THE FINANCIAL PANIC OF 2008

Investors can be forgiven if they have only now realized that what they have been going through in the markets of late is of historic proportions. Financial panics are rare events but when they occur they generally wipe out at least half and sometimes more of investors’ stock market wealth. Capitalism, it seems, has a knack for creative destruction. Does that mean that investors should never invest in the stock market? Of course not. Eventually it recovers, but it usually takes years.

Does that mean that given the events of the past couple of weeks that everyone should now join the panic? That is definitely a more difficult question to answer because in a panic sell off even  the good is thrown out with the bad and it is a more a case of bids just disappearing then it is that there is something fundamentally wrong with many stocks including preferred shares of blue chip companies. At the end of the day quality will recover faster than the fundamentally unsound. The rapidity and broadness of the decline has even caught us off guard.

Financial panics have been around at least as long as organized economies. The first recorded panic in modern economies was in 1819. At its heart was a failure of the banking system following the War of 1812. It was preceded by a change in monetary policy caused by heavy borrowings to finance the war, and the monetary expansion in turn spurred an expansion of banks and bank notes. The resulting speculative investment led inevitably to collapse, with bank failures, bank runs and bankruptcies.

We can suppose that at least this time the mania wasn’t tulips, so there is at least a chance that this one might reasonably recover in our lifetimes and some will recover… [ read more ]