ME has spent most of his retirement from service to the United States studying, thinking, and writing about the country he served.
PART II - This is a continuation of part one which simply became too lengthy to contain in one hub. I am surprised the hub editors didn't say something. Anyway, enjoy.
10/19/18 - I finally, after many years of procrastination, sent the manuscript of this series of hubs out for publishing as a book.
1/11/19 - I am Published :-) !!!!
RICHARD MILHOUS NIXON
RECESSION OF 1973
EVERYTHING CONSIDERED, THIS RECESSION was the worst since 1937, until 2008. At one year four months in length, it was three months longer than one in 1937, but only two month shorter than 2008. Unemployment, however, hit 9%, far less than the 19% seen in 1937 as well as the 25% in 1933, but, nevertheless it was the highest until the 1981 and 2008 recessions, both of which surpassed a 10% unemployment rate. You should also begin to be able to understand how different recessions were between the pre- and post-Keynesian economic periods by comparing declines in GDP. In 1933, GDP fell 26.7% and in 1937 it fell 18.7%. Compare this to 1958 and 1973, when GDP only fell 3.7% and 3.2%, respectively; these remained the low points until 2008, when GDP declined 5.1%.
What led to the “worst” downturn since 1937? Many events, the Vietnam War and the 1973 OPEC-inspired oil crisis being the primary ones. One of the main factors leading to recovery was a page President Nixon took from President Franklin Roosevelt; he unilaterally (something Roosevelt didn't do) took America off the gold standard for the final time. Unlike many recessions, the 1973 recession was a rather complex one, with many internal and external factors all coming to a head in 1973, which precipitated a major stock market crash; heralding the beginning of the recession.
LYNDON B. JOHNSON WAR WITH THE GREAT SOCIETY
GUNS AND BUTTER
ONE FACTOR LEADING TO THE RECESSION was the cost of the Vietnam War. That cost, in and of itself might have been bearable, if it were not for the compounding effect which was starting to be felt from the effects of President Johnson's Great New Society program. Like President George W. Bush in the beginning of the twenty-first century, President Johnson refused to raise taxes to pay for the cost of the Great Society and Vietnam War; instead, he started to borrow money to pay for both and began running a larger and larger budget deficit (printing money) and increasing the national debt.
Everything else being equal, printing money leads to inflation in normal times and the late 1960s was no exception since the economy was still booming. Generally, inflation in one country leads to larger and larger trade deficits, which is what began happening in America. The effect of this is to weaken the dollar which, because of the restrictions of the 1944 Bretton Woods monetary system, established to keep the international monetary system stable, increased the depletion of America's gold reserves. (The reasons for this are rather intricate and were complicated by the advent of currency speculation among nations and huge banks.) The Bretton Woods agreement, among other things, had two requirements, 1) the dollar would be pegged to gold at $35/ounce and 2) the U.S. guaranteed that it would convert dollars into gold upon demand. This worked fine while the private market for gold remained near $35/ounce, but by the late 1960s it had increased to $40/ounce and as it headed even higher, the weaker the dollar got.
Various patches were tried to repair the collapsing system, such as letting the price of gold float, while still keeping the dollar pegged to gold, but nothing really worked. The situation kept deteriorating; inflation kept rising; and so did the unemployment rate; enter Richard Nixon - stage right.
INFLATION RATES (%) 1966 - 1987
RICHARD NIXON HAD A MESS on his hands when he took office in January 1969. The Vietnam War was not going well and the world economy he inherited was structurally coming apart at the seams, given the tug-of-war going on between currency and gold speculators on the one hand, and the restrictions caused by trying to maintain the gold standard on the other. Eleven months after taking office, Nixon had to endure a small, short recession; a precursor to what was to come.
