Share

The Great Crash of 2008

Monday 01 December 2008

by: Robert Reich  |  Robert Reich's Blog

photo
While the US economy has only recently been officially deemed as in recession, many Americans have been struggling with poverty for a long time. (Photo: Stephen Shames, 1985)

    If this isn't a Great Crash I don't know how to define one. Stocks were down another 7 percent today. Since the peak of last year, major stock indexes have dropped 47 percent. We're in range of the Great Crash of 1929.

    Why is the Great Crash of 2008 happening? First, because investors are beginning to understand the enormity of the bubble economy that began to form in the late 1990s when all constraints were lifted on borrowing in order to buy everything that was assumed to be increasing in value - starting with houses and including securities and shares of stock themselves. So-called "margin requirements," first instituted in the wake of the Great Crash of 1929, were all but abandoned, as big banks and hedge funds found ways around them.

    Even more important, investors are starting to fathom the emptiness of American consumers' wallets. Retail sales last Friday and Saturday - the first days of the Christmas buying season - were disappointing. Had retailers not discounted to the point of taking losses, sales would have been abysmal. In other words, consumers have gone on strike.

    Why have they gone on strike? Not because of the difficulty of getting credit. Most consumers can barely afford to pay the interest charges on the debt they're already carrying. Consumers have gone on strike because their earnings haven't kept up. The recovery that officially ended December, 2007 (the National Bureau of Economic Research now tells us) was the first on record in which median earnings declined, adjusted for inflation. Since then, many people have also lost their jobs or are working part time when they'd rather be working full time, or else know they're in danger of losing their jobs.

    The speculative bubble still has some air in it; asset values will continue to drop before they hit bottom. That will take at least a year, possibly two. But don't expect asset values to bounce substantially back, even then. The only way to revive Wall Street is to revive Main Street, and the only way to accomplish this is to get America back on the course of rising median incomes.

    --------

    Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley. His latest book is "Supercapitalism."

  

»

Comments

This is a moderated forum. Β It may take a little while for comments to go live. Be civil and on-topic, don't threaten or advocate violence, please keep it under 300 words. Thanks for participating.

The reason consumers aren't

 Tue, 12/02/2008 - 19:28 β€” Harvey Frost (not verified)
The reason consumers aren't buying is because they are afraid, not on strike. Never before has Merton's concept of the self-fulfilling prophecy been exemplified on such a monstrous scale. People are so terrified of a depression that they are making one happen. What started as a credit crunch primarily in the mortgage sector of the investment market, has swept like wildfire across the entire spectrum of the economy, fueled by the panic of investors and fanned by the terror of consumers. Let's just pray that when Barack Obama assumes office, a contradicting wave of optimism will wash away the debris so we can start rebuilding what in so many ways was a sound economy, just going through a rougher than usual cycle.

Yes, Americans are on a

 Tue, 12/02/2008 - 20:05 β€” Elliot Hoffman (not verified)
Yes, Americans are on a "consumption strike", for many reasons. A key reason for this entire mess is a culture of deception, spin and lies, which has gone on for decades. The whole notion that we can consume our way to happiness is completely bogus. Defining quality of life by the size of your house or manliness / womanliness of your car is insane. In a finite world with finite resources (for the most part) and population growth out of control, we need to redefine what a quality life is really about. We need to decouple QOL from standard of living. Certainly, we need the basics and some beauty and pleasure in life, but friends, family, community are left behind in the rat race that has been created by those in control of capital, those who advertise at us and those pushing all the junk we need like a hole in the head. Add a culture of enormous waste (energy, water, space, food, etc.) and we have an American and western culture out of control without a clue that it's really about us and how we choose to live our lives. If we are unwilling to look at our shadow and look at the truth instead of living in denial, join our KIGB group - (Kiss It Good Bye). It's time to transform our culture from one of consuming to one of investing - in the future, in life worth living for all, not just for Americans. As the old saying goes, we either all hang together or we all hang separately.

The obsession with growth is

 Tue, 12/02/2008 - 20:07 β€” greg gerritt (not verified)
The obsession with growth is what is destroying the planet. Get used to a shrinking economy, do better with less. There is no longer a resource base to use in recovery. No more fish to catch, forests to cut, grasslands to plow. Oil has peaked. Share better, love better, and use less stuff to make up for the hollowness of consumerist culture, and the wars necessary to protect consumerism.

An economy based primarily

 Tue, 12/02/2008 - 20:30 β€” Anonymous (not verified)
An economy based primarily on consumerism, is not an economy that will last. Nor is one based on credit. In short, it’s not about confidence, it’s about the money, and it’s all gone.

