Over the past week I’ve been watching the CBC documentary, “Meltdown”. Is the story of how the world’s financial system was almost brought to its knees two years ago this week. It’s a story of how the bankruptcy of Lehman Brothers served as a flashpoint for the many other economic problems that almost put us into a deep deeper economic depression. If you get a chance you might decide to watch the last couple episodes. It gives a great understanding of what actually happened two years ago.
Two years out from that debacle we are still not back to where we should be. The American economy although out of recession is still mired with high unemployment, weak growth and little improvement in home values. Sure we avoided a total economic meltdown, but the events of two years ago are having a terribly long hangover.
Sometimes it might pay not to know too much. I say that because two years ago I felt our economic world was coming unglued. As many of you know I analyze futures prices for the Grain Farmers of Ontario. Two years ago on the Friday before the weekend grain was up the limit in commodity markets. I was expecting grain to go up again on Monday. However on Sunday I learned of the Lehman bankruptcy and then as they say “all hell broke loose.”  The stock market crashed and so did commodity markets. For me standing out of my field I really did think twice about my money and what was I going to do.
I was openly wondering about Canadian banks failing. Can you imagine? Can you imagine the Canadian Imperial Bank of Commerce and the Toronto Dominion Bank closing their doors? That is what I was thinking about two years ago this weekend. I felt that if Lehman Brothers was let go through the tremendous exposure from Canadian banks and even with their billions of reserves it wouldn’t have surprised me to see it frittered away. If we were going to enter a depression with asset values gone, so to will be gone the banks. If you owe the bank a lot of money you would probably win because who cares if the banks broke. However, most Canadians have a few bucks stored in the banks and therefore such as scenario could turn into a real problem.
The other thing I was thinking about at the time was the big grain giants actually defaulting. With markets plunging downward and the hedge pressure overwhelming I could see how some big grain companies might not be able to make their obligations. I saw farmers not being paid all across North America.
So when Hank Paulson the then US Treasury Secretary orchestrated a bailout and an economic stimulus with the other G-20 finance ministers, at the end of the day we were all bailed out. It might not feel that way but at the end of the day none of my thoughts came true. The reason they didn’t come true is because our governments refused to let that happen.
The economic fallout was bad enough anyway. Two years down the road the United States is very close to a deflationary environment. The CPI core index, which excludes food and energy, has been running at .1% or below for nine of the past 10 months. It might not be textbook deflation where prices move down consistently but it is obviously a measure of how degraded the US economy really is. I think it would be difficult to get those percentages to rise without some type of increasing US home prices. Needless to say, in September 2010 that is unlikely at least in the short-term. Despite two years of fighting back from the economic abyss, consumers and businesses still have their hands on their wallet. US consumers and businesses measure every dollar spent.
Until that changes, I find it very difficult to offer much hope for greater US and Canadian economic growth. The economic stimulus, which has been put into the economy over the last two years, has effectively saved us by jumpstarting the economy again. The problem is there are some that say we need a third and fourth stimulus to keep things going and that’s where the well runs dry. At a certain point increased spending has to be replaced with buoyant economic growth. We’re not there yet and that continues to be a drag on employment and wealth creation.
I guess I will take that versus where we were two years ago. It’s a bit of a dog’s breakfast because the abyss of two years ago was such a sorry mess based on the worst capitalism had to offer. New economic thinking is not only needed, its imperative. Two years ago was greed and stupidity run amuck. We should never forget that.