To combat the rising the inflation, in 1971, Nixon implemented his famous wage and price freeze. At the same time, he unilaterally took America, and therefore the world, off the gold standard, thereby totally dismantling the Bretton Wood agreement; this was known as the Nixon Shock. As you can see in Chart 1, inflation had already peaked in 1969 and had already fallen significantly by the time these two actions occurred, but they probably did help to continue the slide until mid-1972. Nevertheless, these moves set the stage for problems later, especially the fall-out from the wage-price freeze policy
THE 1973 OIL CRISIS AND 1973 RECESSION
ON OCTOBER 6, 1973, SYRIA AND EGYPT ATTACKED ISRAEL, and the Yom Kipper War was on. On October 12, 1973, President Nixon authorized Operation Nickel Grass, an overt strategic airlift to deliver weapons and supplies to Israel, after the Soviet Union began sending arms to Syria and Egypt. On October 16, 1973, the Organization of Petroleum Exporting Countries (OPEC) declared a 70% increase in oil prices and on October 20, 1973, the Arab exporting countries began an oil embargo on the West. In November 1973, the 1973 recession began
UNEMPLOYMENT RATES (%) 1966 - 1987
RECESSIONS AREN’T ALWAYS CAUSED by internal economic or financial conditions or policies, they are sometimes caused by external events, such as the Civil War. The 1970s recession was a poster child of such an event and Presidents Nixon, Carter, and Reagan were standing in the way of an economic avalanche. This is not to say that governmental monetary and fiscal policies didn't aggravate the situation on occasion (on other occasions, of course, they helped), but the economic events in America in the 1970s and early 1980s were largely driven by what was happening in the Middle East and Southeast Asia.
The 1970s was beset by three major external events, the Vietnam War, the 1973 Oil Crisis, and the 1979 Oil Crisis, see Chart 2. It is said the "good times can't last" and that is certainly true here. After one of the longest periods of economic expansion in the 1960s, the economy was ready for a change and these outside events provided the catalyst.
The economic pressure brought on by the Vietnam War began raising deficits in the early 1970s which, along with a crisis developing around the divergence of the private price of gold compared to "pegged" rate, created the first ripple, the 1970s recession with the accompanying rise in unemployment and interest rates. President Nixon's reaction to that in taking America off the gold standard, coupled with the fed tightening the money supply and Nixon's wage and price controls, helped bring things under control, or so it seemed for both inflation and unemployment started coming down. Unlike the 1960s, the 1970s was a volatile time relative to world politics and events which left confidence in the economy weak.
Then the huge shock of having oil prices increase 70% almost overnight was too much; the stock market crashed and the economy tanked as the gas lines grew; unemployment and inflation skyrocketed, even though the fed did all it could to stop it from happening; all they could do was mitigate it, the result was the infamous "stagflation", unusual for a recession.
Government countermeasures kept the recession from spiraling out of control until it had run its course. The recession ended in May 1975 but unemployment kept rising until it hit 9% before sliding back down until the next oil crisis drove it, and inflation, up to its all time high in the early 1980s since the Great Depression period.
CLASSIC U-SHAPED RECESSION
The recession of 1973 was the worst overall recession since 1937 when you consider length, unemployment, inflation, and decline in business activity. This recession lasted one year, four months, a characteristic of the 'U'-shaped recession seen in Chart 3; as reported, unemployment hit a recent record of 9%; inflation rose to 12%, second highest ever except for the 15.1% reached in 1981; and business activity (GDP) fell 3.2%; only the latter metric was less than previous recessions in the last 30 years, but only by .5%.
When compared to the Great Depression or the 1937 recession, 1973 was a drop in the bucket, hardly a blip, but then that was the point of all the structural protections built into the Progressive version of economic policy, but more on that later.
SHAW OF IRAN
RECESSION OF 1980
The Carter-Reagan Recession started with a short downturn from Jan - Jul 1980, but began in earnest in 1981. It was a major recession primarily brought on by the confluence of three world-wide events. Most people now call it, perhaps unfairly, the Reagan recession because he was in power when it was officially announced and, coincidentally, my second attempt at entrepreneurship went down the tubes. (Of course, I could thank him as well because I ended up with a pretty interesting career as a civil servant.)