"God money, I'll do anything

 Tue, 12/02/2008 - 21:16 β€” Anonymous (not verified)
"God money, I'll do anything for you. God money, just tell me what you want me to. God money, nail me up against the wall. The god of money don't want everything he wants it all. No you can't take it No you can't take it No you can't take that away from me Head like a hole, Black as your soul. I'd rather die than give you control. Bow down before the one you serve, You're going to get what you deserve. God money's not looking for the cure. God money's not concerned about the sick among the pure. God money let's go dancing on the backs of the bruised. The god of money's not one to choose."-NIN

If wages haven't been

 Tue, 12/02/2008 - 21:47 β€” Anonymous (not verified)
If wages haven't been keeping up to the cost of living, why arn't we hearing more from economist like Reich about raising the minimum wage - and putting an annual cost of living increase on it. (only eight states currently do this now.) Why al the concern about the "middle class" and nothing about the "poor working class"?

Thank you Robert. I

 Tue, 12/02/2008 - 22:27 β€” Terri K in NC who doesn't do recreational shopping (not verified)
Thank you Robert. I thought - What was such as great deal, so cheap, or necessary for people to stand in line for hours and then stomp a person to death when the doors opened? What do they need all that crap for? And then there's the debt - people who are $thousands and $thousands in debt to the credit card companies because they or their kids had to have all the latest purses or TVs or shoes. Shopping has became recreation. Magazines push the latest this and that. You won't be IT without that $1,500 purse. People don't walk or interact with their kids. They BUY them stuff. You/they get bored - shop. You/they get sad - shop. You get pissed off - shop. A cure for everything is something new, better, bigger, the latest model, the newest movie.... $$ make-up that makes you younger looking.. And it's all tomorrows trash and environmental hazards.

The reason consumers are not

 Tue, 12/02/2008 - 23:17 β€” Anonymous (not verified)
The reason consumers are not buying the extras this year is not really fear. it is fact. The rule used to be " your house payment should not be over 1/3 of your monthly earnings". Currently they run at 45% of the combined family earnings. Add in the increase in food prices(artificially blamed on transportation costs[oil is down, food is not]. Then add in the facts that no corporation has given "cost of living" raises equal to the raise in prices, health care has increased in cost,insurance rates increase with no concomitant increase in coverage,and the fact that most of the "bailout money" has so far gone to company CEO's and travel junkets. How can the American consumer trust the future far enough to spend.

"If wages haven't been

 Wed, 12/03/2008 - 01:26 β€” haverwench (not verified)
"If wages haven't been keeping up to the cost of living, why arn't we hearing more from economist like Reich about raising the minimum wage - and putting an annual cost of living increase on it. (only eight states currently do this now.) Why al the concern about the "middle class" and nothing about the "poor working class"?" Actually, if you read Reich's book _I'll Be Short_, you'll find he does endorse tying the minimum wage to inflation. He also proposes other steps to combat rising inequality in income and the distribution of wealth, such as improving public education and giving an "equity stake" to all Americans at birth. Some of his proposals are more controversial than others, but you can hardly accuse him of being indifferent to the plight of the working poor.

I agree with Elliot Hoffman.

 Wed, 12/03/2008 - 02:14 β€” Liz Kruidenier (not verified)
I agree with Elliot Hoffman. Consumerism has lead us to throw away our old stuff so that we can buy new stuff, before it ever wears out so that what? Our house can look like somebody else's idea of what they think is chic, mod or way out? Gone is the idea of saving, God forbid, to buy a few nice things, repairing them when they need to be fixed and cherishing them as they grow old with you.I have a couple of orientals that my mother loved and mended, as she grew older, and the colors don't always match, but I treasure them because she did. She realized the work that went into them and loved their colors and beautiful designs and she wanted them to last at least until she died. There is so much more we can do for each other if we limit our needs and share our wealth with those that have less. We could build a kinder, more compassionate and completely sustainable world that would provide shelter, food, clean water, and health care for everyone. Think of the challenge. Think of the satisfaction. We all know we could do it. So what is stopping us? Is it that we are more concerned about the crash of our stock market than the crash of our value system? Probably.

Not to be disrespecful, but

 Wed, 12/03/2008 - 06:25 β€” Kashilinus (not verified)
Not to be disrespecful, but Robert Reich was once in a position of power and could have used that position to forge pathways that would have helped to avert the current crisis. I don't recall that happening, but now, in hindsight, is smugly enriching himself with books and appearances before talking heads. If the nation takes the direction of modernizing its infrastructure - bridges, roads, high speed rails, power and water grids (yes water. Move flood waters to arid areas), free broadband, clean energy, etc, there is hope that a balance can be reached. But we need education too, that leads to shunning frivolous consumerism, while favoring elevating advancements like these computers that allow us to discuss these problems.

Harry Figgie, Founder of

 Wed, 12/03/2008 - 06:44 β€” Kashilinus (not verified)
Harry Figgie, Founder of Figgie International authored a book in 1992 titled "Bankruptcy 1995 The coming collapse of America and How to stop it". Foreword by Warren Rudman. Timing was off a bit, but Robert Reich was in Clinton's service as Secretary of Labor from 1993 to 1997. I suspect he must have blown off this work. It certainly doesn't appear that he took it seriously.

