Dan Snow's History Hit - The Financial Crashes that Changed the World

Episode Date: March 11, 2024

Over the last turbulent century, the global economy has suffered the shockwaves of recessions and depressions, bubbles and unchecked investor euphoria. And with the UK's spring budget announced this week, we ask the question - have we learnt from the economic mistakes of the past?In this episode, Dan is joined by Linda Yueh, Fellow in Economics at St Edmund Hall, Oxford University and author of "The Great Crashes". We look back at some of the most significant stock market meltdowns since the Wall Street Crash of 1929 and turn our attention to the most likely candidate for the next big financial crisis...Produced by James Hickmann and edited by Dougal Patmore.Enjoy unlimited access to award-winning original documentaries that are released weekly and AD-FREE podcasts. Get a subscription for £1 per month for 3 months with code DANSNOW sign up at https://historyhit/subscription/We'd love to hear from you- what do you want to hear an episode on? You can email the podcast at [e-mail] can take part in our listener survey here.

Hi everybody, welcome to Dan Snow's History. When I give talks, one of the most frequent questions I get is why do we seem to learn nothing from history? And sometimes I think that's a little bit unfair because I think we do learn things from history. We've managed to construct the most complex civilization in the history of the known universe and we've done that by building on the achievements and learnings, lessons, of our forebears. But there are areas in which I agree it seems that we are incapable of learning lessons. I think one of those areas is conflict. Another of those areas is our fascination with charismatic despots. But one I think that will strike a chord with everyone

is the good old stock market and the way that it represents our fluctuating economic fortunes. The bubbles, the crashes, the euphoria, the despair, and the drawn-out recessions and even depressions that we have to live with afterwards. The famous economist J.K. Galbraith, who advised many American presidents, wrote, there can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, the extent that is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present. I love that quote. Why are we unable to banish the spectre of stock market failure, of banking failure? Well, here to come on

the podcast and talk to me all about it is Linda Yu. She's an economist and broadcaster. She's an adjunct professor of economics at London Business School and a fellow of economics at St. Edmund Hall in Oxford. We're going to look back over the past hundred years, going to look at some of the biggest and most dramatic crashes, why they're caused, how we emerged from them, and then we're going to finish up by looking at the next likeliest candidate for a big stock market crash. It's China, folks, and it's not going to be pretty. She's just written a brilliant book called The Great Crashes, and it seemed like a very good time to get her on the podcast and ask her why we keep having these crashes. Enjoy. never to go to war with one another again. And lift off, and the shuttle has cleared the tower.

Linda, thank you very much for coming on this podcast. Thank you, Dan, so much for having me. When I read your book, I was just left thinking to myself, why do we keep doing this to ourselves? What is wrong with us? It's a question I ask myself repeatedly as I looked over the past century of financial crashes. And I always joke, there's one lesson that we never learn. Obviously, we all know about Ponzi schemes. So, shockingly, the Ponzi scheme is named after a banker called Charles Ponzi,

is named after a banker called Charles Ponzi, who had something great to sell you in the 1920s. He could get you a deal like nobody else. And then when the whole Ponzi scheme collapsed after 18 months, he went to prison. And when he came out again, he had some land in Florida to sell you during the 1920s. So there are some lessons we should just say up front, nobody ever learns.

And why do we not learn? Because unlike a Ponzi scheme, which I think it's impossible to win, I guess there are winners in stock market cycles, right? There are loads of examples of people who got out at the right time and got in at the right time. So it is understandable why we seek to play in this system. Completely. And I think that's completely spot on because there's always going to be criminals. There's always going to be fraud. But what's underlying it, and this is intrinsic to every financial bubble and bust, is that you just don't know if it's a bubble. You don't know if it's a fundamental transformation or if it's a bubble. So one of the best examples of this is the dot-com bubble from the late 1990s. And the Fed chairman at the time, Alan Greenspan, he famously said,

is this irrational exuberance? Today, we might call it FOMO, fear of missing out. You can see all these internet companies. I mean, just imagine for the first time ever, you can buy something on the internet rather than going into a physical store. That must be transformative. And you can see why, therefore, if you were thinking, actually, maybe this is the next big thing you'd want to pile in. And that's exactly what builds up bubbles because internet shopping is not with us all the time. But those companies were just too early. So in the book, I write about how, you know, one of them, which sells clothes, something that we

do all the time now, buying on the internet. But they were creating websites with 3D images at a time when most homes didn't even have broadband. And so people couldn't actually access the website. But it's a great example as to why, you know, we will always have bubbles and busts. But the lessons that I try to draw out to my book is that they don't have to be great crashes. They don't have to be the Great Depression, the global financial crisis. You can hopefully learn some lessons from history to prevent it from ruining people's lives and creating a global meltdown. So, Linda, we've talked about one of the great crashes that you've worked on that people are familiar with, the dot-com.

