One day in October 1929 the stock market suddenly went into a catastrophic
plunge. The resulting economic depression saw millions of people across the west struggling to feed and clothe themselves and their children. Farmers walked off farms in places like Oklahoma, that then proceeded to be ravaged by dust storms of particular ferocity. It also enabled the rise of dictators like Adolf Hitler who seized on Germany’s ill fortune to push extremist agenda’s that would ultimately prove horrendous.
89 years after the 1929 crash, with notable crises or severe corrections in 1987 and 2008 is it possible that another is looming?
Possibly. When the 2007-09 crisis ended, legislation.was being pushed through Parliaments and national Houses of Representatives world wide. It was an attempt to ensure that the appropriate legislation would have time to be passed by Parliament seeking to address those concerns knowing a contentious debate about anything that may entail restrictions or negative attitudes is likely to follow.
New Zealand should not fool itself. A large scale collapse would affect all economic sectors. Tens of thousands of jobs in New Zealand could be potentially wiped out by the collapse.
As was the case in the 1930’s a new collapse with prolonged depression could give rise to a new generation of hardline politicians and/or dictators. The key players however are already firmly entrenched.
The conditions are favourable. The key conditions in the United States that contributed to the Global Financial Crisis of 2007-09 include:
- Reserve Bank failing to check toxic mortgages
- Massive corporate governance breakdown
- Powerful mix of debt and risk by a large number of households and Wall Street
- Policy makers inability to.understand what was happening and how to fix it
- Massive failure of public and private accountability
Attempts to rein in the banks were introduced under President Barak Obama. The reforms that were enacted by Chris Dodd and Barney Frank were meant to check the conditions that led to the 2007-09 Global Financial Crisis. They have been systematically under cut by President Donald Trump. On 24 March 2018 much of the gains that were made by the passage of the legislation that Mr Dodd and Mr Frank put their name to were undone by the Financial CHOICE Act.
New Zealanders need to spread their savings across multiple sources, so that their exposure to undue risk is mitigated. Although New Zealand banks are more transparent than American banks, they are lacking in corporate oversight. Between 01 January 2006 and 01 January 2013, 67 financial institutions failed in New Zealand between 2006-2010 costing New Zealanders more than N.Z.$9 billion in savings that they thought were secure.
What have New Zealand institutions done to reduce the likelihood of further collapses in the future and improve the chances of recovering the losses? Not very much. I cannot recall any regulatory checks and balances being put in place that ensure savings are not being squirreled away.
What new tools and ideas does the Reserve Bank have for dealing with the challenges a stock market crash, post Global Financial Crisis? Shamubeel Eaqub, an economist, painted a grim picture in 2017 of how well prepared New Zealand banks are.
It honestly seems like a really radical idea, and possibly one that would not work in New Zealand. When Iceland suffered the Great Financial Crisis like other western countries it decided that enough was enough, and that the banking sector was going to get a lesson. The bad players were arrested, tried and jailed. Whilst the rest of Europe wallowed in recession or very little growth, Iceland began to recover in a way that surprised many.
How could New Zealand learn from these experiences?