I am in my seventies. For my entire life people have obsessed about the Federal Deficit. Somehow, all that stopped about a month ago. The reason was COVAD-19. And this is the one and only time in this post that I am going to get anywhere close to talking about anything medical. It was the inspiration for the post but it also has nothing to do with what I am going to talk about.
With a few exceptions the Federal Government has run a deficit in every year that I have been alive. It has spent more than it has taken in. There is a whole school that says, "this is bad, very bad" because "the money has to be paid back sometime". Yet somehow, here we are.
The Federal Government is currently running up World War level deficits and right now no one has a single bad thing say about it. I'll have more to say about that later. But, in the mean time, what I want to talk about is the "pay it back sometime" part. And my launching point is going to be a mathematical construct called a "set".
When I was a kid the educational approach taken when it came to mathematics was "just teach them how to do it". The "it" started with addition and subtraction. It then moved on to multiplication and division. Most kids were exposed to entry level algebra ("x + y = z" stuff) but there it ended. For math nerds like myself, we went on to be exposed to geometry, trigonometry, and maybe calculus. And mixed in with these other advanced subjects was something called "set theory".
It is no longer done that way. Now set theory is introduced far earlier into the process. And various branches of mathematics are explained in terms of set theory. The Venn Diagram (the thing with the overlapping circles) is something that children are now familiar with. I think this new approach is actually better. But what do I know? I am certainly no expert on the subject.
Early on in a discussion of set theory the "universal set" or the "set of all sets" is introduced. Say there are a specific, finite number of possible sets. If you know which sets are included in a specific subset then you automatically know all of the sets that are excluded. This ability, if you can pull it off, turns out to be very useful. But, in fact, the universal set contains an infinite, not a finite number of elements. So all of a sudden the mathematics of infinity get involved.
I spent some time talking about the mathematics of infinity in this post: http://sigma5.blogspot.com/2020/01/to-infinity-and-beyond.html. In fact, it took ideas from set theory to make sense of the mathematics of infinity. It's a handy example that illuminates just how powerful taking a set theoretic approach to other branches of mathematics is.
And an exploration of the mathematics of infinity demonstrates that the standard rules of arithmetic do not apply to infinities. As is the case with Quantum Mechanics, only certain specific questions can be asked in certain specific ways. If you go elsewhere, the result will be nonsense.
As a result, this idea of a "set of all sets" and the derivative notion of being able to partition all sets into "one subset containing the sets we are interested in" and "another set containing all other sets" becomes less useful. You can't tell how many elements are in at least one, and perhaps both, of these subsets.
It turns out that the problems we were forced to wrestle with when we contemplated infinites also rear their ugly heads when we start talking about the Federal Deficit. Here too, standard arithmetic does not apply. So conclusions based on applying standard arithmetic to the Federal Deficit often produces nonsense.
If the Federal Government has a known, finite lifetime and if the books needed to be in balance and all debts paid at the end of that lifetime then a deficit would unambiguously be a bad thing. The money would have to be found somewhere to pay off all of the bonds the Federal Government has issued on time and in full.
But when is that date, again? There is no date. The Federal Government is expected to go on forever. It's life expectancy is infinite. Therefore, infinities and the mathematics of infinities must be used instead of standard arithmetic.
Oh, it might not. Something might come along to put the Federal Government out of business. But, if that happened, is it likely that all of its debts would have to be paid off from its own resources? No. There are two likely scenarios.
Some other country (or group of countries) might invade and succeed in taking everything over. In that case what's going to happen is completely up to the invaders. They might write the debt off. After all, they didn't run the debt up so why should they be responsible for paying it off? Or they might use the Federal debt as an excuse exact reparations far in excess of the then current amount. Or they could do something else. From our vantage point in the present there is no sense in worrying about how it would go.
The second likely scenario is that a new government would be formed that would take over our current one. That happened to us once when our current government took over from the Continental Congress that operated under the old Articles of Confederation. In that case, the new government assumed all the assets and liabilities of the old government. So there was no end date when it came to the debt. Everything just kept rolling along.
There is actually a third alternative. Our current government might slowly evolve in a step by step manner into something else, say by making periodic Amendments to the US Constitution, But at every step along the way the government, whatever form it took at any specific point along the way, would maintain continuity when it came to how debt is handled. This scenario is equivalent to the "the government goes on forever" scenario.
And, from a practical perspective, things have always worked the same way. The Government issues debt, typically in the form of "bonds". Any specific bond issue has its own terms and conditions that include when and how the government must pay the bondholders off. The government has always succeeded in adhering to the terms under which each specific bond issue was "floated". So the bondholders have always gotten everything they were entitled to.
Now, there is some "smoke and mirrors" going on here. In almost all cases the government issues new bonds. Some or all of the proceeds from the new bond issue are used to fulfil the obligations undertaken with respect to the old bonds. In short, it's a Ponzi scheme!
Every year people discover that the way government financing works is a Ponzi scheme. They are shocked and think that this is a bad, bad, very bad thing and that people should be alarmed and instantly rise up in arms. I think it is important that people understand that it is a Ponzi scheme. But I also think it is important for people to understand that it is not a dangerous scheme that needs to be shut down.
What made Ponzi's original scheme dangerous was that ultimately he was not able to pay his investors off and in full. A Ponzi scheme where investors don't get what's owed them is a dangerous Ponzi scheme. But what if at every step along the way all the investors get paid off in full, even though it's a Ponzi scheme? That's what I call a benign Ponzi scheme.
At this point it might be useful to go back and reread my "Infinity" blog post. Remember, as soon as you insert infinities into the situation the rules not only become different, they become quite unnatural. Our instincts are no longer a reliable guide. Instead they lead us astray.
A good way to understand what's going on is by looking at the debt as a percentage of US GDP. If the GDP goes up 3% and the Federal debt goes up 3% then the economy maintains exactly the same ability to manage the debt. But the reality is even crazier than that. The important question is not "is the debt too high?" The important question is "is the debt so high that investors lack either the inclination or the ability to purchase it?"
In fact, a question that is never asked but should be is "is the debt growing too slowly to meet the needs of the economy for government debt?" I spent some time talking about this sort of thing in http://sigma5.blogspot.com/2019/04/modern-monetary-theory.html.
One of the few periods of budget surplus happened at the vary end of the last century. And it turned out that the fact that the amount of Federal debt was shrinking rather than growing actually made problems for some parts of the economy. After the election was over the new Bush administration reversed policy and the government went back to deficit spending thus increasing the amount of government debt available to the economy.
As I also pointed out in my "Modern Monetary Policy" post, there is a need to make sure we don't just run the debt up willy-nilly. Theoretically, these arguments should apply now. But no one is currently concerned that the Federal deficit will run to several trillion dollars this year. People are focused instead on the critical problem (which shall not be named) before us.
