October 19, 2007 7:44

How the 1987 crash brought us back to the 1800s

Today's the big day! The 20th anniversary of the Crash of 1987! We've already been deluged with reminiscences and will-it-happen-agains. If you want more, my friend and fellow Acalanes High School graduate Matthew Rees's recounting in The American is the most thoughtful and exhaustive I've seen.

But, uh, will it happen again? Depends what it is. If it's a 20+% one-day drop in the stock market, maybe not. If it's a financial system freakout, where suddenly everybody stops trusting each other and lending each other money, well, that happened a couple of months ago. It happened in 1998, too.

In 1987, matters were at their worst the morning after the stock market crash. That's when the global banking system threatened to freeze up and lots of people involved with Wall Street started worrying that modern capitalism was about to come to an end. Only the soothing words of Fed chairman Alan Greenspan and the determined arm-twisting of New York Fed president Gerry Corrigan kept us from a 1930s-style debacle. The Fed came to the rescue in 1998 and this summer, too.

This appears to have become our new financial market reality. Every ten years or so a crisis, usually brought on by some financial innovation that not everybody has figured out how to use wisely.

This also happens to have been our old financial reality. In the 19th century, financial-system lockups occurred with such regularity (every 10 or 11 years) that English economist William Stanley Jevons tried to explain them as a product of the 11-year sunspot cycle. After the Depression, tight regulation of financial markets put a halt to those crises for a few decades. In 1987, with markets freed of many of their fetters, the crisis cycle made its return.

Is that such a bad thing? Maybe not. A few weeks ago, Princeton historian Harold James wrote:

If today’s credit crunch has historical parallels, they are closer to nineteenth-century “normal crises” like 1837, 1847, or 1857. In those panics, financial innovation caused uncertainty and nervousness, but also induced an important and beneficial learning process. The financial institutions that survived the crises went on to play a crucial role in pushing further development, and they had enhanced reputations because they withstood a crisis.

That raises the question, though, of what role the Fed and other central banks ought to play. Hardly anybody second-guesses what Greenspan and Corrigan did in 1987. The Fed's actions in 1998 and today have many more critics. The argument is that they're standing in the way of that "important and beneficial learning process." It's the possibility that they may also be standing in the way of the abyss that makes things complicated.

Update: Nice of the Dow to commemorate the big anniversary by falling 367 points, don't you think? (That's not all that far off the 508-point drop of 20 years ago, but is only a 2.64% decline, compared with 22.6% in 1987.) A few more interesting 1987-related links: Nouriel Roubini argues that it could happen again, Barry Ritholtz gawks at a WSJ chart of how the Dow stocks have performed since the 1987 crash, and Herb Greenberg tells how the crash sent him back into journalism.

As for the whole "peak oil" discussion in the comments below, the lessons of the 1987 crash would seem to be that:
(1) Unimaginable things do in fact happen. According to the risk models of the day, a 20% one-day drop in stock prices was only supposed to happen once in a billion billion years. So I wouldn't entirely rule out any worst-case scenario.
2) Nothing is inevitable. If economists and central bankers hadn't learned anything from the experience of the early 1930s, the 1987 crash might have led to an economic disaster. But we humans are in fact capable of learning and adapting.

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October 18, 2007 9:18

Krugmania and self-loathing at the Lotos Club

Yep, that's him, the universally beloved New York Times columnist and author of the new book The Conscience of a Liberal (not to be confused with The Conscience of a Liberal). Why such a low-quality photo? Well, this is now the third in a series of Curious Capitalist posts featuring lousy cameraphone photos from book parties, and it would be kind of weird to switch to a good camera now (plus, Mrs. CC has the family camera out in California at the moment).

I only stayed at the party for a couple of minutes. I was in a cranky mood when I arrived, and when I surveyed the crowd of tweedy, conscience-filled liberals and realized I didn't recognize a single one except for Paul, who wasn't exactly going to have the time or the inclination to hang with me, I decided to bail. After shaking Paul's hand, of course.

Let me emphasize that my crankiness had nothing to do with Paul Krugman. Although maybe it did have something to do with it being a book party. Because that means he finished his book. For any regular readers wondering what came of last week, when I handed this blog over to Mark Gimein so I could work on The Myth of the Rational Market, I'm afraid I have to report: Not nearly enough. During the workweek I spent some of the time working on my Denmark saga, which I should have finished writing the week before. Then on Saturday I ended up blowing almost the entire day watching college football. I did have my laptop in front of me, but let's say I was a little distracted. And after Cal lost that game to Oregon State, I was also disconsolate. So no, I didn't get nearly as much done as I should have. Which, after more than four years of messing around with this thing, is seriously pathetic. So I've been intermittently furious at myself all week and, well, that's the state of mind I was in when I arrived at the Lotos Club

There. Glad to have gotten that off my chest. As for Krugman's book: Haven't read it. Been busy. I did crack it open briefly today to see if I could find anything I disagreed with violently enough to write a column about, but no luck.

