Wall Street Fear

The following essay was initially published in the Fall 2010 issue of Phi Kappa Phi Forum, the member magazine of the National Honor Society of Phi Kappa Phi.

By John T. Harding

   The only thing we have to fear is fear itself.
 — Franklin D. Roosevelt, from his 1933 presidential inaugural address

   Fear is a major factor that drives Wall Street. Financial history is full of examples of investors succumbing to it and causing widespread economic damage, including fallout from the Great Crash of 1929 and the lesser-known Panic of 1907.

   A cynic might say that while Wall Street is populated by bulls and bears, investors are sheep and cattle, often driven by fear — and its companion, euphoria. Despite many financial history lessons showing that neither is a reliable motivation for fiscal decisions, investors continue to delude themselves into thinking that “this time is different” and that they’ve defeated the inevitable business cycle, thus changing the rules forever.

   “The U.S. subprime crisis of 2008 followed the script of scores of banking crises past,” wrote Paul Krugman and Robin Wells in their review of Carmen Reinhart and Kenneth Rogoff’s This Time is Different: Eight Centuries of Financial Folly (for The New York Review of Books, May 13 edition). The core of that folly, Krugman and Wells noted, is that “too much debt is always dangerous,” whether the borrowing is by governments, financial institutions or individuals. “Yet people — both investors and policymakers — tend to rationalize away these dangers,” the reviewers added; “they either forget history or invent reasons to believe that historical experience is irrelevant,” thus setting themselves up for disaster. 

   Economic historian Charles P. Kindleberger put it this way in his often-reprinted 1978 book, Manias, Panics, and Crashes: A History of Financial Crises: “Asset price bubbles — at least the large ones — are almost always associated with economic euphoria.”

    At some point, however, the delusion fades. And as John Maynard Keynes wrote in his 1936 classic book, The General Theory of Employment, Interest and Money, “It is of the nature of organized investment markets ... (that) when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and catastrophic force.”

   This happened in the Panic of 1907 when rumors — some true, some false — sent frightened herds of depositors stampeding to banks, brokerages, and other financial institutions to rescue their cash before firms went belly up. Such a run, however, only made things worse. For example, the stock of United Copper Co. fell from $62 to $15 in only two days after a failed effort by a speculator to corner the company’s shares. And depositors withdrew $8 million in three hours from the Knickerbocker Trust Co. in New York City before the bank suspended operations, according to an historical pamphlet prepared by the Federal Reserve Bank of Boston.

   There was no deposit insurance or investor protection for customers; there was no government agency or central bank to bail out troubled firms. So as the panic spread, financier J. P. Morgan rounded up colleagues to organize a rescue operation, depositing cash with troubled banks and brokerage firms.

   Some six years later, the Federal Reserve Act was signed by President Woodrow Wilson, establishing an independent central banking system to regulate the nation’s financial institutions, monitor the economy, and control the supply of money.

   Disillusion, Keynes noted, “comes because doubts suddenly arise concerning the reliability of the prospective yield,” among other reasons. And when the investment herd perceives a lack of reliability, fear kicks in, as in, most famously, the stock market crash of 1929.

   The tsunami of stock market speculation that led to the Great Depression began to build early in 1928, according to Harvard economist John Kenneth Galbraith in his 1954 bestseller The Great Crash of 1929. This “mass escape into make-believe, so much a part of the true speculative orgy,” Galbraith wrote, “started in earnest,” and as the words of brokers and investment counselors “became golden,” audiences listened “with the truly rapt attention of those who expect to make money by what they hear.”

   Eventually, however, the foggy air of overconfidence was blown away by the winds of economic reality, and the panicked populace demanded their money back, rushing to retrieve what little may have been left of their invested hopes and dreams. By mid-October 1929, disillusioned investors lost confidence, dumped their stocks, and the market crashed.

   While the 1907 episode is also known as “the Rich Man’s Panic” because it directly affected mostly wealthy people, during the 1920s, millions of average Americans had poured their savings into the stock market. Hundreds of banks failed in the first six months of 1929 and hundreds more during the ensuing Great Depression; stocks lost an estimated $50 billion over the two years following the crash; and the jobless rate during the Great Depression soared to a staggering 25 percent.

   Just as the Panic of 1907 led to the creation of the Federal Reserve, the Great Crash of 1929 led in 1934 to the Federal Deposit Insurance Corporation, also an independent entity, whose mission is to cover the assets of depositors, easing their fears when banks become insolvent.

   And it may be coincidence, but it is curious that the last four major financial crises in America happened in October (1907, 1929, 1987, 2008) — just before Halloween.

Style

   For writers and editors, style is nothing more than consistency of usage. It's not a question of which form is "correct," but which form the editor in chief prefers. And that, by definition, is subjective.
   If the editor says percent is one word, not two, that's the form you use. Other editors may prefer two words (per cent), or the abbreviation (pct.), or the symbol (%). The writer's appropriate response is, "whatever sharpens your pencil" (or floats your boat, of lights your fire, or fills your cup, or creams your coffee, etc.).
   For guidelines on style and usage, Strunk & White's Elements of Style remains a best seller, even after a hundred years. Otherwise, consult the Associated Press Style Manual, or any of the academic stylebooks such as those required for Freshman Comp classes. (You remember, the book you had to buy but never read?)
   Keep in mind that style manuals are guide books, not law books, and each represents the choices and biases of the editors who compiled them. But they all have the aim of consistency of usage and improved communication.
   One other thing to keep in mind: The problem with academic style manuals is that in trying to be complete and comprehensive, they become unwieldy. Moreover, too strict adherence to arbitrary rules can stifle creativity.
   Ralph Waldo Emerson was right in calling consistency a hobgoblin, but here's the full quote, with emphasis on "foolish":

   "A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines."

