Introduction
Todd Buchholz is a former Director of Economic Policy at the White House, a managing director of the US$15 billion Tiger hedge fund, and an economics teacher at Harvard.
Buchholz advised President Bush Snr and is a frequent commentator on ABC News, PBS, and CBS. He recently hosted his own show on CNBC. He is also Co-Founder of Enso Capital Management, LLC and Co-Founder and Managing Director of Two Oceans Management, LLC. He delivered a lecture at the White House entitled “Clarity, Honesty and Modesty in Economics,” and has been a keynote speaker for corporations such as Microsoft, Citibank and IBM.
He has written numerous books, including Market Shock: 9 Economic and Social Upheavals that Will Shake Our Financial Future, New Ideas from Dead Economists and From Here to Economy. His latest works, New Ideas from Dead CEOs and The Castro Gene, were published in 2007.
Buchholz is a contributing editor at Worth magazine, where he writes the “Global Markets” column. He has written articles for the New York Times, Wall Street Journal, Forbes, and Reader’s Digest. His editorials in the Wall Street Journal correctly forecasted the 2001 slowdown in the US.
He won the Allyn Young Teaching Prize at Harvard and holds advanced degrees in economics and law from Cambridge and Harvard.
The Crisis and Comparisons
Trust is dead. President Teddy Roosevelt proclaimed himself a proud “trust-buster.” But that was about cartels. Wall Street fraudsters like Bernie Madoff and the crooked Illinois Governor Blagojevich are busting the trust that people had in markets and in government.
Therefore, the collapse of the world economy is not like the Great Depression. It’s more like the fall of South Vietnam. Or the Fall of Rome, with barbarians figuring out how to pick the locks of the gates.
The stock market crash of 1929 tumbled into the Great Depression when central banks hoarded cash, and the Federal Reserve Board watched as the money supply evaporated like yesterday’s rain puddle. Meanwhile, the protectionist Ross Perots of 1930 blamed scurrilous foreigners and then jacked up barriers to trade, led by the US Smoot–Hawley tariff. Politicians compounded the error by strangling American workers with higher tax rates, raising them more than four-fold for lower income earners and three-fold for high-income earners.
Today’s government economic policy is not nearly so reckless and stupid. Central banks have slashed interest rates and, so far, only small protectionist hand grenades have been lobbed.
So where does the Vietnam analogy come in? Early in my career, I wrote an academic paper called “Revolution, reputation effects and time horizons,” arguing that when an invader conquers a country, the economy will collapse, tracking a catastrophic mathematical function.1 What drives the collapse? Not guns. Not nooses. The catastrophe comes when time horizons shrink. Why? Because merchants must believe that their counterparties will be around next year, or next month. The Latin root for “credit” means trust. Would you lend to fly-by-night traveling salesmen? The current crisis has turned nearly every company into a fly-by-nighter, grabbing onto the last chopper out of Saigon.
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