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October 18, 2007 1:47

Indian policymakers battle the reality that their country is getting richer

In India, a lot of people are apparently worked up about the fact that the rupee has appreciated 20% against the dollar over the past five years. No matter that it had lost 85% of its value against the dollar over the previous two decades--the rise in the rupee now is seen as alarming and dangerous for the Indian economy. The folks at the Reserve Bank of India have been pushing for some restrictions on capital flows to stop this rise from continuing. Others are calling for more drastic measures.

I know all of this because of an excellent blog post (with lots of good links) by economist Ajay Shah (via Amit Varma). Shah is on the side of those who think it's time for India to grow up, accept that it's part of the global economy, and allow capital flows and currency fluctuations to take their course. But follow some of his links and you quickly realize that this may still be a minority opinion in India.

I imagine similar debates are going on in China, although they're not being fought out in public (if they are, I certainly can't read them). Shah's approach is surely the right one for the long term. But fact that so many policymakers in India and China aren't ready for it is both understandable and pretty scary. It's understandable because India and China are countries with hundreds of millions of extremely poor people, economies that only recently began to enter the modern era, and financial systems that still may not be up to the challenge of handling free flowing capital from abroad. It's scary because China in particular is already such an important part of the global economy that by trying to delay the inevitable rise of its currency against the dollar it may be setting itself and us up for a huge and ugly shock.

Which I guess explains why, despite the fact that I usually think writing about currencies is pointless and boring, I keep finding myself drawn to the subject these days.

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October 18, 2007 8:05

Follow your dream and your mustache, and you too can become a social media sensation

Following the example of Fox Business Channel, I've decided to make this a more aspirational business blog (no, not really, but bear with me for this post). So I thought I'd share the inspiring story of Aaron Perlut, with whom I had breakfast Wednesday. Here's Aaron, as captured by my cameraphone:

Aaron, as you can see, has a mustache. "I've had one on and off since I was four," he says. Early in the summer of 2006, he and several colleagues in the St. Louis headquarters of PR firm Fleishman Hillard--some mustachioed, some not--were sitting around shooting the breeze and came up with the idea that it would be amusing to start a campaign to bring back the unfashionable mustache. They founded the American Mustache Institute and organized 'Stache Bash 2006 that summer in St. Louis, a party that attracted about 50 guests and raised a couple hundred dollars for charity.

Early this summer, Aaron and the boys were trying to come up with a way to garner more attention for their efforts. They're PR guys, so they thought of sending out a press release announcing their choice for Best Sports Mustache of All Time. But they also know their way around the Internets, so they decided they'd be better off making a participatory event out of it. They set up a Website with a sports mustache poll, told all the journalists they knew about it, and waited. "Next thing we know we're getting 250,000 unique visitors to our Website weekly," Aaron says.

Articles in USA Today and the Daily Telegraph played a role, but it was really the sports blogosphere that made it happen. Dan Steinberg's brilliant D.C. Sports Bog at washingtonpost.com and Matthew Cerrone's MetsBlog.com (which may well be brilliant, but I'm not a regular reader so I can't say) led the way, Aaron says.

"It's been unbelievable, the impact of social media on what has happened," he says, adding that it's "very interesting to see what the 21 to 25 male age group latches onto."

Thanks in part to Cerrone's hard work, Mets announcer and former first baseman Keith Hernandez--a write-in!--won the honor. In response, the Mets organized a Mustache Night at Shea Stadium Sept. 14, handing out fake mustaches to the first 20,000 fans to show up. I happen think it was something of a travesty that the award didn't go to a member of the 1972 Oakland A's, who reintroduced the mustache to baseball after an absence of 40 years (that's what Aaron says, and as executive director of the American Mustache Institute he ought to know). But I guess I should have been on Athletics Nation drumming up support for Rollie/Reggie/Catfish/Joe/etc. Or better yet just Rollie, who was the one A on the ballot.

Anyway, a bunch of guys who spend their days battling to get attention for their mostly corporate clients (Aaron, for one, is always bugging me about UPS) suddenly found themselves deluged with publicity that they barely had to work for. The reason Aaron was in New York this week was to do a taping of Fashionably Late with Stacy London, a soon-to-launch talk show on TLC. He and co-conspirator Daniel Callahan have done scores of interviews with media outlets around the world. Stuart Elliott portrayed the mustache effort as the model of a modern advertising campaign in the New York Times a couple weeks ago.