The kick-off event was the 1979 overthrow of the not so nice Shaw of Iran, Mohammad Reza Pahlavi, Mohammad Reza Pahlavi, by the order of magnitude worse religious tyranny the world has seen since the Catholic Inquisition in the 1400s. Oil production fell off considerably and this destabilized world oil prices considerably which then led to a quick, huge run up in oil prices to their highest levels to that point in history.
The next factor that led to the 1980 Recession was the run-up in the Federal Reserves Prime Interest rate which is their main monetary policy weapon used to battle inflation. As you can see from the Chart 1 above, as a general rule, as the price of a barrel of increased so did inflation. This results from the fact that the price of oil wasn't being driven up by market forces, in other words not by supply and demand, but by external events, speculation, and greed. Because so much production and transportation relies on oil and oil products, their prices were forced to increase for non-economic reasons. That, by definition, is inflation. You can also see that the Fed kept raising the prime (discount) rate in an effort to battle inflation.
Now look at the Chart 2 below. It shows the change in the Gross Domestic Product The GDP reflects the cumulative effect of the titanic struggle between the inflationary forces of ever increasing oil prices and the resulting run-up in inflation and the Fed's effort to curb inflation by turning down the fire underpinning economic activity. The Fed ultimately won ... as you can see from the upper chart, in a BIG way.
The period between 1977 and 1981 was called "stagflation". It is the worst of all possible worlds as it is when you have flat or falling economic growth coupled with high inflation. It is what some people call a death spiral, a situation that is very hard to break-out of. This is why Paul Volcker, the current Fed Chief, went to such drastic measures to break the spiral.
ANNUAL % GDP DURING THE NIXON AND CARTER ADMINISTRATIONS AND THE FIRST PART OF THE REAGAN ADMINISTRATION
The third factor that led to the 1981 Recession was the Oil Embargoes of 1967-1968 and 1973-1974. You can easily see one Charts 1 and 2 that both brought on economic chaos followed by negative growth and two recessions. These were like the before shocks that strike just ahead of the Big One. This may also be one reason why the unemployment rates for the 1981 recession aren't remembered as vividly as they should be. This earlier recession led to higher unemployment rates (10.8%) that stayed above 10% much longer than the same rates did this time around. Our current unemployment problems have a long way to go before they break the longevity record of the 1981 recession as well. For example, unemployment hit its low point of 5.9% two years before the 1981 recession started and didn't get back to that level until 6 years after the recession was over. I don't remember anyone complaining about how terrible a job President Reagan was doing getting people back to work, do you? Under his Presidency he had unemployment rates above 8% from from the end of 1981 to the beginning of 1984! It didn't get below 7% until 1986! Do you think today's Right-wing Conservatives who are in power now said one word of complaint against Reagan back then? I think not. (Darn these soapboxes, they keep jumping in front of me.) Anyway, unemployment was at 4.2% only 6 months before the official start of the 2007 recession. We don't know if will ever get that low again since 5-6% is normal.
Notice how I have not brought up either President Carter or President Reagan as being associated with the cause of this recession? That is because I personally don't think they are. From the discussion above that the real culprits were the Arab oil moguls and Paul Volcker's necessary reaction to the calamity they caused, don't you see.
President Carter is out of the picture because the stage was set for the big fall when he took office in 1977. He had no control over the rapid increase in oil prices and the reaction by Paul Volcker. The 1981 recession was a done deal and just needed to happen.
I do think President Reagan's fiscal policies set the stage for future problems, mainly America's first runaway deficit, but not this recession. He was just the unlucky fellow who happened to be President when it landed in his lap.
ANNUAL % GDP DURING BUSH 43 ADMINISTRATION
THE ARCHITECTS OF DOOM AND SAVIORS, ALL BUT ONE WERE BOTH
The Great Recession of 2007 - 2009
The Great Recession of 2007 officially started, according to the NBER, in December 2007. It officially ended in June 2010, again according to the NBER. Official or not and whether the American economy is actually expanding again or not is a bit mute if the American People feel we are not; and right now they still don't!
