Have We Forgotten How To Have A Recession?

0:00 The crash of 1929 and the Great Depression that followed

0:03 in its wake was the most severe economic downturn in modern history.

0:07 A huge financial bubble, record inequality,

0:10 loose borrowing, and bad economic policies,

0:13 all combined to create a perfect storm of manufactured suffering.

0:17 The impact on regular workers was so bad that many

0:20 soldiers who fought in the Second World War said they

0:23 preferred serving on ships in the Pacific because at least

0:26 there they were supplied with rations and a place to sleep.

0:30 But what a lot of people forget is

0:33 that this downturn wasn't all that unusual at the time.

0:36 Sure, the Great Depression was a little bit greater than the rest,

0:41 but between 1900 and 1929,

0:43 there were no less than nine separate economic crashes.

0:46 And at least four of those would

0:49 be considered major recessions by today's standards.

0:51 What makes this even more concerning is that today, almost 100 years later,

0:56 economists and historians still don't fully

0:59 understand what exactly caused the Great Depression.

1:02 And if we don't properly understand the lessons of history,

1:05 it makes it very hard to learn from them.

1:07 The only thing is by one means or another, we have actually gotten really good

1:12 at avoiding economic recessions, at least on paper.

1:14 Since the end of the Second World War,

1:17 the frequency and severity of economic downturns has constantly declined.

1:21 Now, you might point to examples like 2008 and the lockdowns of 2020,

1:26 but they are more the exceptions that highlight a rather concerning rule.

1:31 The global economy really did take a beating 5 years ago thanks to lockdowns.

1:35 But the average person actually saw their debts decline,

1:39 savings increase, and overall financial situation improve.

1:42 Beyond that, of course, some other people did far far better.

1:46 Almost a century on from the Great Depression,

1:49 it looks like one of two things have happened.

1:52 Either we have found a cure for economic crashes,

1:55 or we have forgotten why we had these downturns in the first place.

1:59 We begin our coverage tonight of what's been

2:01 called the worst financial crisis in modern times.

2:04 Three of the five biggest investment banks are gone.

2:07 Major sectors of America's financial system are at risk of shutting down.

2:12 They pushed an unprecedented $700 billion bailout package

2:15 through Congress to shore up Wall Street investment banks.

2:19 When the virus is under control and our economy is ready for new growth,

2:25 direct payments to most Americans,

2:27 checks will be sent to individuals of up to $1,200.

2:31 All right, so before we get

2:34 into the main course of chronicling economic devastation,

2:37 might I suggest we start out like every

2:39 video essay ever with a nice fruity metaphor?

2:43 Back in the 1800s and early 1900s,

2:45 many American forests burned every 10 to 30 years.

2:49 These were routine and mostly lowintensity fires

2:52 that cleaned out deadwood before it piled up.

2:55 But when the midentieth century rolled around,

2:57 the US became very good at putting out fires.

3:01 In 1935, the US Forest Service formally adopted the 10:00 a.m.

3:06 policy, requiring that all fires be put out by 10:00 a.m.

3:10 the next morning.

3:11 A decade later, they launched the Smokeoky the Bear campaign,

3:15 which encouraged Americans to take fire prevention into their own hands.

3:20 Today, a combination of better training,

3:22 satellite detection, more water resources, and Smokeoky the Bear have all made

3:27 Americans better at detecting and fighting fires.

3:30 But what they didn't realize was that stopping

3:33 nature from running its course only postponed the burn,

3:36 giving the next fire more to feast on.

3:40 So when you suppress every tiny burn,

3:43 the whole forest saves its anger for one giant meltdown.

3:47 And economies are absolutely no different.

3:50 For decades now, every time a small

3:53 economic downturn tried to burn off the deadwood,

3:55 policy makers stepped in to put it out.

3:57 And it seems like for every crisis, no matter the size,

4:00 we've done more and more to course correct.

4:03 After the.com bubble burst in the early 2000s,

4:06 interest rates were pushed down to levels they hadn't seen since the 1960s.

4:10 This helped to keep the system chugging

4:12 along in the short term by lowering repayments

4:15 for average consumers and giving businesses easier

4:18 access to loans to survive through the downturn,

4:21 but it came with some consequences.

4:24 Companies that should have gone out of business survived longer,

4:27 capitalizing on low interest debt and government

4:29 support that didn't fix their underlying business,

4:32 but it did keep them alive for a little longer.

4:35 These are called zombie companies, which we will get into in a bit.

4:39 Now, typically good fiscal and monetary policy

4:42 uses financial tools to help our economy recover

4:44 when times are bad and then puts away the adrenaline shots when times are good.