"I spend so much time on far more legitimate issues, and there has been an amazing cultural response to bringing back the mustache," Aaron says. Why? He figures it's because (a) it's funny and (b) there are "no strings attached. It's very clear that there's nothing to be gained other than to bring back the mustache and raise money for charity." (This summer's 'Stache Bash raised about $5,000 for Challenger Baseball for disabled kids in the St. Louis area.)

There might be some for-profit strings attached in the future, though. "There's definitely been an interest by some companies in harnessing what we're doing," Aaron says. He doubts he'll ever turn mustache-promotion into a full-time job: "I don't see myself leaving the Knights of Flackhood anytime soon." Still, given what's happened over the past three months, you've got to think it's at least a possibility.

So what's the aspirational lesson here? Follow your passion, or at least your humorous faux passion, and make sure Dan Steinberg and Matthew Cerrone know about it.

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October 17, 2007 7:57

What can New York do to improve the odds in its battle with London for financial supremacy?

The insanely prolific Dan Gross had a piece in the NYT Sunday mag about New York's diminished profile as a financial center. Dan ascribes this mainly to the increasingly "multipolar" nature of the global economy, meaning that it's not so much that there's something wrong with New York as that there's a lot more action in and around Shanghai, Dubai, Singapore, etc., than there used to be.

I tend agree with him there, but even in a multipolar financial system some poles will be more equal than others. And London, not New York, has been emerging lately as the most important pole of them all.

Why's that? The main reason would seem to be location. London is within reasonable air travel distance of the U.S., the Middle East and Asia, and perhaps more importantly is in a time zone that allows easy communication with both Asia and the U.S. during the workday. As economic activity becomes spread more widely, that central location becomes ever more valuable. And barring some serious continental drift, there's really nothing New York can do about it.

But what could New York do to improve its competitive position? I've got a few ideas:

1) Regulation. This has been the issue Hank Paulson & Co. have been harping on. And since it's the only thing Hank Paulson & Co. can do anything about, they probably should be harping on it. I'm extremely dubious of the argument that Sarbanes Oxley is driving lots of market activity away from the U.S. But the U.K. has a significantly more rational (if not always more effective) financial regulatory regime: Just one agency, the Financial Services Authority, and a tendency to focus on principle rather than picayune detail. We could probably use something more like that.

2) Livability. Having lived in both New York and London in the past decade, I'd have to say that New York is better. Better weather, better public transit, better restaurants, friendlier people and, most important, better playgrounds (except for that Diana, Princess of Wales' Memorial Playground in Kensington Gardens, but that's the exception that proves the rule). London does have better TV, better lamb chops, better drivers, better access to cool European destinations, and better soccer--which is important to me. But soccer great and former Londoner Thierry Henry says "New York is the best city in the world," and who am I to argue with that? The completion of Red Bull Park in Harrison, NJ, will make metropolitan New York even better. The addition of another soccer team, maybe in Queens, plus regionwide lamb-improvement and driver-education efforts, might make it insurmountably better.

3) Taxes. They're low by global standards in both places, but the U.K. tax system is much more geared to the interests of expat rich people. That makes it a haven for lots of Russian and Middle Eastern billionaires, which is a mixed blessing, but it also makes it easier to attract really smart derivatives geeks from abroad. I'm not sure what the U.S. ought to do about this, but it's something that ought to at least be part of the political debate here.

4) Passport Control. The immigration people at Heathrow are polite to non-U.K.-citizens and usually get them through the line very quickly. I know that from personal experience. Meanwhile, I've heard from lots of foreigners that coming through immigration at Kennedy (and elsewhere in the U.S.) is an excruciatingly slow and often demeaning process. This is potentially disastrous for the long-term prospects of both New York and the U.S. in general. And while I'm being sort of jokey in the rest of this post, I'm dead serious about this: Discouraging foreign businesspeople from visiting the U.S., which we now effectively do, is a potentially disastrous policy.

Update: Felix Salmon seconds the emotion, and adds a crucial detail:

In fact, it's a much, much bigger issue than putting more and friendlier immigration officers on staff at JFK. The really big issue is allowing business people to visit NYC on business in the first place.

Many international executives simply can't get a visa to visit the US, or if they can it takes months. This applies especially to businessmen from what is arguably the world's largest economy, China. If NYC wants to remain relevant, it has to start looking west rather than east, and taking full advantage of the US's Pacific Rim status. That means encouraging, not discouraging, human business links with China.

Have you ever wondered why Hank Paulson spent so much time flying back and forth to China when he was CEO of Goldman Sachs? Yes, the country was important to him, but it wasn't that important. Rather, it was the one country where he had to go there, because they were simply incapable of coming here.

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