Via DPF, Alan Bollard has described the credit crisis as the greatest destruction of wealth in world history. That doesn’t sound right to me. Sure, vast amounts HAVE been lost in the equities markets. But if a nation’s houses are valued at 1 trillion dollars one year, increase in value to 2 trillon over five years and then decrease back to 1 trillion have we really lost a trillon dollars? Likewise, what if a bank claims that their complicated, opaque financial products are worth 1 trillion dollars but they’re really totally worthless? There has been some loss of wealth due to the fact that the economy was operating under false assumptions of value but we haven’t lost a trillion dollars.
Compare this to the crash of 1929 in which many governments (notably the US) let the banks go under; 90% of savings and investments are notional (they don’t physically exist) but they represent real economic wealth and when the bank gets wiped out that notional wealth is instantly destroyed (which is why governments go to extraordinary lengths to keep banks solvent). Just about everyone in the world lost their life savings in the late 20’s and early 30’s. Things today are rough but we haven’t seen anything like that.
Nor have we seen destruction of wealth comparable to that of the mid 1940s in which many of the worlds cities and industrial regions were destroyed by a combination of conventional and nuclear weapons. The current crisis is bad but not THAT bad.