In using history to understand the future, Future Watch constructs rhymes between the past and the present. Life is complex so one past rhyme cannot be sufficient. The rhymes may be graded as primary, secondary etc.

The crisis of 2007-08 is rhymed with the crises of 1927, 1971, 1987 and 1997-98. After each crisis past the Dow Jones went higher followed by recession.

So Future Watch monitors the news and then finds rhymes with the past.

A headline on the BBC’s website for August 6, 1998 reads “Ex-senator Edwards admits affair”. The rhyme then is captured by the BBC’s headline of August 17, 1998 which reads “Clinton admits Lewinsky affair”.

So we have a former Democratic presidential hopeful and a then Democratic president having affairs during a crisis before the boom before the bust.

By collecting news rhymes for each rhyme period and comparing the rhyme period ‘speculations” may be made about the future.

The rhymes of the past for today are the late 1920s, early 1970s the late 1980s and late 1990s.

Some examples for each period for today:

* Jenny Anderson, Wall Street Winners Get Billion-Dollar Paydays, nytimes.com, April 16, 2008:

“Since 1913, the United States witnessed only one other year of such unequal wealth distribution - 1928, the year before the stock market crashed, according to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington.”

* Stanley White and Kosuke Goto, Dollar Slumps Most in Eight Years Against Yen on Credit Losses, bloomberg.com, March 17, 2008:

“The dollar is the weakest since at least 1971 based on a Fed trade-weighted index...”

* William Kristol, The Shape of the Race to Come, nytimes.com, April 7, 2008:

And an experienced Democratic operative e-mailed: “Finally, I think [McCain’s] going to win. Obama isn’t growing in stature. Once I thought he could be Jimmy Carter, but now he reminds me more of Michael Dukakis with the flag lapel thing and defending Wright. Plus he doesn’t have a clue how to talk to the middle class. He’s in the Stevenson reform mold out of Illinois, with a dash of Harvard disease thrown in.”

In a close race, that “dash of Harvard disease” could be the difference.

* Elizabeth Stanton, U.S. Stocks Fall; Financials Drop to Lowest in Decade, bloomberg.com, July 14, 2008:

“The S&P 500 Financials Index retreated to its lowest level since October 1998, two months after Russia's debt default sent the index down 23 percent in a month.”

History, therefore is suggesting that the Dow Jones is going to a new nominal high to be followed by the Second Great Depression.

The historian Niall Ferguson writing in his latest article in the Financial Times opined that:

"The difference is that the monetary and fiscal authorities have done everything in their power to prevent a repeat of what Milton Friedman and Anna Schwartz dubbed “the great contraction” between 1929 and 1933. What happened then was that falling asset prices caused thousands of banks to fail, while the Federal Reserve did almost nothing to mitigate (and a good deal to accentuate) the consequent monetary implosion. Under Ben Bernanke’s historically informed leadership, the Fed has done the exact opposite, slashing interest rates and, more importantly, targeting liquidity at banks through the discount window and new term auction facilities...

"No, this is not the Great Depression 2.0; the Fed and the Treasury are seeing to that" ("How a local squall might become a global tempest").

It is so disappointing that such a distinguished financial historian displays his ignorance.

We cannot compare today's 'upwave' response to 'crisis' with the the 'downwave' response of the 1930s. Anyway we need a depression to "reset" the global economy for sustained growth. Preventing a depression only postpones the adjustment and makes it even more severe when it arrives.

(Even in the aftermath of October 29, 1929, at the start of the 'downwave', Hoover cut taxes and Harrison cut the discount rate.

"... on Thursday, 31 October [effective November 1]...the Federal Reserve Banks lowered the rediscount rate from six to five per cent. The Reserve Banks also launched vigorous open-market purchases of bonds to ease money rates and liberalize the supply of credit... On all these happy portents the market closed down [i.e., "suspended"] for Friday, Saturday, and Sunday..." (John Kenneth Galbraith, The Great Crash 1929, (London: Penguin Books, 1992), p.141).

This was followed by a 0.5 percentage point cuts on November 15, 1929, February 7 and March 14 of 1930. Over a period of seven and a half months interest rates went from 6 to 2.5 percent.

"In the belief that tax reduction would counter the depression Hoover asked Congress in December, 1929 for lower income-tax rates. Congress responded at once" (Harold Underwood Faulkner, American Economic History, 8th edition, New York: Harper & Brothers, 1960, p.649).

From the post-crash low in November 1929 to the peak in April 1930 the Dow Jones increased by 48 per cent).

[Compare the tax rebate and interest rate cuts of 2007-08].

But we are not yet at the stockmarket turning point, so Ferguson is comparing apples with oranges.

We are leaving the 'crisis' that leads to the final rally of the stockmarket before the turn in social mood contributes to debt liquidation and provides the big 'push' to the hegemonic and techological transitions that are taking place.

