Darkest before the Dawn - Words of Encouragement

Courtesy of  John J. Maxfield / Executive Editor for Bank Director: " We are at the beginning of a crisis. We don’t know how severe it will be, though we know it’ll be bad. These are fearful times. Yet, if you think about the unfolding crisis in the context of past crises, there is reason for cautious optimism.

Let’s start with the Great Depression.  It began as a severe recession before two factors turned it into a depression. First, more than 6,000 banks failed between 1929 and 1933. This predated deposit insurance, so people rushed en masse to withdraw their money. Second, in 1937, the Federal Reserve prematurely raised interest rates, sending the economy into a second steep recession. Neither of these is at play today. Deposits are insured and the Fed, while far from infallible, is unlikely to repeat its long-panned mistake from 1937.

The next crisis in the United States didn’t strike until the 1980s.Two OPEC-led oil embargos in the previous decade caused energy prices to skyrocket, with inflation and interest rates following suit.This sparked a series of overlapping banking crises. Savings and loans failed because their cost of funds exceeded the yield on their earning assets. Commercial banks failed after commercial real estate prices plummeted and less-developed countries like Argentina defaulted on bank loans. Suffice it to say, the interest rate environment today couldn’t be more different. All rates are low. The yield curve may be flat, but it isn’t egregiously inverted.

Finally, the third major banking crisis of the past century was the housing collapse in 2008-09. That was a debt-fueled bubble that popped after housing prices crested in 2006. That isn’t the situation today either. We aren’t dealing with the aftermath of a debt-fueled bubble that will require a long period of deleveraging.

There has never been a crisis that we didn’t fully recover from.

The same will be true here."