Strangely enough, I think

 Wed, 12/03/2008 - 08:45 β€” Oracorf (not verified)
Strangely enough, I think the crash in our stock market IS the crash in our value system. There is no basis in fact to sustain the wealth. 25000 BILLION € disappeared during the first days of the crash, while in fact the truth is they never existed... So long as labor is considered a liability rather than an asset, our houses will be built on bubbles that make sand seem down right stable...

Consumers are not buying

 Wed, 12/03/2008 - 13:54 β€” Anonymous (not verified)
Consumers are not buying because with credit cards maxed, they are spending their real money and realizing it will only do so far. On the "growth" issue- uncontrolled growth is called "cancer".

Reread the post by Liz

 Wed, 12/03/2008 - 15:39 β€” Anonymous (not verified)
Reread the post by Liz Kruidenier. It says a lot of truth in a few words.

For years, the working class

 Wed, 12/03/2008 - 17:37 β€” Anonymous (not verified)
For years, the working class has been struggling with recession/depression conditions, to the indifference of the ruling elite. When the structural damage to the economy caused by the disappearance of both manufacturing and the middle class starts to cost the wealthy some pocket change, presto! A crisis, and a great excuse to shake down non-wealthy taxpayers for a few trillion. It is truly obscene that Congress pretends concern for the working class to justify more wealth heading upwards. It is beyond obscene to spend well over a trillion a year on war and killing, but when was the last time the punditocracy mentioned the connection between bad economic times and the horrendously bloated spending on violence?

The first elephant in the

 Wed, 12/03/2008 - 17:44 β€” cheaptalker (not verified)
The first elephant in the room represents the direct involvement of average folks in the ongoing stock market crash. This was not the case in 1929. The second elephant is delivering letters from Citigroup informing card holders about the increased interest rates they will be charged. I am assuming that we are not the only couple whose credit card agreement has new terms. The current APR on our account is 13.4%. The new minimum standard APR will be 19.99%. I am ignoring the default rate, since I am tired of trying to find it on our last statement. We never carry a balance, always pay on time etc... Opting out of the new terms will result in the termination of our account on the date our current card expires. Payment in full will be required. Needless to say USAA will be getting all of our business in the future...

Robert, you jumped the gun

 Wed, 12/03/2008 - 17:46 β€” jessepoverseas (not verified)
Robert, you jumped the gun again. While we short folks deserve a handicap, two months is too much. There is no Great Depression of 2008. There will be a Great Depression of 2009. There will be Obamavilles and Democratic soup lines. The depression will be Obama's and the Democrats' doing. All because they tried to extend socialism to the not rich. After four years of pain and suffering, we will see the light, return the Rethuglican true leaders to their deserved postions, return to the correct path of socialism for the rich, and (a few of us will) live happily ever after.

A booming economy based on

 Wed, 12/03/2008 - 18:50 β€” sfrider (not verified)
A booming economy based on strong consumer demand can only exist in the presence of strong faith in a better future. Sometime in the middle of its second term, Republican politics and the Bush administration finally succeeded in destroying much of that faith. Two little wars dragged on and could not be won decisively. America tortured prisoners and lost the respect of other nations. Extremism and international terrorism could not be stopped. The effects of extreme weather on the population of affected areas could not be mitigated. Bush undermined faith in the ability of Social Security and Medicare to protect future generations in their old age. Healthcare could not be provided to all at reasonable cost. Effective programs to deal with petroleum dependence and climate change could not be created. A major highway bridge collapsed and infrastructure decayed. Proper airplane maintenance and safe food supplies could not be guaranteed. The government could not pay its way without borrowing massively from future generations. The middle class watched the rich get richer as the middle class got poorer. And people began to think that spending more than they earned and buying things they didn't need was perhaps not such a great idea because improving incomes, productivity, etc., grandly touted as the key to a more robust future might not be there to bail them out after all. So, why buy a new car when the old one still has a lot more miles left in it? Why buy an expensive one when an economical one will do? Why invest in home improvements when property values will not be increasing? Why buy a boat or an RV when less expensive recreational activities are available without such expensive toys? Etc. And now we adjust to a different way of life that finds pleasure in less commercial things while a new administration attempts to restore our optimism. Here's hoping they succeed, and in the process perhaps create a more balanced society: one, for example, where health care for all, the environment, and economic security are valued at least as much as a new Lexus.

The underlying cause of the

 Sun, 12/21/2008 - 12:11 β€” CEIHG Managua (not verified)
The underlying cause of the world's economic, social and political problems is that in almost all countries, land, natural resources, common domains and natural opportunities naturally open to labor have been largely privatized and therefore monopolized. The monopoly of mother earth by the few creates in the same degree the monopoly of economic and policital power. The result is the perverse world we live in. The solution is simple: Nationalize the value of land and natural resources, transferring all taxation *off* of *productive* labor, capital, and commerce, and *onto* land and resource values. This solution to a sustainable and prosperous economy for all remains suppressed and ignored because it really is as simple as it sounds, and it definitively would readjust the distribution of wealth to a state of actual justice. (Read *Progress and Poverty* by Henry George for the definitive explanation.)