4:49 After the crisis, if you can even call it that, had been all but dealt

4:54 with, Federal Reserve Chairman Alan Greenspan kept

4:56 interest rates at 1% for a full year.

4:59 This might not seem bad, but it had a lasting impact.

5:02 Banks seized this opportunity to start giving out more debt.

5:06 People with poor credit scores were getting

5:08 home loans that they otherwise couldn't afford,

5:10 and hedge funds were coming up with creative

5:13 financial instruments to package and sell this debt.

5:16 It's worth noting that they did

5:18 this because the incentive structures allowed them to.

5:21 Mortgage lenders just sourced the loans and got paid a fee for doing so.

5:25 And then they would package up those loans

5:28 and sell them to Fanny May and Freddy Mack,

5:30 a mortgage lending program created by the government.

5:34 By the mid-200s, Wall Street had built a house of kindling.

5:38 And when the Federal Reserve started to raise interest rates,

5:41 defaults on subprime mortgages sparked the global financial crisis.

5:45 the worst downturn since the Great Depression.

5:48 The government was quick to take action.

5:50 In an election year, both the outgoing and incoming administrations were

5:54 keen to throw money at the problem.

5:56 Almost a trillion dollars was directed

5:59 towards the financial sector through various bailouts,

6:02 recapitalizations, and stimulus programs.

6:04 The central bank followed by bringing interest rates down to almost zero.

6:08 Now, this made things better at the time, and the economy did slowly recover.

6:13 But almost two decades later,

6:14 it's still not clear if we fixed the problem or just masked the symptoms.

6:19 The Emergency Economic Stabilization Act of 2008 purchased bad loans

6:23 from banks to give them money to make more loans,

6:27 and fraudulent activity went almost entirely unpunished.

6:30 2008 may have been a test on the financial system,

6:34 but the results were clear across the economy.

6:37 The idea of too big to fail might not exactly be shocking to you anymore,

6:41 but it goes deeper than that.

6:43 If smaller businesses are allowed to fail while big

6:46 businesses are coddled for the sake of economic stability,

6:50 then they are effectively given a golden opportunity

6:53 to buy the dip with the government's credit card.

6:57 In fairness, the DoddFrank Act in 2010 did create

7:00 guard rails to help prevent a similar financial crisis,

7:04 including regulation around mortgage lending practices, bank stress tests,

7:09 and establishing the Consumer Financial Protection Bureau,

7:12 which might not be around for much longer.

7:15 No question about it, I am ready to get hurt again.

7:19 Anyway, the point is that learning from history is a lot

7:22 easier when there isn't a profit to be made by forgetting it.

7:25 Fast forward to 2020 and the whole world shut down because of CO 19.

7:30 Everyone was told to stay indoors to prevent the spread of the virus.

7:35 Now, this would absolutely have catastrophic

7:37 effects on the economy if left untouched.

7:39 The federal government rushed to give stimulus checks

7:42 to households and businesses through the car's act.

7:45 Altogether, federal spending in response to CO

7:48 19 amounted to almost $5 trillion.

7:50 and the central bank launched a bazooka of stimulus as well,

7:54 buying up government bonds and mortgages.

7:57 This gave banks more money to lend so that institutions

8:00 and regular people wouldn't run out of money during the pandemic.

8:04 The result was that during a time when economic fundamentals

8:08 like being able to trade or work normally were being undermined,

8:12 the average person was actually getting richer

8:14 and the average business was getting more reckless.

8:16 Because why wouldn't they?

8:17 When wildfires were a frequent occurrence,

8:20 they would burn off deadwood and sick trees,

8:23 making way for new, healthier vegetation to take its

8:26 place and get access to vital nutrients and sunlight.

8:29 And when recessions run their course,

8:31 they wipe out bad debts and failing businesses so stronger,

8:35 more innovative companies can grow in their place.

8:39 The economist Joseph Schumper argued that economic

8:42 downturns are effectively the economy's renewal cycle.

8:46 old, bloated and unproductive companies fall apart and bank

8:50 loans and investment money flows into ideas worth building.

8:54 He called this creative destruction and said that economic downturns

8:59 are needed much like the human body needs to detox.

9:02 Companies that are not doing well leave the market,

9:05 capital leaves to more promising technologies,

9:07 and workers move to more productive jobs.

9:10 When we don't let this process happen,

9:12 we're left with zombie firms or companies that are

9:16 persistently unprofitable and only supported by cheap capital.

