New Reality: Some thoughts on the economy by El Ross Grande (my Dad)

A few weeks ago, when the Stock market started to plummet, I watched the news and listened with rapt attention as the white-teethed anchormen told me... nearly nothing. I began to realize how little I understood about how our own economy works (tried to avoid such knowledge in the past, I'll sheepishly admit.) Then I realized, these politicians and newspeople might know even less than I do about it all, otherwise, they might actually tell me something I don't already know. Which scared the crud outta me, if you want to know the truth. So I called my Dad. Because, he's got a B.S. and part of a Ph.d. in Economics (Vietnam War was creating a glut of doctoral students, so he took his MBA out into the world and (barely ever) looked back at the world of academia. I don't think he really changed his major to Parks and Recreation like my Mom said. At least not for long, anyhow.) So, after about two hours on the phone, my Dad had talked me down a bit, and explained to me why we can't let all the banks who made cruddy loans fail, even though it seemed logical to me that in a market system, we take the bad (banks fail) with the good (high times during the real estate boom). I'm still a little ticked off about the whole thing, honestly. Because, why should everybody else has to live the with the natural consequence of their actions, but not banks or insurance companies?

Anyway, my Dad knows what he's talking about, not only because he learned it at school, or at work, or watched the MacNeil-Lehrer News Hour every night for like 30 years even though we all made great fun of him for it (sorry, Dad), and even reads the Wall Street Journal, and other deadly boring stuff like that; but because he's sort of medium-oldish, and he's been around to see some stuff. People my age and younger weren't even old enough to consciously remember the last real recession we had, although, I can vaguely recall sitting in the back seat of our Chevy Nova (I loved that car, and cried when we sold it to smokers), waiting in line for hours to get some gas. And I think fuel shortages from the middle east oil embargo precipitated our economic troubles in the early 80s. But really, I have no idea what I'm talking about, because who teaches history majors anything about what actually goes on in the world? Nobody, that's who. 

So, here's a guest post from my Dad. I've only ever had one other guest post, and it was also my Dad, from back when I was still partly under the delusion that this was a book blog. So, check it out, too. Now, if only I could get my Mom to write something, as well...

In July of 1932 the Dow Jones industrial average closed at 41.63. In the three years since the famous stock market crash of 1929, the market had given up about 91% of its value. The most popular song that year was Brother Can You Spare a Dime?. A comedian at the time said," My broker told me to buy stocks for my old age. It worked wonderfully; within a week I was an old man. Many businesses are better off than ever", he concluded, "take red ink for example, everyone is using it."

Banks were in so much trouble that depositors were terrified of losing their money and people literally tucked their money into their mattress. Checking ground to a halt. Most transactions for the average household were done in cash. If you needed to pay your rent, you walked over to the landlord and handed him a fist full of dollars. There was no FDIC, so when a bank failed, people really lost everything. My own grandfather was angry until the day he died that he had not known enough to get his $2500 out of a small bank in Safford, Arizona in time. That was a life savings for recently married 30-year-old Ralph Layton. I can still feel his pain and frustration. He had to put off his dream of building a home and buying a farm for his family. Easy loans for homes and farms would not be around again for a few years, so he set out to save again.

Life suddenly looked bleak, as people understood that realizing their dreams was going to take longer than they'd hoped. By the end of the great depression, most people who had a job felt grateful just to be able to feed their families.

People who knew what it was like to fear starvation could not turn away another hungry family. Welfare, as we know it, had its origin in the depression as well. My Mom remembers running into the house in Central, Graham County, Arizona, to tell her own mother that the "Okies were coming" so she needed to get them something to eat. (Those "Okies" were from all over the midwest, and beyond, but they all got called Okies.) So, in spite of hardship, there were some good things about that time.

The financial crisis today has the same cause as the problem that created

the depression. A bubble created by easy and abusive use of credit, burst, and the entire system had to deleverage. When banks have bad loans, they must increase their own capital. If they cannot, they fail. When people cannot obtain credit, the money supply deflates and the price level drops. When that happens quickly, everyone panics. They become angry and confused, as homes, investments and jobs are lost. It feels the same to us as it did to our grandparents that experienced the great depression. This time, I hope, the government understands that they must use every tool necessary to prevent the money supply from deflating, and maintain our confidence in the financial system. Of course, the bigger the panic, the greater the task. Safeguards like the FDIC, the welfare system, the bank regulation, the Federal Reserve's efforts to increase the money supply and guarantee our deposits tend to make this one a little less scary, but it still gives us all a big headache. I think it helps me understand how my grandparents must have felt in 1930.

A friend of mine that I worked with at Nestle for many years was planning to retire next year. He told me yesterday that his 401K was now a 201K, and he would need to work another 10 years to retire with the same income that he had planned to have next year.

Or, maybe like the rest of us, and our grandparents before us, he will need to adjust to this "new reality."

My Dad, Big Ross, with my son, Little Ross, at Skyline, nearly 10 years ago.