See "Boom and Bust Republicans" for the historical and the present crisis-boom-bust.

(In the 19th century the 'crisis' was war-related, in the 20th, and now the 21st century, it was and is 'finance-related').

Ben Strong, the Governor of the Reserve Bank of New York, is accredited with ‘saving’ the day in the 1927-crisis and Ben Barnanke, the Chairman of the Board of Governors of the Federal Reserve will be accredited with ‘saving’ the day in 2007-08.

Both Strong and the treasury-secretary were 'involved' in the crisis of 1927, just as Bernanke and Paulson are 'involved' with the crisis of 2007-08.

"Had the situation continued, most European nations would have had to leave the gold standard. Given the complexities of the reparations situation, the United States would be dragged down with them in a major financial crisis. Accordingly, Secretary of the Treasury Andrew Mellon and Benjamin Strong eagerly accepted invitations from European central bankers to a conference on the question. In 1927 Montague Norman of the Bank of England, Hjalmar Schacht of the Reichsbank, and Charles Rist of the Bank of France met with their American counterparts. The situation might yet be saved, they argued, if the Federal Reserve cut its rediscount rate. Such an action would lower American interest rates in relation to those in Europe, and therefore attract funds to European banks. At the same time, low interest rates would encourage borrowing in America and stoke the speculative furnaces. Strong was unhappy about the latter probability, but in the end proved willing to further stimulate an already active American economy in order to save international stability. In 1927, the Federal Reserve lowered its discount rate from 4 to 3.5 percent.

"Wall Street greeted the lowered rate. It meant businesses could borrow funds more easily, and so expand operations and profits. More important, it assured a continual flow of cheap credit for the call-money market. Member banks were able to borrow money from the Federal Reserve at 3.5 percent and then lend it as call money at 5 percent, making an easy profit of 1.5 percent. Thus, the international situation was resolved in such a way as to encourage speculation on Wall Street" (Robert Sobel, Panic on Wall Street, (New York: Macmillan, 1968), pp.360-361).

But Ferguson makes a very good point with this statement:

"But, as in the 1930s, the critical phase is not the US phase. It is when the crisis goes global that the term "credit crunch" will no longer suffice."

Events outside America, and response in America, in 1931 provides the template to view the future:

"The deterioration of the situation in Europe added to the problems of the American authorities. In May 1931 the Credit Anstalt of Vienna was obliged to close and the German banks to which it was heavily indebted were soon in difficulties. They could not meet their short obligations to London, and this frightened other Europeans, especially the French, into withdrawing their balances from Britain. By September England had lost so much of its gold reserve that it was forced to devaluate the pound, an action that set off a series of devaluations around the world. This did not solve the balance of payments problems since it left most countries in about the same position relative to others as before.

"During the latter months of 1931 the United States also faced a heavy loss of gold. In an effort to stop the drain, the Federal Reserve Bank of New York raised its discount rate from 1.5 to 3.5 percent, with only temporary effect. By February 1932 the gold of the Federal Reserve Banks was close to the legal minimum that the Glass-Steagall Act was passed; it permitted government securities to be substituted for gold as collateral for Federal Reserve notes, above the minimum of 40 percent. This made it possible for the Reserve Banks to increase open-market purchases and pump new funds into the market, but the flood of bank failures continued" (Margaret Myers, A Financial History of the United States, (New York: Columbia University Press, 1970), p.306).

The response to the "heavy loss of gold" was an attempt to save the gold standard. In the future the response to a "heavy loss of 'money'" will be an attempt to save the dollar standard.

"David Tice ... believes the canary in the coal mine will probably be the dollar. He expects the greenback to tank as international investors start to lose faith in the U.S. credit bubble. He also predicts the Federal Reserve will respond by jacking up interest rates to protect the dollar from complete collapse. That, of course, would bring the credit market to a grinding halt" (Brett Arends, Prudent Bear's Tice Says the Plunge Is Coming, thestreet.com, May 4, 2007).

While a bit simplistic, Peter Temin observed:

"By the summer of 1931 ... the United States was in the grip of a severe depression. But if recovery had come then, the downturn would have been within the historical range of business fluctuation. It would have been a hard time, but not the disaster of the 1930s. The growing depression was turned into the great depression by the Federal Reserve in the fall of 1931" (Peter Temin, "The Great Depression", The Cambridge History of the United States, (CUP, 2000), p.311).

The 'gold' standard was 'saved' in 1927 but not in 1931-32; the present dollar standard was 'saved' in 2007-08 but not in a future crisis.

At least Andrew Mellon, Hoover's treasury-secretary had the right policy response, unfortunately not implemented, as opposed to Bush's present treasury-secretary, and I presume, John McCain's treasury secretary.

"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 from less competent people.”