What the history of the last thirty years tells us is that all the "rules" people talk about for what is and is not too much Federal debt are nonsense. And the "rules" are supposed to apply to all governments, not just the US government. We can take advantage of this to look all over the place. And when we do what we see is that levels of debt that were supposed to automatically trigger a financial crisis sometimes didn't. And sometimes debt levels that weren't supposed to be a problem turned into a problem.
Does that mean financial crises don't happen? No! It just means they often don't happen when and where they are supposed to. They also sometimes happen when and where they aren't supposed to. Instead of the traditional rules we are told to pay attention to we should actually pay attention to two factors.
The first factor is "is the money there to lend to the Federal Government?" And what the last twenty years have taught me is that it is possible to magic almost limitless amounts of money out of thin air. Tricks like Quantitative Easing have magicked hitherto unimaginable amounts of money seemingly out of thin air.
Another refrain that has repeatedly shown up for at least the past fifty years has it that "high Federal borrowing is crowding out other types of borrowing" causing bad things to happen in the economy as a whole. Yet there is zero evidence that this has ever actually happened.
The way we would know this was happening would be to see interest rates skyrocketing. But high Federal spending and high interest rates seldom go together. Interest rates are at historic lows right now, for instance So the money is there.
The other factor is whether the people who have the money are willing to hand it over to the Federal Government by buying government issued bonds? This is a psychological and a political question. It is not a technical question.
If we look at various governments in various parts of the world at various times we see little correlation between the "underlying conditions" or the "technical factors" and the willingness of lenders to fork over the dough.
In the US interest rates are, in part, a "risk premium". So interest rates are an indication of how risky lenders think a loan is. But interest rates, particularly those paid by the US government, have been historically low for the last twenty years. Yet by traditional non-interest-rate measures, during this same period US government debt has been more risky, often much more risky, than it had been in the past.
Scores for non-interest-rate metrics have shown that US government debt was far less risky at pretty much any time before the past twenty years. So the US has been a more risky bet in the last twenty years than during many periods before that. But the risk premiums lenders have recently charged the government have been at all time lows.
The "rules" aren't actually rules after all. Right now lenders want to lend the US government money in spite of the higher risk factors, so they will. The risk factors are higher than they were six months ago. Yet no one expects the Federal Government to have the least bit of trouble selling a quantity of bonds that is several times greater than it ever has ever attempted to sell before.
Before leaving this subject let me reiterate the point that I do believe there are limits to how much debt the US government should run up. But what you hear about what is or is not too much is mostly nonsense. And I am going to use the extremely thin excuse that brevity prohibits me from going into what those limits should be.
With that, let me turn to the other area I promised to address in my title, private (non-governmental) debt. And here I am going to ignore corporate debt and focus exclusively on debt incurred by individuals and families.
The many commentators who trot out "the family budget" as the gold standard for how the Federal debt should be managed. They believe that debt incurred by families will be repaid. From there they extrapolate to the position that the Federal Debt must also be repaid.
Ignoring for the moment, the differences between a family's budget and the Federal Budget, let's ask if the basic premise is true, do families always repay their debts? And again, let me start by asking "how much family debt is too much debt?"
When I was a kid if you wanted to qualify for a mortgage you were expected to be able to make a 20% down payment on a house. And the house was supposed to cost at most 2 1/2 times the husband's annual salary. (Back then the assumption was that all house buyers were married and that only the husband worked.) So, if a husband made $15,000 per year, good money at the time, he was limited to buying a house that cost $37,500 or less. Now, back then such a house was a very nice house.
Now nobody puts down 20%. A more typical down payment is along the lines of 3%. And I don't know what the current income-to-house-cost ratio is but it is much higher than 2 1/2 times. The old rule actually made some sense.
If you could rent and still save enough money to put 20% down then you could afford to furnish the house, maintain the house, pay all the taxes, utilities, and fees, and still keep up on your mortgage payments. The 2 1/2 to 1 ratio was also a pretty good rule of thumb for making all this work.
The problem for the economy as a whole was that the percentage of the population that could afford a house in this regime was low. And that meant that few new houses were needed. And that meant that few new houses were built, few new houses that need furniture, appliances, etc. were around to drive up sales or furniture, etc.
Building lots of new houses requires lots of ancillary spending on things like washing machines. Spending on those ancillary things is good for the economy. And a good economy means more people can afford to buy a house, etc. It's called a virtuous circle.
Again, lots of economic activity means there's lots of money around. So again the problem is more psychological and political than technical. The "rules" are not actually rules here either. If lenders want to lend they will lend. And whether the "official" rules that are supposed to tell us whether now is or is not the time don't turn out to make any difference.
And here again let me remind you that although the "official rules" that supposedly tell us when things are getting out of hand don't work, that doesn't mean that more is always better. At some point "more" leads to bubbles. Bubbles eventually burst. When they burst bad things happen. Avoiding bubbles bursting is a good thing. Expecting the official rules to tell you when things can be pushed further and when it's time to pull back to avoid bursting a bubble, that's the foolish part.
And as a practical matter the only important question is "will the loan be repaid?" And that too turns out to be the wrong question. Some loans always default. So the real questions are "is the default rate so high it is causing problems?" and "who will get stuck with the bill?"
When the economy cratered in 2008 it turned out that the default rate, which had been predicted to be near zero, suddenly became extremely high. The prediction that the default rate would continue to stay near zero into the indefinite future is an example of the official rules failing us. And it is not uncommon for conditions to make a drastic change very quickly without us getting any warning from the official rules.
But the 2008 Panic also showed up a large disconnect. The people who decided who did and did not get a loan were not the same people who got stuck when the loan went bad. From the perspective of the people who got us into the mess, 2008 was a great year.
They made tons of money. Sure, the economy cratered and other people lost lots of money but they did just fine. In fact, they did better than fine. You see, someone else got stuck eating all the bad loans while they got keep their bonuses, commission checks, etc.
Wall Street, the banks, etc., have gotten very good at this game. They make a lot of money when there is a lot of activity. If there is too much activity and things eventually go south, someone else will again be left holding the bag. From their perspective, it is good to make shaky loans.
If a lot of activity that will eventually go badly wrong is what it takes to crank the volume up high enough so that they can make lots of money, then so be it. The fact that everything is built on a foundation of sand is not their problem. They will suffer no financial harm when the river rises and the foundation washes away.
We are in the midst of a grand experiment. Nobody knows how much individual debt is too much. So Wall Street and others keep coming up with new ways to increase loan volume to individuals and families.
Bear in mind that the extremely high default rate that was a prominent feature of the Panic of '08 was not enough to force fundamental change. So it is not altogether clear that private debt needs to be repaid either.
