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"Can capitalism survive? No, I do not think it can."
– Joseph Schumpeter 1942

Schumpeter's apparent pessimism about capitalism stemmed from his view that populist politicians bemoaning the loss of jobs to creative destruction would work to halt this process, producing more security but much less growth, innovation and freedom. It remains to be seen if the events of the past two months will finally vindicate Schumpeter's pessimism or prove to be an effective means of dealing with so much systemic financial failure.

The month of September alone saw a year's worth of economic and financial events. During this time, the U.S. government did more to try to resolve the financial crisis than the government of Japan did during the entire decade of the 1990s. During September, AIG was effectively nationalized, money market funds were insured; another financial relief program, Treasury Asset Relief Program (TARP), was created; short-selling in financial service stocks was outlawed; rumors were floated about possible bank mergers; the stock market volatility soared. The Fed set up yet another credit facility to purchase commercial paper.

In the rest of the economy, mortgage foreclosures are soaring. The financial system is still writing off billions in bad debt. Job losses continue to pile up. Economic growth is slowing sharply overseas. Wages are stagnant. Pessimism is the order of the day.

And yet amidst all this gloom, there are still a few reasons for optimism. The Europeans have finally arisen from their slumber and started cutting interest rates. The British have crafted a well-thought-out plan for recapitalizing their banking system. The U.S. Treasury is quickly realizing that buying assets at above-market prices might not be such a good idea but putting capital into a few key banks could make a real difference.

Energy prices have come down dramatically, giving both the consumer and food businesses that worry about distribution costs a small but much needed break. It is also encouraging that in the earnings reports that have come out for Q3, non-financials are up on average 18 percent, which is slightly better than in Q2. Banks are still hurting terribly, but they are making slow progress toward righting their ailing balance sheets.

Looking at the commercial paper (CP) market, which has become ground zero for the current wave of the credit crisis, non-financial commercial paper is still doing just fine. Financial CP is another matter but the Fed is going to start buying financial commercial paper and that should help. Other than the obvious worry all of this creates, evidence of the transmission of all this from Wall Street to Main Street still seems small.

Non-Financial Commercial Paper Outstanding


Looking Forward
"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people …"
– Andrew Mellon, November 1929

As Secretary of the Treasury to Presidents Harding, Coolidge and Hoover, Mellon was a combination of Ben Bernanke and Hank Paulson. Before his public service, he was a combination of Warren Buffet and Bill Gates. He also owned one of the largest private art collections in the world, which, before his death, went on to form the core collection for the National Gallery in Washington. His advice for addressing the financial crisis that led to the Great Depression was ignored and today seems quaint in its moralism.

And yet, his prescription for recovery remains as sound today as it did in 1929. Values are adjusting, painfully in many cases, and the assets in question will quickly move into other hands. Falling home prices are making housing more affordable and stimulating buyer interest. Bank of America has acquired Merrill Lynch. Barclays picked up the wealth management pieces of Lehman, and pieces of AIG will be sold off to the eventual benefit of the U.S. taxpayer. The Treasury's TARP program of $700 billion will accelerate this process. While the economy is far from being out of the woods, by the standard laid down by Andrew Mellon in 1929, we are making progress at a breathtaking pace. For food businesses, that will not be much solace in the very short-run. But over the longer-run, it does mean that the current recession will run its course and that a recovery can be expected sometime before late next year.

To comment on this article or pose another topic for this columnist, contact Dr. Carl Steidtmann at csteidtmann@deloitte.com.