The Great Crash of 2008

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 contraints 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.


Originally published at Robert Reich’s blog and reproduced here with the author’s permission.

10 Responses to "The Great Crash of 2008"

  1. devils advocate   December 2, 2008 at 9:05 am

    excellent blog!however, “inflation” was very much higher in realityevery consumer paid 10%+ each year for the past few years!this reality was totally ignored and “inflation” still is not really accounted for

  2. From the other side of the ocean   December 2, 2008 at 10:59 am

    I think that this disaster is the result of the fact that we progressively created an extremely materialistic society. People has been led to believe that they can commit themselves for a multiple of what they earn. I read every day complaints about the lack of financial markets regulations. In my opinion the seventh commandament (do not steal) more than suffice. Recovery will be possible if confidence will be restored. One step towards this goal will consist in the removal of those who are mainly responsible for this financial meltdown. A material change in the sytem is needed. Up to now I haven’t seen signs in this direction. You can bet that the clique of the financial institutions will held responsible the fair value accounting principle for all that happened and put it to death, so everybody’s conscience will be clear and the market operators will start again making millions at the expense of the taxpayers and the dreamers.

  3. From the other side of the ocean   December 2, 2008 at 10:59 am

    I think that this disaster is the result of the fact that we progressively created an extremely materialistic society. People has been led to believe that they can commit themselves for a multiple of what they earn. I read every day complaints about the lack of financial markets regulations. In my opinion the seventh commandament (do not steal) more than suffice. Recovery will be possible if confidence will be restored. One step towards this goal will consist in the removal of those who are mainly responsible for this financial meltdown. A material change in the sytem is needed. Up to now I haven’t seen signs in this direction. You can bet that the clique of the financial institutions will held responsible the fair value accounting principle for all that happened and put it to death, so everybody’s conscience will be clear and the market operators will start again making millions at the expense of the taxpayers and the dreamers.

  4. From the other side of the ocean   December 2, 2008 at 10:59 am

    I think that this disaster is the result of the fact that we progressively created an extremely materialistic society. People has been led to believe that they can commit themselves for a multiple of what they earn. I read every day complaints about the lack of financial markets regulations. In my opinion the seventh commandament (do not steal) more than suffice. Recovery will be possible if confidence will be restored. One step towards this goal will consist in the removal of those who are mainly responsible for this financial meltdown. A material change in the sytem is needed. Up to now I haven’t seen signs in this direction. You can bet that the clique of the financial institutions will held responsible the fair value accounting principle for all that happened and put it to death, so everybody’s conscience will be clear and the market operators will start again making millions at the expense of the taxpayers and the dreamers.

  5. Anonymous   December 2, 2008 at 11:06 am

    I wish someone would delve further into the needs of consumers. Through this entire situation, we hear of more credit being needed. This is one consumer who doesn’t need more credit, or anymore stuff. Our cars are big and new enough, our house just fine, we have 6 Macs!! and four aluminum baseball bats for one growing son.You get the point, as a society we just don’t have the never ending needs, and our wants are attenuated by our wallets. When we realize the needs are generally met, I think we will reset asset prices and downshift expectations. The only real losers are those whose income is derived from asset based fees and commissions, they will continue to try and move asset prices north.

  6. Anonymous   December 2, 2008 at 12:06 pm

    I wish they would clearly understand this aspect of the consumer’s point of view, to there complacity also to the break down of core values. The real point is you cannot protect people from themselves. Now we who where prudent are dragged to level of isolation to survival of others we care about. Our civil actions are stressed in the community to its care i.e food clothes ect… I will share my lunch with college students who have not been feed for 3 days and I will sift regard to those who are in need only since they deserve it. For god sakes we watched this happen for so many years that we are livid to there obtuse attitude in corporate and government. Its not that we told you so but given the political landscape to date why will they not understand that they broke it with the overall trade inbalances and malinvestments. Heart rules the mind, and the mind rules the body politic. I work for a global company for decades now and they are just as guilty to apathy of greed based reason. I feel they think to chase earnings they will just try to build new consumers since there are capitilizing as I write this. Those who are fed in my household do not get fed untill there morning duties are done as it was on the farm where I was raised. People I carefully talk to when I ask think there food comes from the super market. All I can do help those deserve it. Epic is not the scope we are talking about now. Its coming and judgement is certain. Balance the issues to fair trade or as empires do until we the citizens totaly abandone the serf development by the state since you enabled a generation of cry baby’s of affairs we call America. I work Corporate and we have Farm in the Family since my Father a veteran seen these poor decision coming as my grandfather did also when he suffered the minor depression we had in the 20’s. Pray for direction and prove me wrong. The hour is indeed late. Warning is pointless, ask history.Of course we seen it coming. I ask my senator to be acountable to no avail.

  7. TheEdge   December 2, 2008 at 2:14 pm

    Mr. Reich,I enjoy your posts, thank you. Our society is too leveraged. Ironically, the profiteers of such a credit spend policy are first to be bailed out. Not all, but most. The average Joe, by far most of America, are left to fend for themselves, in hopes that an Obama “New Deal” is on the horizon. Profiteers are on the prowl, ever vigilant on how to exploit such a deal for personal gain. It’s the “American Way”. Our system requires losers if some are to be winners (profit enormously). Companies don’t police themselves for risk. Companies are driven by people (CEO’s, CFO’s, etc)that want profit, big bonuses, high stock prices, etc., NOW, during their time to accumulate massive wealth. They are not concered about the long term horizon. It’s human nature. Capitalism, unbridelled drives the frenzy. Alan Greenspan is a face to the misguided frenzy. Oops, eh Alan? You have solidified your place in history. But, who cares about the future, eh? Count your money folks and, regardless how you gained it, hope you have enough to preserve your lifestyle for the years to come. Pay no attention to those heart wrenching stories on TV and down the street about people not so fortunate, particullarly the young and old. They should of been better short sighted capitalist, or at least lucky enought to be immediately related to one. Wars are born from times like these. God speed.

  8. Guest   December 2, 2008 at 7:27 pm

    “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.”Really? Someone explain to me why the American worker or any other worker without unique skills should expect to get paid a multiple of 20-100+ over workers elsewhere. I live in SE Asia where my standard of living exeeds anything in the USA…at 5% the cost.

    • Guest   December 3, 2008 at 1:53 pm

      Very good point.Everything is massively inflated in America: housing prices (where else in the world do people pay nearly half of their monthly income for basic shelter?), food prices, fuel prices, medical care, and nearly everything else is HUGELY overpriced because, presumably, there are so many middlemen and everyone seems to need to get their cut from basic goods needed for survival.Prices of the basics (food, shelter, medicine, etc) need to deflate, while all of the luxuries like big screen TVs, really nice houses, luxury cars, jewelry, and so on should inflate.

  9. Guest   December 2, 2008 at 7:58 pm

    If Banks take public money they must lend it. Period. Else the infinite capacity and core drive to hoard will consume any and all gov plans conceived. There must be a mandated tracking of the money, else we are simply printing money that will be hoarded in bank vaults, then, once it is unleashed, a Misean inflationary nightmare of devastating proportions will ensue, coupled with a real resource crunch brought about by severe underinvestment. Option 1: Lend directly to consumers, sidestep the banks, CALL THE BLUFF. They will cave. MZM is screaming up, it must find the real economy, else printed and holed up in vaults it will change from a beaujolais to a poisonous vinegar. Call to action, who will respond…