So maybe the "family budget" doesn't behave the way commentators day it does. No matter. They are mostly interested in hammering home the idea that deficits should be kept low. Except, of course, when their political allies are in power. Then it's okay to run the Federal debt up higher and higher.
They are actually doing us a service at the moment. We need to spend the money. If only they would just shut up all of the time. When they are talking they are not making us more informed. They are making us less so.
Sunday, April 19, 2020
Monday, April 6, 2020
Financial Panics
Long ago in a Galaxy far, far away . . . I'm not going to go that far but you know I like my historical context. I am going to talk about the current economic situation, call it the COVID-19 Panic. But first, as advertised, some background.
In the middle ages most people lived on farms that existed within the domain of the local feudal lord. There was no money to speak of and what passed for government was provided by the lord. He provided for the common defense, maintained the roads, and provided a few other basic services. He levied a tax that consisted of some portion, traditionally a tenth, of whatever the farmer produced in return. The important thing was that all economic activity was local.
In the few larger cities and towns Goldsmiths and Silversmiths started providing a service to the rich and powerful. They would store their valuables in a safe or strong room. Using this shared resource cut down on costs. And the smarter of them observed that only a few people needed their valuables at any one time. So they could make a tidy buck on the side by loaning out some of the stored valuables at interest. This was the beginning of the banking system.
And it eventually occurred to the rich and powerful and those that they did business with that there was a better way to do so than using the valuables themselves, the plate silver, coins, etc. Instead, a piece of paper called a "draft" could be used. The draft promised that "valuables in an amount equal to whatever" would be handed over to the bearer ""on demand".
These "demand drafts" were was the foundation of currency. And this new and improved way of doing business quickly became very popular. As a result, some "banks" (places where you "banked" your valuables) got so big and successful that they were eventually able to finance the governments of whole countries.
A country like France would issue a certain amount of "coin of the realm". But for really big transactions, ones involving more than a bag or two of coins, they came to depend on demand drafts drawn against banks run by the Rothchild family, for instance.
The Rothchild's were one of the first to go international. Various family members set up banks in various large cities in various countries. Money in large amounts could be moved from place to place by using a demand draft drawn on a Rothchild bank at one location. It would be honored by Rothchild banks operating at other locations, perhaps even at a location located in another country. This became common practice in Europe.
The US ended up with something similar but less well developed. Various government sponsored "national" banks were created. But politics did them in. So, for a big chunk of the history of the US, there were only small banks that confined their operations to relatively small geographic areas.
And for the most part that worked fine. Most people traveled no great distance. And the advantage of paper money were so obvious that for a long time it was the custom of each bank to issue its own currency. It was not only the done thing but it was completely legal at the time.
At this time the Federal government was tiny. Like the feudal lord of yore it provided only modest services. It provided for the national defense, maintained some roads, ran a postal service over those roads, and that was pretty much it. Almost all revenue came from tariffs assessed on imported goods. The Federal government had little or no daily impact on most people most of the time.
But then railroads and the Civil War came along. Railroads were the first large business that operated on a national scale in the US. They needed a banking system that was national in scope and big enough to serve their needs, which dwarfed anything that had come before. Sadly, there was nothing in place to meet these needs.
The Civil War was an enterprise whose scale dwarfed even the largest railroads. Soon after the start of the War the Union government was raising and spending unbelievable sums of money. The Confederate government was smaller but it too was soon operating on a hitherto unheard of scale.
The War cost more than a million dollars a day to prosecute. That was sum far beyond the capabilities of the then extant banking system. As a result, the US government, which had previously confined itself to minting coin, got into the business of printing paper money, called "greenbacks" for the color of ink used then and now.
All this was grafted on top of a wholly inadequate system. And banks were still issuing currency backed only by their good name and reputation. Back in the time before the War and before the railroads, this business of each bank issuing its own currency worked, sort of.
Local people knew their local banker. If they spotted something hinky, the thinking went, they could pull their money out before the bank went under. Only suckers (people who lived some distance away) would get hurt when that bank's currency became worthless.
But after the Civil War got under way that became impractical. And soon there was fantastic amounts of money sloshing around as the railroads, then the oil industry, the steel industry, etc. became giants. As a result, we had a "panic" (that's what they were called) about every ten years.
If a small bank here or a small bank there all of a sudden went under it was hard on the locals but had no wider impact. But after the War ended various developments like the railroads operating on a national scale knitted banks together. So you now had the possibility of a serious ripple effect.
One bank going down could cause a run on another bank and the situation could now spiral into an event that had a broad impact. It didn't happen every time. But it happened often enough, about once every ten years, on average.
Finally, in 1914 the Federal Reserve was chartered. The thing that allowed it to survive political challenges that had taken down it's predecessors was it's "economic stability" mission. It was supposed to stop these very destructive panics from happening.
It was not completely successful. Banks could still go under and people could still lose their money. The possibility of a panic was enough to cause people to start a "run on the banks". Panics happened often enough that people were all too familiar with them.
Bankers of the time had the same problem that their Rothchild era predecessors had. Everything was fine as long as everybody didn't try to pull their money out at the same time. (And assuming the banker wasn't an outright crook or completely incompetent.)
A run didn't require everybody to demand their money. It only took a significant portion of depositors demanding their money, all at the same time. That was enough to turn a sound bank into an unsound bank.
What finally fixed the problem was the introduction of a government agency called the FDIC in the '30s. It guaranteed that people would get their money even if the bank went under. Once the Fed and the FDIC were in place we went a long time without anything that looked like a panic. People and companies could go about their business without worrying about whether or not the bank they used in was in danger of going under.
But this Fed/FDIC solution eventually became a victim of its own success. The fact that nothing had gone wrong for a long time caused people to forget what a panic looked like. That amnesia gave political factions the opportunity to weaken the system so they did. So we went back to a point where panics became possible again. And with that, I would like to look at some panics. And I am going to start with the big one, the Great Depression.
We all know that the Stock Market crashed in 1929. But at the time the Market was not that big of a thing. Only a few rich people owned stocks. And the fact that a company's share price had tanked had little or no effect on the day to day operation of that company. But important people were harmed by the Crash and they forced the Federal Government to take action.
It was not the crash itself but the response to the crash that did most of the harm. Under Hoover the Federal Government's response was to do what everybody thought at the time was the right thing to do. That was to clamp down on the banking system. Bank reserves must be increased. Loans must only be made to blue chip clients. Unlike with the crash itself, these changes had a widespread impact.
Many businesses both large and small needed access to credit. All of a sudden only the people who didn't need credit could get credit. That caused businesses large and small to pull back. They started cutting back on production and laying people off. That meant business dried up for suppliers who responded by laying people off. Laid off people (there was no unemployment insurance at the time) were forced to cut back on their expenses so they bought less. And the spiral continued.
