Columnist.
October 1987: The U.S. stock market collapsed 23 percent in one day, the largest one-day drop on record. For the rest of that year economists debated how deep the depression would be in 1988. There was no depression in 1988. The reason was that for the first time in central banking history there was a coordinated global response to a visible economic crisis. The leadership attached to that response was provided by U.S. Treasury Secretary James Baker III.
In the summer of 1914, the few who had any sense of what was about to happen to the world had no idea how long it would take for their fuzzy contemplations to unfold. The German Army had been preparing for a European war for some time, including a planned invasion of France detailed down to almost an hour-by-hour execution schedule. What followed was four years of horrific bloodshed that killed 10 million and wounded 20 million more. Following that was a Spanish influenza epidemic that killed an estimated 50 million more. Following that was a global depression that ended with the German hyperinflation of 1923. If you lived in Germany, your life was literally on the edge of existence for almost eight years.
Recent commentary by David Stockman, former Reagan Administration budget chief, is timely for investors because it focuses on the Federal Reserve's internal debate about "policy normalization" in advance of Wednesday's important Federal Open Market Committee meeting. Stockman argues that the Fed's desire to raise rates, first, followed by actions to shrink its balance sheet (allowing its debt securities to mature without reinvesting the proceeds) is "putting the cart before the horse" and that the reverse — reducing the balance sheet followed by raising interest rates — is the right path to "normalization." Stockman has a valid point, but there is potentially much more to the story.
