When I got into business journalism in the 1970s, economic illiterates were running most of North America's newsrooms. The older editors were children of the Great Depression; the younger ones were children of the 1960s who were waging war against the military-industrial complex.
Thus, financial journalism was a lonely ghetto in many daily newspapers. My first managing editor, an amiable jock in charge of an Ottawa daily, believed that the financial pages should be buried at the back of the sports section. "It's a great masculine package," he assured me, apparently convinced that the Dow Jones Industrial Average would interest only the occasional male reader who ventured behind the lacrosse scores.
Then something remarkable happened. In the mid-1970s, with the emergence of a powerful cartel of energy-exporting nations, oil prices, which had languished in single digits, sprang to $12 a barrel and beyond. By the end of the decade, inflation had soared and interest rates climbed to 20 per cent.
It was a scary, exciting time, much like today. A combination of high inflation and stagnant growth laid the basis for economic crisis. North America experienced a credit crunch and a housing collapse. Major institutions were bailed out: New York City, Continental Illinois Bank and Chrysler.
It all sounds very familiar (particularly Chrysler), but it was 1979, not 2009, and the world has never been the same. The cataclysmic events that culminated in the 1980-1982 recession propelled financial news to the front pages.
That recession was the first cold shower of reality for early baby boomers, who, having started off as the Radical Generation, found themselves morphing into the Investor Generation, as spouses, parents and mortgage-laden homeowners.
As their thirst for financial information increased, the media responded. Financial news is now updated minute by minute on specialized TV channels and the Internet. Business has become as much a spectator sport as hockey or baseball. Ordinary punters now know the difference between the discount rate and the prime rate. And if they don't, BNN and CNBC will explain it.
So how could people who came of age in the financial crisis of the late 1970s, who became so immersed in financial news, who thought they were so smart about money, end up looking so dumb? For all their apparent cleverness, this generation is now mired in the worst equity meltdown and economic downturn since the 1930s.
As the wounds healed from the early 1980s recession, the boomer generation rode the great bull market of the past 25 years. There were crises, such as the crash of October, 1987, when the Dow average plunged more than 500 points in a day. It turned out to be a blip; markets bounced back quickly, spurred by prompt action from central banks. We emerged from the nasty early-1990s recession, and the love affair with investment, as opposed to mere savings, became more intense.
Investors became enamoured with the Internet, and then the dot-com bubble burst. But that shock was largely confined to one sector, just as the 1990s Asian financial crisis was confined to one region. Markets recovered from the attacks of Sept. 11, 2001, and we put our faith in crisis management by governments and central banks, and in the oracular wisdom of Alan Greenspan, the U.S. Federal Reserve Board chairman.
NO SAVIOUR
But the sands were shifting beneath our feet. Robert Bruner, dean of the Darden School of Business at University of Virginia, is a student of financial panics, such as the U.S. banking crisis of 1907, when J.P. Morgan almost single-handedly saved the system. Today, there is no heroic saviour. Not even Warren Buffett could stem the selling panic, and Barack Obama has stumbled in the early going.
Markets are much more complex than in the past, which means the crises are more intractable and the risks incalculable, Prof. Bruner says. Add to this the incredible speed at which "hot money" flows around the world. Finally, globalization has enhanced the sheer scale of any crisis.
During the boom, a speculative fervour gripped homeowners, particularly in the United States, where they got hooked on cheap, gimmicky mortgages. "They believed they could buy low, sell high and could always get out at the peak, instead of being the last player in the game to hold the old maid card," Prof. Bruner says.
As in past panics, greed and envy drove markets. "There is nothing so disturbing to one's well-being and judgment as to see a friend get rich," the economist Charles Kindleberger wrote in the 1989 edition of his classic book Manias, Panics and Crashes.
Just as investors had an inflated sense of their own wisdom, there emerged a new class of financial engineers, or "quants," who channelled their numerate talents into contriving complex investment products bundling mortgages and other instruments.
This creativity was accompanied by regulatory breakdown, says Maurice Levi, professor of international finance at the Sauder School of Business, of the University of British Columbia. He decries the decision to allow these instruments to be traded over the counter, rather than on a regulated exchange. That created a vast unknown still hovering over the global economy: What exactly is the scale of the risk?
After the sustained boom of the past decade, an economic slowdown was inevitable. "History tells us that booms are followed by slumps," says Richard Lipsey, professor emeritus in economics at Simon Fraser University. But this time, the breaking of the boom was accompanied by huge exogenous shocks in the form of the U.S. housing crisis and a related collapse in credit and financial markets.
As in past speculative manias, share prices overshot their realistic values, so also, when the markets reversed, they overshot on the downside. Last year, the market meltdown knocked an estimated $30-trillion (U.S.) out of global investment portfolios.
PANIC ON THE BULGE
And a much broader spectrum of the population is harmed than in past panics, Prof. Levi points out. "You and I and carpet layers and bus drivers all have our money in mutual funds." In 1929, the year of the crash that set off the Great Depression, it was mainly grandees such as the Rockefellers, Fords and Vanderbilts who had significant stock holdings.
This investing population is dominated by the bulge of boomers, who have suddenly realized they need to change their behaviour. The typical investor has a quarter to a third less in savings than expected, with the same number of retirement years left to spend it in. The result is a cutback in current spending, which exacerbates the crisis in the real economy.
The lesson from all this is that information alone does not make wisdom, says Monica Townson, an economist who in the 1970s was one of the rare Canadian journalists who specialized in economics. She blames a lot of the current panic on the 24-hours news cycle. The bombardment of news every minute feeds a herd mentality, she argues.
That mentality has fundamentally changed the way the stock market prices assets, Prof. Levi argues. At one time, people got information in different ways at different times and thus could disagree on the price of a stock.
"You need disagreement to find a market price. If you think it is worth $10, and I think it is worth $8 or $9, I'm willing to sell and you're willing to buy, and we can have a market."
But now we all receive the same news at the same moment through the Internet, Prof. Levi says. "So we've all got bad news or good news instantaneously. There is no room there for much disagreement between two people or parties about what something is worth."
Therefore, we all try to sell or buy at the same moment. Eventually, the market does find an equilibrium price, but only after extreme volatility, with prices going up and down several hundred points in a single day.
That volatility, in turn, scares people. According to Prof. Levi, investors expect a much higher rate of return to compensate for this systemic risk. That drives prices even lower during a market downturn.
So the generation that came to maturity in the 1970s and 1980s may be much better informed than their parents, but this cascade of information makes it more susceptible to manias followed by panics. People are prone to more irrational choices, whipped on by the constant flow of news and views.
In the end, all we really know is that the downturn will end. Robert Kelly, the Canadian who runs Bank of New York Mellon Corp. - one of the sounder U.S. banks - says he tells his employees: "There have been a dozen downturns since Second World War, but also a dozen recoveries. We always recover. That is just the reality."
That's cold comfort for a generation that was once supremely confident about its command of information. Now, it is supremely unconfident about when that recovery will come.
Senior writer in Report on Business and author of Stampede! The Rise of the West and Canada's New Power Elite