In the mean time, banks had less money to loan because they had to hold more back to meet the higher reserve requirements. And at the hint of any weakness on the part of any bank customers started a run on that bank. If the bank had been sound before it soon wasn't. That spawned even more runs as people and businesses got more and more concerned about losing money they couldn't afford to lose by keeping it an a bank that might fail.
The Hoover Administration kept tightening and tightening. And things kept getting worse and worse. That ushered in the Roosevelt Administration. They put in the FDIC and mandated a "bank holiday", temporarily closing all banks. During the holiday every single bank still in existence was audited. Some banks were found to be unsound and they were closed. But most banks were found to be sound.
Once the holiday was over and a bank opened back up its customers were told that it was "backed by the full faith and credit of the Federal Government". People believed the promise, which was kept then, and is kept now. Bank runs became a thing of the past. That didn't fix the economy but it did fix the banking system.
The next time there was a significant problem in the banking system took place roughly fifty years later. It is usually called the S&L Scandal. But I'm going to call it the S&L Panic. It turns out that "there are banks and then there are banks". (Unfortunately, I will need to return to this later.)
The FDIC promise that a "bank" was backed by the full faith and credit of the Federal Government applied only to "Federally chartered commercial banks". What? If a bank has the phrase "National Bank" in it's name then it's covered by the FDIC. But there are other kinds of what most people think of as a "bank". The two biggest groups of these other types of "banks" are "Savings and Loans" and "Mutual Savings Banks".
There are technical differences between the two. But for our purposes we can ignore these differences and lump them together. Both were considered to be "community banks". They dealt with consumers by offering car loans, mortgage loans, and the like. They also took deposits. But they couldn't provide standard checking accounts. Nor could they make loans to businesses.
The limits on the types of activities they could engage in was supposed to make them smaller, less risky operations. So they didn't require the intrusive business standards and audit requirements that the FDIC imposed on Federally chartered commercial banks. (It turns out that there are also state chartered banks but I am going to ignore them.)
They were not part of the FDIC insurance and regulatory system. Instead, they had their own insurance system and regulatory agency. But both were not anywhere near the industrial strength operation the FDIC was. The thinking was that they didn't need to be.
Anyhow, the people who ran the S&Ls and MSBs agitated to give these institutions more bank-like capabilities. In the deregulatory era of the time, they got their wish. They could provide checking accounts, their ability to make loans was greatly expanded, and so on. They could have been folded into the FDIC system. But they liked the looser regulatory environment and lower cost of insurance they were used to. They managed to keep it.
And the hotdogs that had been behind the change behaved like hotdogs. And promptly got into trouble. There were lots of crooks who did crooked things. There were lots of incompetents who did incompetent things. As a result lots of these institutions got into lots of trouble.
And the FDIC-lite insurance system they were using wasn't up to the task of covering their losses. Nor was the FDIC-lite regulatory agency they reported to able to keep them in line. So naturally they applied to the Federal Government to bail them out. And they got their wish.
This cost taxpayers tens of billions of dollars. In the end the remaining institutions were theoretically on a similar sound footing as the FDIC insured national banks. The bad news was that it wasn't really true. The good news is that a lot of people went to jail. Not enough, but still some is better than none.
This "put them on a sound footing" business was true to some extent. But a lot of it was a sham. They still had their own FDIC-lite regulatory agency. It was beefed up but still that wasn't nearly as stringent as the FDIC. And the insurance requirements were improved but remained FDIC-lite too. But people pretended that the problem was solved and moved on. And for a long time nothing happened to contradict this happy picture.
Next in line is what I call the Dot Com Panic of 2001. I have a low opinion of the movers and shakers on Wall Street. So, when things go wrong, my first instinct is to blame them. But this is one of those rare examples where it was not their fault. The general public did this mostly on its own. They got little or no help from the usual cast of Wall Street slime balls.
The IBM PC was introduced in 1981. It was not the first PC but it made a very big splash when it arrived on the scene. And the fact that it came from IBM, then a giant and well respected company, legitimized the whole thing.
And it turned out that it didn't take much time for smaller, smarter, and more nimble companies to figure out how to cash in. Microsoft was one of the first. They got in bed with IBM. That's usually a recipe for getting swallowed whole. But Bill Gates outsmarted IBM and emerged on top.
Compaq Computer, then (and unfortunately also now) a company nobody had ever heard of, pioneered the process of legally cloning the IBM PC. The result was a "compatible" computer that would run all the IBM software but which cost significantly less.
Compaq (and the other clone companies that followed in its footsteps) made a ton of money. With it now established that "there's money in them there computers" lots of companies started piling in. And for a long time personal computers (and later the internet) looked like a license to print money.
Both Microsoft and Compaq were financially sound companies. But then we started seeing companies who said "trust me -- we'll eventually make a ton of money". The public bought the argument and bought the stock. So the share price of these stocks went up and up and up.
At first Wall Street steered clear. They just couldn't figure out how these companies could make enough money to justify their share price. In many cases, Wall Street couldn't figure out how many of these companies could ever make any money at all. But the public ignored the advice of Wall Street and bought the stock anyhow. People made a whole lot of money in a very short amount of time.
Wall Street did eventually climb on the band wagon. But they never went all in. And they certainly weren't driving this particular train. And it turned out that Wall Street was right. Many of these companies never made any money. Others made some money but not nearly enough to justify their share price.
And eventually the public caught up with Wall Street and started selling. And prices went from the stratosphere to the cellar almost instantly. But by this time these "dot com" companies made up a big chunk of the Market. So when they went down the market as a whole went down. People who invested aggressively in these stocks lost 90% of their money. Conservative investors like myself lost 20-30%.
This shook up Wall Street. And individuals who had invested heavily lost heavily. The Dot Com Panic depressed the Market in particular and the economy as a whole in general. By this time most people had some money in the Market. Often it was in a company sponsored 401-k. So the pain was widespread. But for most people (and for Wall Street) the pain was modest and short lived. I got all my money back and more within a couple of years.
And that leads me to the "Panic of '08". This was a typical panic in that Wall Street had its greasy fingers all over it. In spite of the fact that taxpayers had ended up ponying up tens of billions of dollars as a result of the S&L Panic, the pressure for deregulation continued. In fact, it probably increased.
In the run up to the Panic of '08 the patchwork of regulatory agencies, audit requirements, reserve requirements, etc. that had built up around "banks" had not been fixed. Bank-like institutions were allowed to pick their regulator. Not surprisingly, they tended to pick the one that regulated the least.
And it turns out (as I warned you above) that there is yet another kind of "bank". Nationally chartered and FDIC insured banks are called "Commercial Banks". They do business with ordinary people and all kinds of companies.
