The Economist recently reported that from the early 1980’s to the peak last year, the financial services industry’s share of total American corporate profits rose from 10% to 40%. In other words, 40 cents out of every dollar earned by every company in the entire country came from banks, brokers, venture capitalists, and private equity investors. If that wasn’t a sign that something was desperately wrong with our economy, I’m not sure what was.
The fundamental changes to our financial regulatory system necessary to ensure that this never happens again are certainly not yet in place, and I’m not convinced that Big Business will permit the kind of regulation that is really required. Nevertheless, I don’t think that things are as bad as some would have us believe.
Today, I received a letter from Marvin Schwartz, a renowned financial advisor at Neuberger Berman. While I don’t completely share his optimism about the future, his analysis does create some valuable context that has eluded many business journalists. So below, I share some of it with you:
“The media continuously compares this economic crisis to the Great Depression. There are stark differences between the Great Depression and today’s economic climate. Then, industrial production declined 47%, whereas today, industrial production is up 4.5% as of the end of August. Then, GDP fell 30%, while today, GDP is flat but trending slightly negative. Then, unemployment reached 25%; today, unemployment is 6.1% and, although trending higher, we do not believe that it will reach 25%. Also, during 1929-32, approximately 4,000 commercial banks and 1,700 savings & loan institutions failed. Importantly, certain important governmental agencies didn’t exist including the FDIC (created in 1934), the Federal Home Loan Bank (created in 1932), and the U.S. Securities and Exchange Commission (created in 1934).
“From a historical perspective on the current situation, we need look only as far back as 1990 (not the Great Depression), when we faced a significant, but much less broad-based and extensive disruption in our financial markets. This period was highlighted by the failure of some 2,000 savings and loan institutions throughout the country, the failure of Drexel Burnham and the near failure of Citicorp, Manufacturer’s Hanover, Irving Trust, etc. The market losses for that year (-9% for the S&P 500) were followed by significant gains of more than 30% in the S&P 500 in 1991 as well as a resurgence in the financial services industry. In 2002, stock market losses of -22% for the S&P 500 were followed by a 28% gain for the S&P 500 in 2003.”