chicken little

Chicken Little thought the economy brittle
chicken little got scared.
Chicken Little thought of a riddle
to see how the investors fared.
It starts with a P an ends with an ic
lets hope that we're all prepared.
If you said picnic, then all is fine
read no further, it will only trouble your mind.
If you said PANIC then join the crowd
we're all going mad for a round.

Panic.  It's what recessions use to be called, in the days before depression, in the days before the Federal Reserve.  The Panic of 1893 reads like a deja vu (wikipedia).  Back then people would rush to the bank to withdraw their money which would in turn force banks to go bankrupt.  That is the panic would break the bank.

After American society got tired of Panics and massive amounts of banks going broke the Federal Reserve was created in 1913.  Nonetheless many banks went out of busisness in the Great Depression.  However, another great social invention came along during the Great Depression, the FDIC, or Federal Depositers Insurance Corporation.  Banks would pay a fee to provide depositers insurance on their deposits up to a preset amount.  When was the last time that you heard of a Panic?

The creation of the FDIC has been very effective in regulating bank panics, because it has created confidence in the fractional reserve system.  A system by definition which can never pay back all of its depositers, even with the help of the FDIC.  But so long as people believe that their money is safe, so it has been for the last 78 years or so.  Even when the FDIC was $25 billion in the red during the recent financial crisis, who among us ran out and withdrew their money?

Confidence, stability, prosperity, and ultimately inflation.  Yes those were the days, when compound interest was the only investment advice a working hack needed.  But the inflation of the 1970s and the high interest rates both for savers and borrowers, only got worse (or better depending on your position), as Fed Chairman Paul Volcker raised rates even further in order to kill inflation, which in turn killed the economy.  But then Saudi Arabia realized that there was a limit to how much they could jack up oil prices and get away with it.  Prices too high and America would use less, and Saudia Arabia and other OPEC countries would make less even though they were charging more.  Gas prices stabilized.  Inflation dropped, and the Fed dropped interest rates accordingly.

And then the stock market which had languished during the volatile 1970s went boom, and boom, and boom, all the way to the Tech bust of 2000.  And interest rates since 2000 have gone down and down and down to essentially zero.

They say that about 50% of Americans are in some way invested in the stock market.  To my knowledge there isn't any such thing as stock market insurance for investors, such as exists for bank deposits via the FDIC.  Ironically, the FDIC was created as part of the Glass-Steagall Act of 1933.  The Glass-Steagall Act at the time also created a separation between commercial and investment banks.  That provision was infamously repealed in the last years of the Clinton Administration.  The recent financial crisis.....well you get the picture.

Panic or picnic. You decide.