9:19 An article by The Economist pointed out that if

9:22 we follow this decadesl long trend to its logical conclusion,

9:25 then it might explain the current endemic of corporate consultants,

9:29 crypto traders, and well, influencers.

9:31 But it might also show us a path to fixing them.

9:35 Some estimates put the number of zombie companies today at around 9 to 20%.

9:40 But couldn't these firms coexist?

9:42 Why can't we have both Yellow Cab and Uber?

9:46 Well, some very smart people, including this year's Nobel Prize winners,

9:50 have been working on a solution to exactly this question.

9:53 Basically, in order for creative destruction to happen,

9:57 the zombie firms need to go to make way for new innovative companies.

10:01 So, we know that zombie companies are kept alive with low interest debts.

10:06 And we know that recessions are a way to detox

10:09 our economic system so that it doesn't become stuck with excessive fat.

10:12 And you might be thinking after all of this, the solution to all

10:16 of this would just be to let recessions run their course, right?

10:19 Well, no.

10:19 That would make things worse in a different but much more painful way.

10:24 So, it's time to learn how history works to find

10:27 out how we forgot to have the right type of recession.

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12:23 So, there are two reasons why we don't let recessions just do their thing.

12:28 The first reason is that recessions

12:30 that are left unattended are absolutely devastating.

12:33 And the first way to demonstrate this is by looking at the panic of 1873.

12:37 After the American Civil War,

12:39 America threw itself into an industrial growth spurt.

12:43 Railroads were being laid across the country at record

12:46 speed and investors were pouring money into anything with tracks.

12:50 Then in 1873, the banking firm financing one of the biggest rail projects,

12:55 Jay Cook and Company, suddenly collapsed under the weight of its own optimism.

13:00 What followed was a chain reaction.

13:02 Dozens of railroads went bankrupt.

13:05 Nearly 18,000 businesses failed and unemployment climbed to 14%.

13:09 Factories shut down, wages were slashed,

13:12 and the crisis eventually sparked nationwide railroad strikes,

13:15 leaving hundreds of people dead.

13:18 But as bad as this was,

13:20 an even bigger economic crisis was already on the horizon.

13:24 By 1893, America was at the tail end of its gilded age

13:29 when the entire country thought the good times were going to last forever.

13:34 Railroads were quickly being built connecting cities

13:36 across the country and manufacturing was exploding.

13:39 But then overnight it kind of just stopped.

13:43 Railroads started going bankrupt.

13:45 Investors panicked and people rushed to pull their money out of banks.

13:50 When banks no longer have deposits to lend, they closed their doors.

13:54 And since there was no FDIC to ensure deposits,

13:56 those who didn't take their money out lost everything.

14:00 What followed was a closure of over 500 banks,

14:04 15,000 companies, and a national unemployment rate of around 20%.

14:09 With some states reaching almost 50%.

14:12 Entire workingclass families lost their homes.

14:14 The fallout was so intense that it even triggered the Pullman strikes in 1893.

14:20 The Pullman company was a Chicago based passenger rail car

14:25 manufacturer and rewarded their employees with a little utopia of houses,

14:30 manicured streets, and everything that their employees

14:32 would need to work and live.

14:34 Kind of like what the tech companies were trying to be,

14:37 except without the bean bags and kombucha.

14:40 When things got bad, the company reduced employee wages by up

14:44 to 30% to account for the falling sales.

14:47 But the problem was that they still had to pay the same amount in rent.

14:52 The company's workers started to strike

14:54 and the company refused to negotiate with the workers.

14:57 So they turned to the American Railway Union for help.

15:01 And help they did.

15:02 The ARU ordered rail workers across the country

15:05 to stop handling trains that had Pullman cars attached.

15:08 Within days, rail traffic west of Detroit basically stopped.

15:12 At its peak, around 250,000 workers in 27 states were involved in some way.

15:18 The federal government stepped in and President Grover Cleveland

15:22 sent 12,000 troops to make the railroads run again.

15:26 Riots broke out, box cars were burned, and tracks were torn up,

15:31 leaving 30 workers dead and many more wounded.

15:34 So yeah, when you look at it like that, a little

15:37 bit of economic support could probably have helped avoid something like

15:40 this, especially considering the fact that the cars weren't a creative

15:44 destruction waiting to rip into an industry for another 15 years.

15:49 Yet almost 40 years later, America would face something far worse.

15:54 The single most devastating financial collapse in its history.

15:58 The Great Depression wasn't just another downturn.

16:01 It was the moment the entire economic system

16:04 seemed to fall out from under the country.

