I am reading a book called “Lords of Finance: The Bankers Who Broke the World” by Liaquat Ahamed. The book is about the central banks of England, Germany, France and the United States between the world wars. In the introduction, he offers a cursory survey of economic crisis, going all the way back to 33 a.d. Here is what Ahamed says:
Each of these episodes differed in detail. Some originated in the stock market, some in the credit market, some in the foreign exchange markets, occasionally even in the world of commodities. Sometimes they affected a single country, sometimes a group of countries, very occasionally the whole world. All, however, shared a common pattern: an eerily similar cycle from greed to fear.
Financial crises would generally begin innocently enough with a surge of healthy optimism among investors. Over time, reinforced by cavalier attitudes to risk among bankers, this optimism would transform itself into overconfidence, occasionally even into a mania. The accompanying boom would go on for much longer than anyone expected. Then would come a sudden shock — a bankruptcy, a surprisingly large loss, a financial scandal involving fraud. Whatever the event, it would provoke a sudden and dramatic shift in sentiment. Panic would ensue. As investors were forced to liquidate into a falling market, losses would mount, banks would cut back their loans, and frightened depositors would start pulling their money out of banks.
…a problem at one bank raised fears of problems at other banks. And because financial institutions were so interconnected, borrowing large amounts of money from one another even in the nineteenth century, difficulties in one area would transmit themselves through the entire system.
So I guess there is nothing new about what we are going through now. The world has seen this before. Many economists have made the point that the economy goes through cycles — it seems to be a point that is difficult to grasp when you are at the bottom of one of those cycles.
As you visit with customers and constituents who ask about the strength of your bank and the economy, remind them of the cyclical nature of our economy. Remind them that we have been through this before. And, that we have typically emerged stronger than we were before.