Why everything new in finance has already been new at least once before

Mutant — Thu, 08 May 2008 04:27:16 -0800

The year was 1978. The US Dollar was collapsing, inflation was beginning to surge, the American economy was on the brink of recession and many warned of the perils of easy money. Needless to say, Arthur Burns, 10th Chairman of the US Federal Reserve, had a tough job. While Burns is widely credited with igniting the late 70's inflationary fires, it was G. William Miller, the 11th Federal Reserve Chairman who poured gasoline on the flames. Before Miller's tenure was complete inflation had peaked at roughly 13% pa and American wealth was being destroyed at an unprecedented rate. Commentators at the time compared America to Germany's Wiemar republic, often employing colourful phrases such as "banana republic" Stern fiscal medicine was needed and the 12th Chairman of the Federal Reserve, Paul Volcker was just the man to do it. Before "Tall Paul" Volcker's reign was over inflation had been markedly reduced - down to 3.2% in 1983 - but at a price. The United States endured a long, deep recession, driven by high interest rates and the highest level of unemployment since 1934. However many economists consider Volcker's remedy, his fiscal discipline as laying a solid foundation for the economic success of the late 80's and early 90's. So the year is 2008. The US Dollar is collapsing, inflation is beginning to surge, the United States is on the brink of recession and some are warning about the dangers of easy money. Will the legacy of the 14th Chairman of the Federal Reserve be Ben Bernanke as Arthur Burns or Ben Bernanke as Paul Volcker? Remember, there is no right or wrong answer. But please do try to avoid wearisome and inevitably grim (not to mention, oft repeated!!) predictions of impending economic disaster. The long view, the history of finance tells us not only has the United States been presented with similar, arguably identical problems in the past, we have dealt with them effectively. These times are hardly unique. We will get through them just fine.

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Why everything new in finance has already been new at least once before