16:07 Banks failed by the thousands,

16:09 wiping out entire life savings of working people overnight.

16:12 And since there was no unemployment insurance,

16:14 losing your job meant your income went to zero.

16:17 Workers who kept their jobs saw wages collapse,

16:20 and many families found themselves skipping meals or sending

16:23 their children to work just to keep the lights on.

16:27 Bank runs resulted in people lining up outside of locked doors

16:30 with the hope that their banks still had something in their vaults.

16:34 Most didn't.

16:35 And if things weren't already bad enough, the dust bowl hit.

16:39 Years of drought and collapsing crop prices turned huge parts of Oklahoma,

16:45 Kansas, Colorado, and New Mexico into a giant bowl of sand.

16:50 Cities like Tulsa, Inid, and Amarillo saw unemployment skyrocket because

16:54 the work simply wasn't there anymore.

16:56 So, families packed up whatever they could fit into their cars and moved west,

17:01 hoping California had anything left for them.

17:04 Most of the time, it didn't.

17:06 People took matters into their own hands,

17:08 and the Bonus Army marched on Washington.

17:11 20,000 World War I veterans demanded

17:14 early payment of their service bonus certificates.

17:17 This resulted in President Hoover ordering the US Army

17:21 to tear gas and set the protesters camps on fire.

17:25 So yeah, this is what an economic crisis looks like when nobody steps in.

17:30 The second reason we don't let recessions run their course is

17:34 because they almost never punish the people who cause the problems.

17:37 Since the 1970s, workers have been getting way more productive,

17:42 meaning people are making more stuff, doing more work,

17:45 and creating more value than ever before.

17:47 Before, productivity growth typically matched wage growth.

17:51 But since the 1970s, wages have fallen behind productivity gains.

17:56 Productivity has increased by 87% while hourly wages have only increased by 33%.

18:03 Now, I'm going to pull up that chart again,

18:05 and I want to see if you notice anything strange.

18:08 Do you see it?

18:09 The periods after financial crisis are when the gaps

18:13 between wages and productivity gains increased the most.

18:15 Meaning that it wasn't workers who reaped the benefits of productivity gains.

18:20 It was, as you can probably guess, business and asset owners.

18:24 Another way to visualize this is looking at wage growth for high,

18:28 middle, and low wage workers in this chart.

18:30 And I only need you to look at wage growth

18:33 between the groups after the.com bubble and the global financial crisis.

18:37 Yeah, it's pretty bleak.

18:39 But I have one more depressing statistic for you.

18:42 We saw the same trend in well, house prices.

18:46 While the median home price represented 3.6 times the average salary in 1985,

18:53 it has shot up to represent 5.3 times the average home price in 2023.

18:58 We have covered this problem extensively on how money works,

19:01 so I won't step out of my lane here.

19:03 But the point is that actions that the government

19:06 and central bank take have done more

19:08 to help the people who caused these problems than

19:11 they have to help those hurt by the problems.

19:14 So if we let recessions run their course,

19:17 they will hurt working people more than they help asset owners.

19:20 But if we step in to fix them,

19:23 then we will help asset owners more than we will help working people.

19:28 Right?

19:28 Well, the problem is that we've forgotten how to have a healthy recession.

19:32 We saw a little bit of what a healthy

19:35 recession should look like with the stimulus checks of 2020.

19:38 Sure, it ended up with some people yoloing it all on GameStop or AMC stocks,

19:43 but at least that was working people doing it and not

19:47 a hedge fund who's first in line for another bailout.

19:50 This cash was given directly to citizens, encouraging creative destruction.

19:54 Workers started moving to where demand was growing

19:58 and away from areas where demand was shrinking.

20:01 Economic downturns will always hurt.

20:03 But the people who should feel it first

20:06 are the businesses and investors who took the risks,

20:08 not the workers who had no say in any of it.

20:11 And helping regular people through a recession isn't just good social policy.

20:15 It's good economic policy.

20:17 Keeping workers employed keeps productivity up and spending power alive.

20:22 And letting deadweight companies shut down might be painful in the short term,

20:27 but it's what makes innovation and long-term growth possible.

20:30 Politicians and central banks are often reluctant

20:33 to do this though because there's a belief

20:35 that anything that could slow down productivity

20:38 could put one country behind the next.

20:41 Now, if you're hoping politicians will change course and put workers first,

20:46 yeah, that's probably not happening anytime soon.

20:49 But if you want to see when everything really went sideways,

20:52 go watch our video on what the happened in 1971.

20:55 And don't forget to like and subscribe to keep on learning how history works...