A few days before the October 14 federal election, in an interview with the CBC’s Peter Mansbridge, Stephen Harper gave Canadians advice on how to play the stock market.
"We always know when stock markets go up, people end up buying a lot of things that are overpriced," he opined "and when stock markets go down, people end up passing on a lot of things that are underpriced."
"I think there are probably some gains to be made in the stock market," he said. "That’s my own view."
October 8, the day after the ever-perceptive leader of the Conservative Party was suggesting that Canadians buy stocks, the TSX closed at 10,056, down from the all time high of 15,073 reached on June 18. The trouble with Harper’s advice is that since he gave it, the TSX has continued its downward trend. On December 24, it closed at 8,311, down 17 per cent from the day he provided his stock tip.
At the time, Harper was thought by many, including his political opponents, to have been callous in giving stock market advice to Canadians when so many people were feeling the pain of the economic downturn, fearing the loss of their jobs or the shutdown of plants and mills in their communities.
Seen over the longer term, though, what stands out is the incompetence of the man. Stephen Harper does not understand that the economic downturn through which we have been passing is not the product of the conventional economic cycle we have experienced since the end of the Second World War, with its more or less pronounced booms and busts. Instead, this is an economic crisis that marks the end of one socio-economic age and the beginning of another.
The proximate cause of the global financial meltdown was the bursting of the real estate bubble, in particular, the collapse of the sub-prime lending sector in the United States. Sub prime lending was legitimated by the foolish decision to de-regulate the financial system to allow mortgages to be provided with little or no down payments to those unlikely to be able to meet the payments.
The more basic cause was the unsustainable debts of the United States, debts of all kinds. There is the eleven trillion dollar U.S. government debt, which is sustained by purchases of U.S. Treasury Bills and other government securities by China, Japan and other countries. There is the net debt of Americans as a whole to the rest of the world which now stands at several trillion dollars. There is the personal indebtedness of Americans, which has soared from just over six hundred billion dollars thirty five years ago to about ten trillion dollars today. This latter debt will be at the heart of the credit card crunch which is waiting to hit the economy in the very near future.
The crisis of the global economy and financial system cannot be overcome by the U.S. or by the West acting alone. In the 1930s, recovery from the severe deflation of the Great Depression required an enormous injection of liquidity into the global financial system. The failure of the United States, the only country with the capacity to provide that liquidity, to bail out the global financial system and to open its markets to the exports of the world, caused the Depression to drag on for years. Its definitive end came only with the outbreak of the Second World War. Today the U.S. is not capable of managing the bailout on its own. Without the financial muscle of China and Japan, liquidity on the scale required, is not available. No matter how gigantic Barack Obama’s stimulus package turns out to be, without the collaboration of the Asian giants, there will be no recovery.
On the topic of stock market, the brilliant Canadian-born economist John Kenneth Galbraith wrote a warning in his analysis of the great crash of 1929 that ought to be required reading for market analysts, politicians and investors today:
"The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains….The bargains then suffered a ruinous fall. Even the man who waited out all of October and all of November [1929], who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months. The Coolidge [Calvin Coolidge was president of the U.S. from 1923 to 1929] bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable."
The labels on the financial instruments have changed from 1929 to 2008. But the story of a speculative market spurred on by foolish governments and greedy big-time investors is the same.
It ought to be no surprise that the demise of the paradigm on which he has staked his entire political and economic outlook should leave Stephen Harper bewildered. Surely a very good reason for Canadians to put him out to pasture.