Monday, March 9, 2009

Reality and Retrenchment

Is the current slowdown the end of capitalism? Probably not...Just like it wasn't over when the Germans Bombed Pearl Harbor.

However, the economic environment that we are currently in is a challenging one, featuring seismic changes in consumption driven primarily by a vaccum of consumer confidence. Here are three internet finds that help illuminate these shifts, along with some quotes and video from the sources themselves:

1) A New York Times Article on Conspicuous Consumption
In just the seven months since the stock market began to plummet, the recession has aimed its death ray not just at the credit market, the Dow and Detroit, but at the very ethos of conspicuous consumption. Even those with a regular income are reassessing their spending habits, perhaps for the long term. They are shopping their closets, downscaling their vacations and holding off on trading in their cars. If the race to have the latest fashions and gadgets was like an endless, ever-faster video game, then someone has pushed the reset button.

2) The Text of a Brooking's Institute Presentation Given Today by Christina Romer
The fourth lesson we can draw from the recovery of the 1930s is that financial recovery and real recovery go together. When Roosevelt took office, his immediate actions were largely focused on stabilizing a collapsing financial system. He declared a national Bank Holiday two days after his inauguration, effectively shutting every bank in the country for a week while the books were checked. This 1930s version of a “stress test” led to the permanent closure of more than 10% of the nation’s banks, but improved confidence in the ones that remained.22 As I discussed before, Roosevelt temporarily suspended the gold standard, before going back on gold at a lower value for the dollar, paving the way for increases in the money supply. In June 1933, Congress passed legislation establishing deposit insurance through the FDIC and helping homeowners through the Home Owners Loan Corporation.23 The actual rehabilitation of financial institutions, obviously took much longer. Indeed, much of the hard work of recapitalizing banks and dealing with distressed homeowners and farmers was spread out over 1934 and 1935.
Nevertheless, the immediate actions to stabilize the financial system had dramatic short-run effects on financial markets. Real stock prices rose over 40% from March to May 1933, commodity prices soared, and interest-rate spreads shrank.24 And, the actions surely contributed to the economy’s rapid growth after 1933, as wealth rose, confidence improved, and bank failures and home foreclosures declined.

3) A 3-hour interview with the The Snowball, Warren Buffett. CNBC has the interview on its website. It has been cut up into 7-10 minute segments, and is well worth your time. The last segment is here.

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