But there is another kind of bank called an "Investment Bank". They are children of Wall Street and, the story goes, they only deal with sophisticated customers who have considerable expertise in investments, banking, risk, etc. So Investment Banks neither need nor want to be subjected to FDIC regulation. This argument worked. They were not subject to FDIC oversight.
And for a long time this seemed appropriate. If an Investment Bank got into trouble then the only people who would suffer a loss were sophisticated Wall Street types. There was even a law in place to force this. But Glass-Steagall, as the law was commonly called, was repealed in 1999. It had said that a bank can be a Commercial Bank or it can be an Investment Bank but it can't be both.
For a long time Investment Banks had been very profitable, far more profitable than Commercial Banks. But as banking laws changed over time it eventually became possible for Commercial Banks to grow quite large and to diversify into many lines of business. They saw owning an Investment Bank as a wonderful business opportunity and as the next obvious diversification step.
And by this time some "little" Mutual Savings Banks (the cousin of a Savings and Loan) had gotten quite big. At one point Washington Mutual, a Mutual Savings Bank that started in my home town and was still headquartered there, was the fourth largest "bank" in the US. WaMu, as it was called locally, had aggressively shopped for a regulator that was completely unprepared to handle an institution of its size and complexity. That made it easy to fly under the radar.
And lots of companies were flying under the radar. They structured their operations so as to avoid all but the most minimal regulatory and audit requirements. Then they started writing mortgages that were highly unsound. I'm going to skip over the details. (If you want more on the subject, it can be found here: http://sigma5.blogspot.com/2013/04/speculative-bubbles-part-2-of-2.html). But wait, there's more.
Wall Street thought these unsound mortgages represented a great opportunity. They packaged them up in such a way that they looked like "AAA" super-safe investments and started peddling them to one and all. Who wouldn't want a super-safe investment that paid a high rate of return? So they had no trouble selling all they could manufacture.
Eventually reality caught up with the unsound mortgages. A lot of regular people lost their homes. And, after a short delay, these so called super-safe investments started going bad. And they took the people who had invested in them down with them.
And the people who had been front and center on all of this had been the Investment Banks. So they started going down. Investment Banks going down was only supposed to hurt sophisticated Wall Street types. But by now it was all tied together. So the Commercial Banks were soon in big trouble.
The result was the TARP, the Troubled Asset Recovery Program. TARP bailed out Wall Street and the banking system. Since we all use the banking system and most of us have at least some money in Wall Street this was good.
But none of the people who lost their homes or were laid off as business took a dive were bailed out. And nobody went to jail even though there was widespread lawbreaking. WaMu went from being the fourth largest bank in the country to being the largest US bank to ever to go bankrupt.
Wall Street came back. And it didn't take all that long. I suppose that, given the amount of money the Federal Government poured into them, that's not very surprising. And, after a long hard slog lasting roughly a decade, main street had finally pretty much recovered when COVAD-19 showed up.
To be fair, the COVAD-19 Panic we are now in, is another of those "not Wall Street's fault" panics. Wall Street is having just as much trouble as everybody else in trying to cope with it. We've all been forced to become COVAD-19 experts. Social distancing, stay-at-home orders, and closing down "non-essential" businesses strikes at the heart of the economy. And a lot of people are getting very sick. This too sucks up a tremendous amount of resource.
Given all this, what's is the economic lookout? The short term answer is easy: It will be devastating. As I write this ten million people have filed for unemployment in just two weeks. A lot of the country, including the part I live in, has been locked down for weeks. The rest of the country will soon be locked down. While that's going on the economy will head straight into the toilet. And it will stay there as long as the lockdown continues.
Sharp economic shocks, if they are of short duration, can produce swift rebounds, a so called "V" curve. The Pollyanna's among us are hoping this is what's going to happen with respect to the COVAD-19 Panic. But from an economic perspective (and from many other perspectives too) this is an unprecedented event. It is not like any of the other Panics I have discussed. So they don't really provide much in the way of guidance.
The event that is most similar to is one I haven't discussed. A "Spanish Flu" Pandemic swept the world in 1918 and 1919. Broadly speaking, COVAD-19 is a Flu. So was the Spanish Flu, named because it was first identified in Spain. It didn't start there, but by the time scientists figured that out, the name had stuck.
The Spanish Flu panic is inextricably connected to World War I. It started just as that War was winding down. And the devastation and unsanitary conditions that were part and parcel of the War helped get it firmly established. Like COVAD-19, the Spanish Flu was almost impossible to stop once it got established. Like COVAD-19 it swept across the world. It would pop up here then pop up there.
There are differences in behavior between COVAD-19 and the Spanish Flu. But they are unimportant with respect to our discussion. A lot of people got sick. A lot of people died. Medical infrastructure got overwhelmed.
Of course, back then the medical infrastructure was not as sophisticated as it is now. For instance, the ventilator had not even been invented yet. But what they did have was the ability to manufacture cheapo masks in large quantities. So they did.
There are pictures of people out in the streets of Seattle at the time. Everybody was wearing masks. It was the law. Of course, back then you could get masks in Seattle and pretty much anyplace else in the world.
With all of our modern sophistication cheapo masks are now a single source item. They all now come from China. China was hit hard and hit first by COVAD-19. This put a dent in their ability to manufacture things. But they are now in the process of restarting their manufacturing sector. And they made zillions of cheapo masks for domestic use as part of their strategy for combatting COVAD-19.
The problem we in the US have is that there is a trade war going on between us and China. This makes it hard to import the tens of millions of cheapo masks we would need to make a mandatory "mask while you are in public" order practical. So such an order has not been issued.
People have stepped in with homemade cloth masks. They are better than nothing but they are not even as good as the standard cheapo mask. And you need a much fancier N-95 mask for the mask to provide a serious level of protection.
The Spanish Flu definitely depressed the economy. How much? We don't really know. The end of World War I also depressed the economy. How much should be attributed to one versus the other is something nobody knows. But it looks like even if we attribute all of the economic damage to Spanish Flu and none of it to World War I, the economic impact of the COVAD-19 Panic will be much larger.
How much larger? We don't know. The US response has been disorganized and confused. And this applies to both the medical side and the economic side. There things both medical and economic that can still be done to reduce the damage and to bring the COVAD-19 panic to an end more quickly. So far this is not being done. And we don't know when that will change.
People have been studying epidemics and pandemics as a medical problem for a long time. If you can give the experts a few key numbers they can tell you how severe things will get and how the medical part will play out over time.
We have been measuring these numbers. The best you can say so far is that results are mixed. Some places are taking the appropriate actions. But lots of other places aren't. It is barely possible to close international borders so we aren't harmed by bad behavior elsewhere. But that can't be done in the case of state and regional borders. Besides, judging by current statistics, we are one of the places engaging in bad behavior.
