Monday, July 7, 2014
Financial Panics and Crashes According to Harry D. Shultz
Perspectives on Financial Panics and Crashes According to Harry D. Shultz Lex Loeb Contributor Network . In 1972, Harry D. Shultz published the book, Panics and Crashes and how to make money out of them., In the book is some great perspective on the history of panics and crashes in financial systems. It is uncanny how well the book predicts the 2007-2008 crisis and panic not just from the prospective of market cycles but from how the panic and crisis plays itself out. Here is a passage from the book with a great description of what occurred in the 2007-2008 financial crisis and panic published in 1972! I had no idea how true and correct Harry Shultz was until experiencing the 2008 panic and re-reading his book.. Everyone should read this passage from the book so they know it is time to quit being irrational even if it is already too late! " ... the banking system will be forced to stop expanding, and even to contract, (and will reduce both demand from the private sector and supply from the public sector)...At exactly this point , the super crisis is bred, And when the economy has peaked out, a process of contraction (which is just as cumulative as the upswing) is set in motion. A Vicious downward spiral is the only outlook possible. And when this is sensed, at the time, in the financial community, there is a mad race for liquidity, for safety ,for hard assets. And once this race is started, millions tend to join in. The crisis then is the decisive turning point at the top. It is the phase in which many people feel that a decisive change, for better or much more probably for worse, is happening. It is a relatively short span of time where the feeling of insecurity is prevalent and the expectations of possible catastrophe grows. In other words, it is a psychological climax based upon the end of a period of euphoria, which in turn was based upon an excessive buildup of credit. This Jumbo crisis may turn into a jumbo panic for actually NO GOOD REASON. Mind you, it is fully possible to have an extended crisis in the business cycle sense, without having a panic. Panics develop purely out of human emotion sparked off in an almost magical way. With a bang, the whole heard of sheep starts dashing madly in the wrong direction, fearing everything left and right. Panics often lead to disaster , for animals and for man. Panics are ,by definition , irrational , the irrational reaction to the appearance of a crisis in the business cycle. For instead of trying to develop sound and rational ways to deal with the depression which looms ahead, people simply try to escape the future by running." JUMBO CRISIS IN DEED! In 2008 , the digital markets world wide joined in a super jumbo crisis and panic. Shultz analyzes historic panics and crashes in the book. The bad news is that he confirms that every time markets build up to a crashed, Government is responsible and not the free markets. This is certainly the case in 2007-2008! Shultz says very clearly that government absolutely causes the bubbles in the economies takes credit for the prosperity on the way up and then refuses to admit any responsibility for the crash. Alan Greenspan and the Federal reserve created the financial conditions over many years leading up to 2007 buy pumping the world economy with excess liquidity. It seems to be true of central banks around the world . Shultz also finds that in every major historic crisis and panic that the federal reserve and central bank ideology fails miserably. Karl Marx's prediction of one final crash before the world becomes socialist and plateaus in permanent prosperity is mentioned in the book and seems to have more applications in 1972 than in 2008 because the most socialist economies on earth have joined the crisis and panic and are going down even faster than the USA! Europe started out laughing about the stupid Americans and their free capitalism without Obama style controls on wages, prices and with so little regulation, and then their much more highly regulated economies start crashing worse than in America. But they have better social security? No they will have to abandon socialism sooner to compete in a bleak financial future sooner. Shultz clearly lays out the facts on how the government(s) created the 1929 crash. I add governments to this because most major markets overseas crashed before the US market crashed. Government intervention with FDR clearly extending the depression to one of the longest in US history. The depression set in and people switched from believing in permanent prosperity in the US sheep heard to Permanent unprofitable existence. FDR might have done better saving the US economy Brazilian style by causing double digit inflation but that would only benefit the ruling class and real estate ownership. The best thing FDR did when the nation was in depression is let people drink beer and spirits again legally! Worse could also have been done by FDR with a hyper inflation like Germany experienced. Stocks went up in the hyper inflation there but the cost of living more than doubled the rate at which stocks appreciated wiping out stock investors. This book looked like it had expired in value but having come down off the federal reserves plateau of prosperity into an economic recession bordering on depression I think it is worth taking a new look at what Shultz has to say. The how to make money part of the book is more about how to preserve purchasing power when everyone Else's is expiring. In a major panic and crash one does well just not going down as far and fast as everyone else, Buy gold is an other message in the book. The real way to make money in a panic and crisis is not necessarily gold but to see how others are being irrational and take advantage of their stupid heard instincts. You get into gold and then at some point you have to get out. Gold is not that easy to deal in. Pay attention to taxes due. Taxes can still kill investors in a crisis and panic. That is one of the major failings of government in such situations. When taxes should be reduced or eliminated to stop a panic the government usually do just the opposite. When you want people to buy stocks to give the market a floor you need to reduce the cost of owning and selling them and invite foreign money back to the nation's shores with advantages. The bush admin and the federal reserve and treasure proved they did not get it and an Obama administration could cause a secondary crisis and panic as the sell off will just continue. People selling off assets in a crash are looking for alternative ways to find yield on their investment especially with an inflation prospect. So having zero interest rates makes stocks look more alluring at some point and buyers should come back in without much government intervention at all. Ridding the markets of capital gains taxes will bring loads of foreign money back. Even foreign money invested in gold deposit accounts on American shores is better than it going elsewhere. The mobs of scared sheep are all looking for government to save them from their fears and that is not going to give anyone a better solution than realizing how stupid and irrational people around you are acting and just going against the grain and maybe being free to take advantage of them in their vulnerability. When people realize they are being stupid the fear stops and the market stop panicking. People see stocks going down 5 percent or more in a day and they start selling into the panic. It does not mean its time to buy but if the market is only down 5% in a day it means someone out there was willing to buy. When it happens a second and third day again moving down 5 % it means someone is still buying when others are panicking. Who is buying? If the people panicking are by definition stupid than the people who are buying what they are selling must not be panicking and might not be as stupid. If the worlds economy goes the way of the great depression the panic madness will not help those panicking any more than the buyers, If the markets settle down and bottom the buyers will be richly rewarded and the sellers will be in depression in a serves them right heard of sheep. What is most fascinating about the 2007-2008 crash is the thing that spawns the crash is totally irrational--sub prime loans affecting less than ten percent of the housing market in the USA.. It probably is masking the real cause of the crash which is the exact same government solution to the crisis as happened the last time before the housing bubble started. The sub prime crisis was nonsense and it got a lot of blame. Then other markets start collapsing so blaming the mortgage sellers starts to look silly when the government really was at fault forcing unnatural prosperity to tax it for the past 20 years. .