Match, Don't Mix

   Fractions and percentages don't mix well. Using both in the same sentence forces the reader to translate one or the other to get them to match. Even if the reader chooses not to translate, the inconsistency forces a pause while figuring out what's meant.
   Here's an example, from a CNN Web site: "About three-quarters of Americans are Internet users, compared with about 90% of Sweden's population."
   Hans Auf, our correspondent in Munich, called such a usage "very strange." And while technically not incorrect, "it's less efficient, so why do it?"
   Indeed. It's not efficient, because it slows reading and interferes with communication, so it should not be done.
   The purpose of good writing is to communicate, to transfer information efficiently. Don't put translation barriers in the way. In defense of the mix-and-match usage, some say it forces the reader to think. Perhaps, but it's better that the reader think about the concept, and not spend time on the mechanics of translating or transposing varying sets of numbers to the lowest common denominator. (Some of us haven't dealt with LCD translation since fifth grade, and hated it even then.)
   As for which is better or more efficient, fractions or percentages, the answer is neither and both. Writers should choose the one that most efficiently conveys the message. And once chosen, stay with it.
   So how to choose. If you select percentages, the rule of consistency applies. And in general, it's better to use numerals and decimals in all cases. This is especially true with a range, such as 8.4 to 9.5. Conceivably, you could write eight-point-four to nine-and-a-half, or 8.4 to 9 1/2, but mixing the forms can only jar and distract the reader.
   The goal is communication, not confusion. Unless you're running for political office.

Austerity

   Demanding austerity in the name of a balanced budget may sound good in principle, but on a national level it can be not only counter-productive but also socially dangerous.
   Conservatives insist that all citizens pay their own way in all things all the time, to take responsibility for their own welfare. This, however, is a fallacy.
   In extreme form, austerity means stop spending money. And while this may be a good idea in the short term for a family, it is not for a government. Why? Because if government stops spending money -- or at least sharply reduces expenditures -- many thousands of government employees are put out of work, lose their wages and end up unable to pay for food, clothing and shelter -- unable to support their families.
   Result: The general economic downturn that initiated the demand for government austerity becomes worse.

Balancing Act

   It may be coincidence, and keep in mind that correlation is not necessarily causation, but consider this:
   For the past 50 years, the balance of payments in international trade has been more strongly negative during Republican administrations than when a Democrat occupied the White House.
   During the 1960s, when John F. Kennedy and Lyndon B. Johnson were in office, the foreign trade balance of payments favored the U.S. by $6 billion. It then began a decline, to a negative $152 billion in 1987, when Ronald Reagan was President, and to a negative $753 billion in 2006, under George W. Bush -- an all-time low.
   Meanwhile, Bush took office with a surplus of $236 billion in the federal budget. Eight years later, that surplus was not only gone, but his budget for Fiscal Year ending in 2009 showed a deficit of $1.4 trillion.

Industry and Capitalism

It ain't what you got, it's the way that you use it.

   The wealth of a nation lies not only in its available natural resources, but to a greater extent in what people choose to do with those resources.
   Economics is the study of what we do with what we've got. It is properly a social science, first known as "political economics," an expansion of the ancient Greek term for household management, from an estate to an entire city.
   The Industrial Revolution helped to bring about capitalism, the use of money to invest in equipment that enabled greater production by fewer workers. But this does not mean that the workers, who become more efficient by using machines, should not share in the benefits of increased productivity.
   Early capitalists -- those who invested in the machines -- believed that since they undertook some of the risk, they were "entitled" to all of the rewards. (There's that word again.)

Job Seekers

   Jobs may be scarce in America, but they're even more scarce elsewhere in the world. The unemployment rate in the U.S. is slightly above 8 percent, and that's a bad thing. But the unemployment rate in Spain is 25 percent, and among the youth in that country, it's 53.1 percent.
   So what do you do when you can't find a job near home? You move to where the odds of finding a job are better. And historically, that's why many workers came to America: This is where the jobs were and, comparatively, still are.
   The latest figures from Eurostat, the statistical office of the European Union, shows an overall unemployment rate in August for the 17 countries that use the euro as its monetary unit of 11.4 percent. The jobless rate for all 27 nations of the EU was 10.5 percent. Following Spain with the highest jobless rate is Greece, at 24.4 percent.
   Austria has the lowest unemployment rate, 4.5 percent, with Luxembourg (5.2 percent), the Netherlands (5.3 percent) and Germany (5.5 percent) following. The unemployment rate in the UK is at 8 percent, just below America's 8.1 percent, while in Ireland, the percentage of workers without jobs is 15 percent.
   Granted, an unemployment rate above 8 percent is no picnic, but the odds of finding a job in America are a lot better than finding a job in Spain, Greece, Portugal, or Ireland.
   So it follows that workers in those countries will try first in Northern Europe, and then -- if they are lucky enough to get a visa or have family here -- will come to America, still, relatively speaking, the land of opportunity.