[Let me digress a moment and hop on one of my favorite soapboxes. One reason the people don't is jobs. Unemployment is hovering a little under 10%. I want to talk about why it is staying at that number in the face of twelve months of private sector job growth! Count them Twelve Months!! President Obama's stimulus policies have added more than 1,000,000 private sector jobs since Jan 1, 2010! Granted, it is not the 6 million jobs that the Republicans and their policies caused to be lost in the first place but it isn't a bad start in trying to stop the boulder they started rolling downhill.
The reason the unemployment number hasn't come down is because of the stupid way we count unemployment. Get this! If a person stops looking for work, we stop counting them!! So, in an extreme and unrealistic example, if, for one week, everybody who had been looking for work the previous week, quit looking and simply gave up ... the unemployment rate would drop to zero; go figure, lol. Now, of course, this would never happen, but what is happening is that when people start going back to work, then those who had previously given up looking, start looking again and we start counting them again; ergo the unemployment numbers don't change. They won't change until the number of people who get hired exceed the number of people begin looking for work again. In addition, the number of new people joining the workforce keeps growing also adding upward pressure on the unemployment numbers. So long as major corporations want to sit on the billions of dollars of cash they have accumulated and not invest and hire, those altruistic son-of-a-guns, then unemployment has to remain high.
In the mean time, those who want to do damage to President Obama's domestic and economic policy get to make hay by loudly (but stupidly) proclaiming that Obama is failing because all they need to do is point to those terrible unemployment numbers and ipso facto, Obama just doesn't have a clue, don't you see, on how to bring those unemployment numbers down ... rubbish. In fact, of course, he is doing what needs to be done, it is the Republicans and Corporate America who are not.]
OK, back on message. The recession lasted one year and six months which makes it the twelfth longest recession or depression that has been estimated by the NBER. The downturn in the GDP was -4.1% which is minuscule when compared to the double digit downturns from 1867 to 1938 which ranged anywhere from 26% to 37%! (and we thought we had it tough!!) Likewise, unemployment while high at the peak of 10.2% which lasted only one or two months, doesn't begin to compare with the Depression of 1929, 24.6%, and the Recession of 1937, 26.7%. Even the Carter-Reagan recession of 1980 had higher and longer unemployment rate at 10.8% than does the current recession.
Who gets the blame for the Great Recession of 2007? President Bush, of course. Everyone knows that the president in power always gets the credit or the blame. Well, I don't work that way. I try to find the real cause. In this case, it really is President Bush and the Republican fiscal policy philosophy. Although, I have to admit, they had more than a little help from the Democrats, mainly Presidents Carter and Clinton. But, nevertheless, when you dig down deep, the real culprit in my opinion is the proven failure of the Republican fiscal philosophy regarding the relationship between business and government (my first foray into this arena was via my first hub "Thoughts on the "New World Order And 2012") and, as I pointed out in the section on the 1873 Depression, the American citizen's and, more importantly, our politician's unforgivable and plain stupid inability to learn from past mistakes.
The prima fascia cause of the 2008 recession was the collapse of the Sub-Prime mortgage loan market from 2007 to 2009. For brevity and clarity I want to reproduce a section from Wikipedia's opening on this subject:
"The US sub-prime mortgage crisis was a set of events and conditions that led up to the late-2000s financial crisis, characterized by a rise in sub-prime mortgage delinquencies and foreclosures, and the resulting decline of securities backing said mortgages.
The percentage of new lower-quality subprime mortgages rose from the historical 8% or lower range to approximately 20% from 2003 to 2006, with much higher ratios in some parts of the U.S. A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages. These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products. Further, U.S. households had become increasingly indebted, with the ratio of debt to disposable personal income rising from 77% in 1990 to 127% at the end of 2007, much of this increase mortgage-related.
After U.S. house prices peaked in mid-2006 and began their steep decline thereafter, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with mortgages, including sub-prime mortgages, widely held by financial firms, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities. In addition to causing increased delinquencies and foreclosures in sub-prime mortgages (along with all other types of mortgages including Alt-A and conforming), the 2007-2010 financial crisis caused a decline in the capacity and willingness of the private financial system to support lending, tightening credit around the world and slowing economic growth in the U.S. and Europe."