The obvious thing to do is to institute national measures to mandate good behavior. That hasn't happened. Unfortunately, it may never happen. What's stopping us is not medical or economic considerations. It's political considerations. And that makes COVAD-19 a political problem before anything else. I wish it were otherwise.
In the middle ages most people lived on farms that existed within the domain of the local feudal lord. There was no money to speak of and what passed for government was provided by the lord. He provided for the common defense, maintained the roads, and provided a few other basic services. He levied a tax that consisted of some portion, traditionally a tenth, of whatever the farmer produced in return. The important thing was that all economic activity was local.
In the few larger cities and towns Goldsmiths and Silversmiths started providing a service to the rich and powerful. They would store their valuables in a safe or strong room. Using this shared resource cut down on costs. And the smarter of them observed that only a few people needed their valuables at any one time. So they could make a tidy buck on the side by loaning out some of the stored valuables at interest. This was the beginning of the banking system.
And it eventually occurred to the rich and powerful and those that they did business with that there was a better way to do so than using the valuables themselves, the plate silver, coins, etc. Instead, a piece of paper called a "draft" could be used. The draft promised that "valuables in an amount equal to whatever" would be handed over to the bearer ""on demand".
These "demand drafts" were was the foundation of currency. And this new and improved way of doing business quickly became very popular. As a result, some "banks" (places where you "banked" your valuables) got so big and successful that they were eventually able to finance the governments of whole countries.
A country like France would issue a certain amount of "coin of the realm". But for really big transactions, ones involving more than a bag or two of coins, they came to depend on demand drafts drawn against banks run by the Rothchild family, for instance.
The Rothchild's were one of the first to go international. Various family members set up banks in various large cities in various countries. Money in large amounts could be moved from place to place by using a demand draft drawn on a Rothchild bank at one location. It would be honored by Rothchild banks operating at other locations, perhaps even at a location located in another country. This became common practice in Europe.
The US ended up with something similar but less well developed. Various government sponsored "national" banks were created. But politics did them in. So, for a big chunk of the history of the US, there were only small banks that confined their operations to relatively small geographic areas.
And for the most part that worked fine. Most people traveled no great distance. And the advantage of paper money were so obvious that for a long time it was the custom of each bank to issue its own currency. It was not only the done thing but it was completely legal at the time.
At this time the Federal government was tiny. Like the feudal lord of yore it provided only modest services. It provided for the national defense, maintained some roads, ran a postal service over those roads, and that was pretty much it. Almost all revenue came from tariffs assessed on imported goods. The Federal government had little or no daily impact on most people most of the time.
But then railroads and the Civil War came along. Railroads were the first large business that operated on a national scale in the US. They needed a banking system that was national in scope and big enough to serve their needs, which dwarfed anything that had come before. Sadly, there was nothing in place to meet these needs.
The Civil War was an enterprise whose scale dwarfed even the largest railroads. Soon after the start of the War the Union government was raising and spending unbelievable sums of money. The Confederate government was smaller but it too was soon operating on a hitherto unheard of scale.
The War cost more than a million dollars a day to prosecute. That was sum far beyond the capabilities of the then extant banking system. As a result, the US government, which had previously confined itself to minting coin, got into the business of printing paper money, called "greenbacks" for the color of ink used then and now.
All this was grafted on top of a wholly inadequate system. And banks were still issuing currency backed only by their good name and reputation. Back in the time before the War and before the railroads, this business of each bank issuing its own currency worked, sort of.
Local people knew their local banker. If they spotted something hinky, the thinking went, they could pull their money out before the bank went under. Only suckers (people who lived some distance away) would get hurt when that bank's currency became worthless.
But after the Civil War got under way that became impractical. And soon there was fantastic amounts of money sloshing around as the railroads, then the oil industry, the steel industry, etc. became giants. As a result, we had a "panic" (that's what they were called) about every ten years.
If a small bank here or a small bank there all of a sudden went under it was hard on the locals but had no wider impact. But after the War ended various developments like the railroads operating on a national scale knitted banks together. So you now had the possibility of a serious ripple effect.
One bank going down could cause a run on another bank and the situation could now spiral into an event that had a broad impact. It didn't happen every time. But it happened often enough, about once every ten years, on average.
Finally, in 1914 the Federal Reserve was chartered. The thing that allowed it to survive political challenges that had taken down it's predecessors was it's "economic stability" mission. It was supposed to stop these very destructive panics from happening.
It was not completely successful. Banks could still go under and people could still lose their money. The possibility of a panic was enough to cause people to start a "run on the banks". Panics happened often enough that people were all too familiar with them.
Bankers of the time had the same problem that their Rothchild era predecessors had. Everything was fine as long as everybody didn't try to pull their money out at the same time. (And assuming the banker wasn't an outright crook or completely incompetent.)
A run didn't require everybody to demand their money. It only took a significant portion of depositors demanding their money, all at the same time. That was enough to turn a sound bank into an unsound bank.
What finally fixed the problem was the introduction of a government agency called the FDIC in the '30s. It guaranteed that people would get their money even if the bank went under. Once the Fed and the FDIC were in place we went a long time without anything that looked like a panic. People and companies could go about their business without worrying about whether or not the bank they used in was in danger of going under.
But this Fed/FDIC solution eventually became a victim of its own success. The fact that nothing had gone wrong for a long time caused people to forget what a panic looked like. That amnesia gave political factions the opportunity to weaken the system so they did. So we went back to a point where panics became possible again. And with that, I would like to look at some panics. And I am going to start with the big one, the Great Depression.
We all know that the Stock Market crashed in 1929. But at the time the Market was not that big of a thing. Only a few rich people owned stocks. And the fact that a company's share price had tanked had little or no effect on the day to day operation of that company. But important people were harmed by the Crash and they forced the Federal Government to take action.
It was not the crash itself but the response to the crash that did most of the harm. Under Hoover the Federal Government's response was to do what everybody thought at the time was the right thing to do. That was to clamp down on the banking system. Bank reserves must be increased. Loans must only be made to blue chip clients. Unlike with the crash itself, these changes had a widespread impact.
Many businesses both large and small needed access to credit. All of a sudden only the people who didn't need credit could get credit. That caused businesses large and small to pull back. They started cutting back on production and laying people off. That meant business dried up for suppliers who responded by laying people off. Laid off people (there was no unemployment insurance at the time) were forced to cut back on their expenses so they bought less. And the spiral continued.
In the mean time, banks had less money to loan because they had to hold more back to meet the higher reserve requirements. And at the hint of any weakness on the part of any bank customers started a run on that bank. If the bank had been sound before it soon wasn't. That spawned even more runs as people and businesses got more and more concerned about losing money they couldn't afford to lose by keeping it an a bank that might fail.
