What makes a crash in the stock market a financial crisis?

Terry Tanaka claims that important lessons are overlooked in a well-known book about stock market crashes

Professor Linda Yueh's The Great Crashes should find a ready audience here, given the popularity of catastrophizing in the UK. Lessons from global meltdowns and how to prevent them, the subtitle, is less persuasive. Surely she understands that stock market crashes are as common in market economies as stagnation is in command economies?

It's clear from the list of endorsements from the financial establishmentChristine Lagarde, Ken Rogoff, Jim ONeill, Nouriel Roubini, and Martin Wolfthat Yueh must have something intriguing to say. With fewer than 200 pages, the book is at least not too difficult to read.

The introduction, which covers The Great Crash of 1929 in a few superficial pages, is followed by seven chapters that describe the crises that have occurred over the past forty years. These include the currency crises of the 1980s and 1990s, the US Savings and Loan crisis of the 1980s, the Japanese property and stock market crash of the early 1990s, the .com crash of 2000 - 2001, the global financial crisis of 2008, the euro crisis of 2010, and the Covid crisis of 2020. She continues by outlining why China could be the source of the next crash (the book was written in 2022).

The story has a few holes in it. The section on Japan neglects to mention that, considering Japan's shrinking population, the country's growth slowdown to 1% was better than the average per capita of developed nations in the early 2000s. Black Wednesday, which marked Britain's withdrawal from the Exchange Rate Mechanism in 1992, was more of the end of a crisis than a crisis. While acknowledging the devaluation of sterling, Yueh neglects to mention that it rose back up over the course of the following five years as a massive fiscal deficit turned into a surplus.

More detrimental is Yueh's failure to inquire as to why stock market crashes resulted in long-term harm in some nations but not in others, whether short-term policy measures that mitigated the crises caused long-term harm, and why the frequency of crashes has increased as governments struggle to prevent them.

How quickly Britain bounced back from the 1929 stock market crash.

Due to its re-adoption of the gold standard in 1925, Britain was able to avoid the unsustainable boom of the late 1920s that other nations had to deal with, which allowed it to weather the 1929 - 1933 slump better than anyone else.

By abandoning the gold standard in 1931two years ahead of the US and GermanyBritain's economy swiftly recovered thanks to new industries and innovation, which, in contrast to France, put it in a strong position to withstand war in 1939. Despite its invaluable lesson, this is not worth mentioning.

Why did the US government profit greatly (with more to come from Fannie Mae and Freddie Mac) from saving the financial sector in 2008 - 2009, while the UK government suffered a significant loss and the UK financial sector never fully recovered? Why has the UK recovered from the pandemic so slowly in comparison to the US? Why did the .com crash of 2000 - 2001 destroy the UK's technology and biotechnology sectors while only causing a brief setback for the US?

The answer is unquestionably that our productive potential has been permanently harmed by the US's far superior policy responses compared to the UK's. Yueh never inquires as to whether the EU's costly actions did anything more than temporarily keep the euro together or whether they were the cause of the eurozone's subsequent poor economic performance.

This could help to explain why the economics establishment has given the book such high praise. Every crisis is a chance to demonstrate how adept they are at guiding the world through tumultuous times; their decisions and those of their partners are never questioned. Through the turbulence brought on by the market's barbarians and the ignorant masses, the book is a triumphant march of the great and the good.

Therefore, "the next great crash" of the Chinese banking and real estate industries does not demonstrate the futility of China's attempt to find a middle ground between capitalism and communism; rather, it simply indicates that inexperienced bureaucrats made mistakes. The European Central Bank, the European Commission, and the International Monetary Fundthe experts of the European Troikaare exactly what they need!

In closing, Yueh acknowledges that since "financial markets have crashed regularly for centuries," it is best to assume that "the next crisis is never far away." Don't worry, though; "Policymakers" can handle a crisis "if their actions are viewed as credible." "Orchestrate a managed deflation of the market and cushion any impact on the economy" is what they can do. They are able to "rapidly deploy credible tools to address a crisis" in addition to "regulating debt levels."

Because it fosters complacency, this naive trust in the government to resolve financial crises without planting the seeds of the next one is extremely risky. The knowledgeable administrators present are merely human beings with flaws who are just as affected by crises and euphoria as everyone else. Without taking into account the long-term effects, they are eager to take any action that will ease the immediate situation and win them praise from the public.

For instance, a bailout is always the answer to a credit crunch brought on by excessive credit expansion, but it only transfers the losses to the public. The economy is hampered by the expense of these bailouts, which Yueh never took into account.

In order to create "a happier, fairer, greener world fostered by regulation, supra-national institutions and a societal shift," Yueh hopes for a "great reset" that incorporates environmental, social, and governance (ESG) into business in the final few pages. She praises net-zero carbon-emissions goals and legislation, but she is unaware of its crucial role in the most recent major crash, which occurred in the renewable energy sector following the release of her book. A better conclusion would be to "put not your trust in princes," or their contemporary equivalent of government and officialdom.