The world economy in the midst of the worst economic tumble since 1929. It is not likely to be as long lasting nor as disastrous to the fabric of society because there is a lot more knowledge about economic causes and effects and a lot more tools available to the policy makers. However; these same policy makers are the reason this crash occurred in the first place.


The last two weeks has witnessed calamitous series of events that has millions of people wondering whether they'll have anything left to retire with or a job to hopefully pay for that retirement. The unfortunate truth about this crash is that it was precipitated by the same people that are now entrusted with cushioning the fall. Four months ago we identified Fed Chairman Ben Bernanke as Political Bull Bullshitter of the Week. A week later we pinned the label on the former chairman Alan Greenspan and a couple weeks after that we tagged Treasury Secretary Henry Paulson. What all three had in common, besides possessing a voice that turns market economies, is that all three were talking up the fundamentals of the economy while those fundamentals were crumbling under their feet. While they were reassuring the financial world that all was well it was clear it was not. Housing prices were in free fall, foreclosures on the rise, and credit markets already tightening. Banks do not fail overnight. The circumstances that produced the largest bank failures in history were already in place early in the summer. The credit market problems were already tightening up. Bear Stearns' collapse could have been a warning of future systemic problems but they chose to believe they'd nipped the problem in the bud with the Bear Stearns' flea market sale.

There strategy was probably to paint a rosy picture as a facade while they performed their corrections out of the glaring spotlight. Unfortunately, they came no where close to actually making those corrections but their facade produced very negative consequences. Rather than let the economy and stock market deflate slowing and orderly, they essentially tied off the end until it burst. As witnessed by the chart below the natural downward trend was stalled by the upbeat pronouncements by the men who supposedly knew best.

The pressure was building all through the summer but the market in July through September acted as if nothing was wrong. In reality, we know plenty was wrong AND WE KNEW IT THEN!. Credit markets were already tightening caused by lenders hoarding their cash reserves because of the bad debts they could see on their books. The rumors about Washington Mutual, Wachovia, Lehman Brothers, et al. were out there all summer. The economic leaders continued to talk up the economic fundamentals all the way through the middle of September. When the bubble burst at the end of September it burst with an explosion that is shocking in its intensity. The result of this burst is a 2000 point drop in the DOW Index and the loss of trillions of dollars of savings and investment. The financial markets are now in panic mode trying to cope with a variety of disasters all at once. A rapid and steep decline is far more difficult to contain because it triggers a lot of margin calls requiring fund managers to sell off quickly when they reach their stop-loss. Of course, the selling merely brings on more panic in a vicious cycle that only ends when everyone is sold out. At this point there will be a long and painful path back to stability and eventually growth. The tragedy of this panic and crash is that it could have been slow and easy. Had those in charge of the economy been forthright in detailing the problems during the summer the economy would have had a much slower and orderly decline. What occurred in the economy is akin to what occurred in New Orleans prior to Katrina. It had long been known that the city was vulnerable to flooding yet the precautionary efforts we all perceived as too expensive. Following the disaster the government has spent four times as much repairing the damage and the lost lives can never be repaired. This is what happened to the economy. Those in charge of the economy waited until a disaster to act. The painful lesson that must be learned is that honesty about economic fundamentals makes for much more orderly market cycles than concealing the reality until it bites them in the ass. Ben Bernanke may turn out to be a competent Federal Reserve Board Chairman but in this first major challenge he failed miserably. Now the world's citizens have to pick up the pieces from a crash that could have been avoided.