The Hoover Administration kept tightening and tightening. And things kept getting worse and worse. That ushered in the Roosevelt Administration. They put in the FDIC and mandated a "bank holiday", temporarily closing all banks. During the holiday every single bank still in existence was audited. Some banks were found to be unsound and they were closed. But most banks were found to be sound.
Once the holiday was over and a bank opened back up its customers were told that it was "backed by the full faith and credit of the Federal Government". People believed the promise, which was kept then, and is kept now. Bank runs became a thing of the past. That didn't fix the economy but it did fix the banking system.
The next time there was a significant problem in the banking system took place roughly fifty years later. It is usually called the S&L Scandal. But I'm going to call it the S&L Panic. It turns out that "there are banks and then there are banks". (Unfortunately, I will need to return to this later.)
The FDIC promise that a "bank" was backed by the full faith and credit of the Federal Government applied only to "Federally chartered commercial banks". What? If a bank has the phrase "National Bank" in it's name then it's covered by the FDIC. But there are other kinds of what most people think of as a "bank". The two biggest groups of these other types of "banks" are "Savings and Loans" and "Mutual Savings Banks".
There are technical differences between the two. But for our purposes we can ignore these differences and lump them together. Both were considered to be "community banks". They dealt with consumers by offering car loans, mortgage loans, and the like. They also took deposits. But they couldn't provide standard checking accounts. Nor could they make loans to businesses.
The limits on the types of activities they could engage in was supposed to make them smaller, less risky operations. So they didn't require the intrusive business standards and audit requirements that the FDIC imposed on Federally chartered commercial banks. (It turns out that there are also state chartered banks but I am going to ignore them.)
They were not part of the FDIC insurance and regulatory system. Instead, they had their own insurance system and regulatory agency. But both were not anywhere near the industrial strength operation the FDIC was. The thinking was that they didn't need to be.
Anyhow, the people who ran the S&Ls and MSBs agitated to give these institutions more bank-like capabilities. In the deregulatory era of the time, they got their wish. They could provide checking accounts, their ability to make loans was greatly expanded, and so on. They could have been folded into the FDIC system. But they liked the looser regulatory environment and lower cost of insurance they were used to. They managed to keep it.
And the hotdogs that had been behind the change behaved like hotdogs. And promptly got into trouble. There were lots of crooks who did crooked things. There were lots of incompetents who did incompetent things. As a result lots of these institutions got into lots of trouble.
And the FDIC-lite insurance system they were using wasn't up to the task of covering their losses. Nor was the FDIC-lite regulatory agency they reported to able to keep them in line. So naturally they applied to the Federal Government to bail them out. And they got their wish.
This cost taxpayers tens of billions of dollars. In the end the remaining institutions were theoretically on a similar sound footing as the FDIC insured national banks. The bad news was that it wasn't really true. The good news is that a lot of people went to jail. Not enough, but still some is better than none.
This "put them on a sound footing" business was true to some extent. But a lot of it was a sham. They still had their own FDIC-lite regulatory agency. It was beefed up but still that wasn't nearly as stringent as the FDIC. And the insurance requirements were improved but remained FDIC-lite too. But people pretended that the problem was solved and moved on. And for a long time nothing happened to contradict this happy picture.
Next in line is what I call the Dot Com Panic of 2001. I have a low opinion of the movers and shakers on Wall Street. So, when things go wrong, my first instinct is to blame them. But this is one of those rare examples where it was not their fault. The general public did this mostly on its own. They got little or no help from the usual cast of Wall Street slime balls.
The IBM PC was introduced in 1981. It was not the first PC but it made a very big splash when it arrived on the scene. And the fact that it came from IBM, then a giant and well respected company, legitimized the whole thing.
And it turned out that it didn't take much time for smaller, smarter, and more nimble companies to figure out how to cash in. Microsoft was one of the first. They got in bed with IBM. That's usually a recipe for getting swallowed whole. But Bill Gates outsmarted IBM and emerged on top.
Compaq Computer, then (and unfortunately also now) a company nobody had ever heard of, pioneered the process of legally cloning the IBM PC. The result was a "compatible" computer that would run all the IBM software but which cost significantly less.
Compaq (and the other clone companies that followed in its footsteps) made a ton of money. With it now established that "there's money in them there computers" lots of companies started piling in. And for a long time personal computers (and later the internet) looked like a license to print money.
Both Microsoft and Compaq were financially sound companies. But then we started seeing companies who said "trust me -- we'll eventually make a ton of money". The public bought the argument and bought the stock. So the share price of these stocks went up and up and up.
At first Wall Street steered clear. They just couldn't figure out how these companies could make enough money to justify their share price. In many cases, Wall Street couldn't figure out how many of these companies could ever make any money at all. But the public ignored the advice of Wall Street and bought the stock anyhow. People made a whole lot of money in a very short amount of time.
Wall Street did eventually climb on the band wagon. But they never went all in. And they certainly weren't driving this particular train. And it turned out that Wall Street was right. Many of these companies never made any money. Others made some money but not nearly enough to justify their share price.
And eventually the public caught up with Wall Street and started selling. And prices went from the stratosphere to the cellar almost instantly. But by this time these "dot com" companies made up a big chunk of the Market. So when they went down the market as a whole went down. People who invested aggressively in these stocks lost 90% of their money. Conservative investors like myself lost 20-30%.
This shook up Wall Street. And individuals who had invested heavily lost heavily. The Dot Com Panic depressed the Market in particular and the economy as a whole in general. By this time most people had some money in the Market. Often it was in a company sponsored 401-k. So the pain was widespread. But for most people (and for Wall Street) the pain was modest and short lived. I got all my money back and more within a couple of years.
And that leads me to the "Panic of '08". This was a typical panic in that Wall Street had its greasy fingers all over it. In spite of the fact that taxpayers had ended up ponying up tens of billions of dollars as a result of the S&L Panic, the pressure for deregulation continued. In fact, it probably increased.
In the run up to the Panic of '08 the patchwork of regulatory agencies, audit requirements, reserve requirements, etc. that had built up around "banks" had not been fixed. Bank-like institutions were allowed to pick their regulator. Not surprisingly, they tended to pick the one that regulated the least.
And it turns out (as I warned you above) that there is yet another kind of "bank". Nationally chartered and FDIC insured banks are called "Commercial Banks". They do business with ordinary people and all kinds of companies.
But there is another kind of bank called an "Investment Bank". They are children of Wall Street and, the story goes, they only deal with sophisticated customers who have considerable expertise in investments, banking, risk, etc. So Investment Banks neither need nor want to be subjected to FDIC regulation. This argument worked. They were not subject to FDIC oversight.
