Wednesday, May 9, 2012

Irving Fisher, Deleveraging and the Lessons for Europe of 1873

 The crowd on the street know Prof. Fisher, if they know him at all, for his October 1929 pronouncement
"Stock prices have reached what looks like a permanently high plateau."

Despite the unfortunate timing and that of the even more untimely/unprescient/unknown "There may be a recession in stock prices, but not anything in the nature of a crash" uttered on Sept. 4, '29 (The DJIA peaked the day before at 381, it would bottom at 41 in 1932), Irving Fisher was the most respected economist in the world at the time and actually quite good at what he did.

From MarketBeat:
What 1873 Tells Us About Euro’s Travails
Market panic leads to catastrophic deleveraging as participants attempt to sell assets and increase capital reserves, triggering a collapse in asset prices and the onset of deflation.

So observed Fisher. No, not Dallas Federal Reserve President Richard Fisher, and no, he wasn’t talking about 2008 financial crisis or the current euro crisis. This was how legendary economist and founder of monetarism Irving Fisher described the panic that gripped the Vienna Stock Exchange exactly 139 years ago Tuesday, an event that was the starting point for a period of global malaise known as the Long Depression, which lasted a whopping 23 years.

It is that 19th-century gloomy period, rather than the more-often-cited 1930s Great Depression, that may offer a better template for understanding our current predicament.

There is a parallel that follows the September 1873 collapse of Jay Cooke & Co., whose excessive borrowing to finance railroad expansion bears similarities to the leverage-fueled collapse of Lehman Brothers in September 2008. Railroad expansion was to the Long Depression era what the U.S. housing boom was to the 2008 financial crisis.

More importantly, the gap between comparatively rich and poor nations such as Germany and Greece, and the failure of the European monetary union to bridge that gap, echoes the income disparities that arose during the Long Depression....MORE