But what allowed this to happen? Why now and not some other time earlier during Clinton, Reagan, Carter, or Kennedy-Johnson administrations? The simple answer is the repeal of the Glass-Steagall act of 1933; this might be characterized as the straw that broke the camel’s back. This repeal was signed into law in 1999 by President Clinton as a compromise with the right-wing conservative Congress both had forgotten the lessons of history.
Part of the reason for the depth of the Great Depression of 1929 was a lack of regulations regarding the relationship between commercial lending banks and investment banks; they could be one in the same and as a result a lot of risk taking and speculation was done in the name of making a profit. It got out of hand (sound familiar?) and ergo, the Great Depression (not quite that simple of course, but you get the idea). Obviously, this wasn't the sole cause to the Great Depression, but it was a major constituent. Consequently, over the painful howls of the conservatives, both Democrat and Republican, the Glass-Steagall Act was passed in 1933. It separated commercial banks, who were allowed to make mortgages, but also assume all of the risk associated with those same mortgages, and the investment banks who could not participate in the mortgage market at all. There was a firm wall between the two. The conservative fiscal ideology does not like walls, however, and deregulation became the name of the game.
Over time, the protective wall began crumbling here and there. In the late1980s enough holes were poked through it and new ways of financing not covered by existing laws were created to allow the Savings and Loan crisis to happen. As a consequence of the havoc created by this financial scandal, which was very similar to what happened in 2002 – 2006, new, powerful oversight commissions were created with new authority granted by Congress to ensure a repeat would not happen.
It was these regulations, among others, that were under attack by conservatives. What grew out of this conflict was something called the shadow banking industry which began in 200; it had really been around much longer but had been dormant. Nevertheless, the growing housing bubble coupled with the inability of the normal banking institutions as well as Fannie Mae and Freddie Mac, the massive mortgage loan guarantee organizations, to provide flexibility in mortgage loans, provided a ready market of people wanting to cash in on the rising prices of real estate and speculators for these shadow financial institutions. They were able to make little secured, low interest loans where other, normal banks couldn’t because they were lightly regulated and where they were regulated the SEC and FED chose not to regulate them because it was “bad for business”.
With emergence of “derivatives”, “bundling”, “swap-backs”, and other strange sounding financial transactions, which these new mortgages might find themselves subject to, took all of the risk of loan making out of the hands of the loan-maker and put it in the hands of the investors; the loan-maker no longer had any “skin-in-the-game” on the mortgage loans they made and simply did not care if they were good loans or not!
In response, the normal banking industry, Fannie Mae, and Freddie Mac lobbied Congress for relief; they got it in a very big way. The Glass-Steagall Act was repealed by the Gramm-Leach-Bliley (GLB) Act of 1999. The GLB Act allowed the investment bank’s financial firms to own sub-prime adjustable rate mortgages, while the commercial bank (who may now be one-in-the-same) no longer must assume any risk associated with the loan which they made and therefore really do not care if they make a good loan or not!! What this meant, of course, was that now NOBODY was regulated and greed was in the air, the brakes were off, the locomotive was running down the tracks on the mountainside and the bridge was out; it was 1857, 1873, 1882, 1893, and 1929 all over again. Each one was a classic Boom-Bust depression brought on fundamentally by unregulated financial markets, a runaway real estate market, a lack of or inactive Fed, greed, and the Austrian school of economics … every one.
What is worse, is that in the financial world of 2001you can make a bet with this investment, a mortgage in this case, like at no other time in history. You can bet the value of the mortgage will go up or, amazingly, you can bet the value of the mortgage will go down!. Previously, real banks could not do this, only shadow banks could. Once Glass-Steagall Act had been repealed, everybody could and nobody cared whether the borrower could pay their loan, not the people making the loan, too some degree Freddie Mac and Fannie Mae, not the SEC, not the Fed, and not the federal government (many state governments started taking notice early on but were rebuffed by the SEC, the Fed, and Congress)
After the repeal of the Glass-Steagall Act and when George W. Bush became president, the Republicans set about dismantling the rest of the barriers that protected society from the excesses of business. The result was predictable, the Almost Depression of 2008.