And for a long time this seemed appropriate. If an Investment Bank got into trouble then the only people who would suffer a loss were sophisticated Wall Street types. There was even a law in place to force this. But Glass-Steagall, as the law was commonly called, was repealed in 1999. It had said that a bank can be a Commercial Bank or it can be an Investment Bank but it can't be both.
For a long time Investment Banks had been very profitable, far more profitable than Commercial Banks. But as banking laws changed over time it eventually became possible for Commercial Banks to grow quite large and to diversify into many lines of business. They saw owning an Investment Bank as a wonderful business opportunity and as the next obvious diversification step.
And by this time some "little" Mutual Savings Banks (the cousin of a Savings and Loan) had gotten quite big. At one point Washington Mutual, a Mutual Savings Bank that started in my home town and was still headquartered there, was the fourth largest "bank" in the US. WaMu, as it was called locally, had aggressively shopped for a regulator that was completely unprepared to handle an institution of its size and complexity. That made it easy to fly under the radar.
And lots of companies were flying under the radar. They structured their operations so as to avoid all but the most minimal regulatory and audit requirements. Then they started writing mortgages that were highly unsound. I'm going to skip over the details. (If you want more on the subject, it can be found here: http://sigma5.blogspot.com/2013/04/speculative-bubbles-part-2-of-2.html). But wait, there's more.
Wall Street thought these unsound mortgages represented a great opportunity. They packaged them up in such a way that they looked like "AAA" super-safe investments and started peddling them to one and all. Who wouldn't want a super-safe investment that paid a high rate of return? So they had no trouble selling all they could manufacture.
Eventually reality caught up with the unsound mortgages. A lot of regular people lost their homes. And, after a short delay, these so called super-safe investments started going bad. And they took the people who had invested in them down with them.
And the people who had been front and center on all of this had been the Investment Banks. So they started going down. Investment Banks going down was only supposed to hurt sophisticated Wall Street types. But by now it was all tied together. So the Commercial Banks were soon in big trouble.
The result was the TARP, the Troubled Asset Recovery Program. TARP bailed out Wall Street and the banking system. Since we all use the banking system and most of us have at least some money in Wall Street this was good.
But none of the people who lost their homes or were laid off as business took a dive were bailed out. And nobody went to jail even though there was widespread lawbreaking. WaMu went from being the fourth largest bank in the country to being the largest US bank to ever to go bankrupt.
Wall Street came back. And it didn't take all that long. I suppose that, given the amount of money the Federal Government poured into them, that's not very surprising. And, after a long hard slog lasting roughly a decade, main street had finally pretty much recovered when COVAD-19 showed up.
To be fair, the COVAD-19 Panic we are now in, is another of those "not Wall Street's fault" panics. Wall Street is having just as much trouble as everybody else in trying to cope with it. We've all been forced to become COVAD-19 experts. Social distancing, stay-at-home orders, and closing down "non-essential" businesses strikes at the heart of the economy. And a lot of people are getting very sick. This too sucks up a tremendous amount of resource.
Given all this, what's is the economic lookout? The short term answer is easy: It will be devastating. As I write this ten million people have filed for unemployment in just two weeks. A lot of the country, including the part I live in, has been locked down for weeks. The rest of the country will soon be locked down. While that's going on the economy will head straight into the toilet. And it will stay there as long as the lockdown continues.
Sharp economic shocks, if they are of short duration, can produce swift rebounds, a so called "V" curve. The Pollyanna's among us are hoping this is what's going to happen with respect to the COVAD-19 Panic. But from an economic perspective (and from many other perspectives too) this is an unprecedented event. It is not like any of the other Panics I have discussed. So they don't really provide much in the way of guidance.
The event that is most similar to is one I haven't discussed. A "Spanish Flu" Pandemic swept the world in 1918 and 1919. Broadly speaking, COVAD-19 is a Flu. So was the Spanish Flu, named because it was first identified in Spain. It didn't start there, but by the time scientists figured that out, the name had stuck.
The Spanish Flu panic is inextricably connected to World War I. It started just as that War was winding down. And the devastation and unsanitary conditions that were part and parcel of the War helped get it firmly established. Like COVAD-19, the Spanish Flu was almost impossible to stop once it got established. Like COVAD-19 it swept across the world. It would pop up here then pop up there.
There are differences in behavior between COVAD-19 and the Spanish Flu. But they are unimportant with respect to our discussion. A lot of people got sick. A lot of people died. Medical infrastructure got overwhelmed.
Of course, back then the medical infrastructure was not as sophisticated as it is now. For instance, the ventilator had not even been invented yet. But what they did have was the ability to manufacture cheapo masks in large quantities. So they did.
There are pictures of people out in the streets of Seattle at the time. Everybody was wearing masks. It was the law. Of course, back then you could get masks in Seattle and pretty much anyplace else in the world.
With all of our modern sophistication cheapo masks are now a single source item. They all now come from China. China was hit hard and hit first by COVAD-19. This put a dent in their ability to manufacture things. But they are now in the process of restarting their manufacturing sector. And they made zillions of cheapo masks for domestic use as part of their strategy for combatting COVAD-19.
The problem we in the US have is that there is a trade war going on between us and China. This makes it hard to import the tens of millions of cheapo masks we would need to make a mandatory "mask while you are in public" order practical. So such an order has not been issued.
People have stepped in with homemade cloth masks. They are better than nothing but they are not even as good as the standard cheapo mask. And you need a much fancier N-95 mask for the mask to provide a serious level of protection.
The Spanish Flu definitely depressed the economy. How much? We don't really know. The end of World War I also depressed the economy. How much should be attributed to one versus the other is something nobody knows. But it looks like even if we attribute all of the economic damage to Spanish Flu and none of it to World War I, the economic impact of the COVAD-19 Panic will be much larger.
How much larger? We don't know. The US response has been disorganized and confused. And this applies to both the medical side and the economic side. There things both medical and economic that can still be done to reduce the damage and to bring the COVAD-19 panic to an end more quickly. So far this is not being done. And we don't know when that will change.
People have been studying epidemics and pandemics as a medical problem for a long time. If you can give the experts a few key numbers they can tell you how severe things will get and how the medical part will play out over time.
We have been measuring these numbers. The best you can say so far is that results are mixed. Some places are taking the appropriate actions. But lots of other places aren't. It is barely possible to close international borders so we aren't harmed by bad behavior elsewhere. But that can't be done in the case of state and regional borders. Besides, judging by current statistics, we are one of the places engaging in bad behavior.
The obvious thing to do is to institute national measures to mandate good behavior. That hasn't happened. Unfortunately, it may never happen. What's stopping us is not medical or economic considerations. It's political considerations. And that makes COVAD-19 a political problem before anything else. I wish it were otherwise.
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