classic study of the causes of the collapse of the financial system in 1929 and 1930.
Way back in 1955 John Kenneth Galbraith published "The Great Crash" a classic study of the causes of the collapse of the financial system in 1929 and 1930.
In that work he developed a checklist of things to watch for so that a similar event could be forestalled in the future.
The short form of the list follows:
(1) Bad distribution of income.
(2) Bad corporate structure.
(3) Bad banking structure.
(4) The dubious state of the foreign balance of trade.
(5) The poor state of economic intelligence.
You will recognize that each and every one of the points listed by Galbraith applies today.
Income distribution is distorted. The median income has been falling for the better part of a decade while incomes of those in the top five per cent (the top one per cent in particular) have undergone spectacular growth.
The corporate structure has become ruinously compromised which can be seen daily.
The banking structure – particularly in the U.S., Ireland and the United Kingdom – was less a structure than a playground for five year-olds. Five year-olds and bankers need adult supervision.
U.S. trade became completely unbalanced over the past eight years. They would borrow trillions of dollars from the Chinese to pay for goods from China. It couldn't last. In Canada, the balance looked strong. But we were mostly providing party favours to the U.S. and when their party ended so did ours.
The poor state of economic intelligence is the most obvious. Few of those in power foresaw troubles ahead, none knew how to deal with them when they arrived and now they are trying everything from CPR to magical incantations to try and revive the collapsed patient. The thinking seemingly is that if you try everything something will work.
Galbraith's diagnosis: "There seems little question that in 1929, modifying a famous cliché, the economy was fundamentally unsound."
"Had the economy been fundamentally sound in 1929 the effect of the great stock market crash might have been small."
In 2009, it appears that large parts of the economy are fundamentally unsound. There is: too much corporate debt (leverage), too much personal debt, too great a concentration of wealth, too heavy a dependence on inventing financial instruments and too little emphasis on the underlying economy.
During the U.S election at the time when the U.S. economy was unraveling Saturday Night Live had scenes where a comedian was cast as an economist and asked what should be done. His answer was: "Fix it." When asked to elaborate he shouted: "Fix it, fix it, fix it."
Pretty reasonable advice especially since Galbraith long ago laid out what needs to be fixed.
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