A CHAIN-REACTION LEADING TO WHAT SHOULD HAVE BEEN A DEPRESSION
In all other periods of history prior to 1933, what was happening from 2006 to 2008 would have ended up in the worst world-wide depression the world had ever known. I say this without a doubt in my mind. It wouldn’t have been a Panic, because of the laws in place to protect against bank runs, but overlaying what was happening in the financial, business, and industrial sectors with those of previous depressions, this was setting up to dwarf them because of the interconnectedness of businesses and financial institutions around the world and the speed of today’s technology, it doesn’t take a rocket scientist or a degree in economics to understand this; I think rocket science is easier nowadays, by the way.
I will by-pass the rest of the politics and mismanagement by the Fed and federal government from 2000 to 2005 and begin with the peak of the housing bubble in April 2006 and follow it through to the implosion which started later in 2006 and continued through June 2009; an amazing three year long economic decline of which only one year, six months of it was the actual recession.
All through 2002 – 2005, regular people, regular investors, and speculators were snapping up houses and real estate of every description, up scaling their living standards, becoming instant millionaires by flipping property which seemed to double in price overnight. People took huge amounts of new found equity out of their homes using low-doc and no-doc loans when no real proof of income or solid collateral were commonly available; just like they were in the 1800s. You could almost blink your eyes and have a loan from a shadow bank; to get a loan from a bank backed by Freddie Mac or Fannie Mae,, you had to try a bit harder for they actually required proof of employment and income, which[S1] accounts for their lower default rates, but their loan-to-value and equity requirements were still pretty lax.
Many attempts were made by various states and other organizations who understood what was happening to convince Alan Greenspan, Chairman of the Federal Reserve, and of many members of Congress of the disaster that was coming; all of the signals were there, but nobody in control believed the nay-sayers, what was happening fit the conservative economic model to a “T”, they said, “stay-the-course” President Bush said, so we did.
Beginning in late 2006, as knowledge that housing starts had slowed down began to spread, prices first stopped rising at such stupendous rates, then flattened out and finally began to decline in a few parts of the country. Most of the mortgage loans made over the preceding six or seven years were based on a “wing and a prayer”, meaning people prayed that home prices would keep going up indefinitely; I actually heard supposedly smart pundits say such idiocies back then, I could only shake my head, because I read and remembered my history. When people believe this nonsense they buy adjustable rate mortgages without thinking about it or doing any analysis as to whether it makes any sense and most mortgages made during this time where adjustable rate mortgages. If they weren’t adjustable rate, they were sub-prime, fixed rate, meaning poor credit history, or worst of all, sub-prime, adjustable rate. Only a minority of loans were made to credit worthy customers with a fixed term.
As in all the other financially-based recessions/depressions of the 1800s and early 1900s which we have studied, the stage for a major depression sometime between 2007 and 2009 was set.
- Greed was rampant through-out the financial sector
- Speculation was everywhere in the real estate market
- The population was going crazy trying to cash in on a stupendous, once-in-a-lifetime housing bubble
- Most government regulation of the financial sector had been repealed and what regulation that was left was not being enforced, on purpose.
- The regulators were asleep at the switch
- Those in a position who could have done something lent a deaf ear to those who were screaming a warning.
- New, exotic investment instruments were invented to place bets with the mortgages made to secure the real estate loans which were accomplished in such a way that relieved the lender of ANY risk from having made the loan in the first place with the consequential result of removing any incentive to properly vet the borrower for ability to repay. With no incentive and no government regulations in place or any oversight if there were, these financial institutions were free to do as they pleased, and they did, a lot as you will see in the next bullet.
- Over $300 billion was invested in mortgages annually by shadow, non-agency lending institutions between 2003 and 2006, most of it sub-prime. Another $100 - $200 billion was made annually by normal institutions, including those backed by Freddie Mac and Fannie Mae.