But let's go back to 1929, which is still seen as the kind of, uh, crash. Talk me through, for those of us who've sort of forgotten to remember how significant it was, talk me through just exactly what happened. Yeah, I mean, the Great Crash of 1929 led to the 1930s Great Depression, which is still the singular, I would say, most devastating economic event, because it was global in terms of its impact, but it was the duration of the economic depression that still makes the 1929 Great Crash the crash that most people think about when you talk about the great crashes. So what happened in 1929 is also the basis for the framework that I propose, which is every crash has three phases. And this is how we can learn lessons from 1929 to apply to other crashes to prevent another meltdown like what happened

then. So the three phases, just very briefly, is there's always a buildup, exuberance or euphoria. You saw that in 1929. There were things like consumer electronics. You were able to fly commercially. You had automobiles. A huge sense of optimism that there were great investments that could be made in these things that were transforming consumers. And as with everything, it just became a bubble. And then when the bubble burst and the stock market crashed...

The stock market tripled in value, did it, in the space of a couple of years? That's wild. Extraordinary. Absolutely extraordinary. And this is the other lesson from all crashes, is that if you're going to pile in, go ahead, but only if you can afford it. And don't do it with too much debt. That is the undoing. And don't do it with too much debt.

That is the undoing. So the inevitable bust happened, and the bust was so severe that banks went under. So when you borrow money to invest, when lots of parts of the economy pile in, when the bubble bursts, valuations collapse, and therefore you ended up with massive bank runs, because this is also during a time when there just wasn't deposit insurance, you know, so this is, I put my money in the bank, I can get it out again, because I know I'm guaranteed I can pull my money out again, in this country is 85,000 pounds, and the United States is now $250,000. But that didn't exist in the 1930s. So therefore, people queued up to get their money out of banks, which of course then triggers banking collapses. So, you know, something like

a third of all banks in the United States collapsed. I'm giving you that as the example, because that leads into the second phase, which is now you're faced with a stock market that's collapsed. You've got bank runs all over the country. Banks are failing. How do you end this crisis? And the second phase is about credibility. The third phase is the aftermath that I'll cover in a moment. But what do I mean by resolving a crisis through credibility? In the 1930s, it was actually FDR who managed to end the acute phase of the crisis. And he did something that his predecessor could not do for about three years. So the depth of the decline in asset prices, what I'm describing, that happened around

1933. And FDR had just become president. Within days, one of his big tasks in his entry was, what do you do with a month-long bank run that doesn't seem to be ending? And how do you stop this depression from getting worse? So what did he do? Well, he talked to people. He shut down all the banks. He had a fireside chat where he told Americans in a radio broadcast, we are sorting out the banks. Only the sound ones will reopen. So believe me when I say it'll be safer to put your money in the bank than under your mattress. So then when he reopened the banks on Monday, I'm sure he was relieved when there were queues outside of the banks, but this time it was to deposit money and not to take money out. And that is an indication of his credibility. And I would also stress, backed up by the fact that his predecessor had laid the groundwork for having legislation that essentially put in deposit insurance. So people had the confidence that only sound banks reopened. But more than that, whether they were sure the bank was sound or not, the federal government was guaranteed they could get their savings out. And then he did the same with the stock market.

He shut that. When it reopened, things had stabilized. But that only went so far because the scale of the banking collapse, the amount of debt in the system, and then the mistakes made by policymakers. So the central bank, the Fed, they tightened credit too soon. The federal government cut back some of their public support, the combination of which led to a second recession that decade known as a recession within a depression. So 1937, 1938, there was a second dip. And that entire episode of the Great Depression lasted for about a decade. It didn't

really end until the start of World War II. And that's the aftermath. That is the final phase of every crash, which it depends on what kind of crash it is. If it involves a lot of debt and banks, it's likely to be terrible and the credibility of the policymaker involved. So FDR was able to turn the corner on the Great Crash, but the scale of it meant that the Great Depression still has this particular spot whenever you think about a devastating Great Crash. I mean, that was a crash that saw the market fall 89% full from its 1929 peak. And we've had financial economic historians on the podcast before saying,

societies can sort of survive a stock market crash, but if it becomes a financial crisis as a result of that crash, that's like a sort of heart attack for, well, the political and economic system of the country. And is that when you start to see, you know, new parties, extremism, it's when people lose their savings,

it's when banks go under. It affects our money on Main Street. That is potentially catastrophic. Yeah, absolutely. The great crashes are the ones that led to recessions. So an economic downturn that affects people's lives and their savings. So the example that I'll give you is the great crash of, which was a great crash, actually, in 1987. That was the worst one-day fall in the U.S. stock market in history up until the COVID-19 crashes. But it didn't lead to a recession. So the crash that we just discussed, the Great Crash in 1929, did. The dot-com bubble bursting led to a recession in the early 2000s.

So not every financial crisis results in an economic crisis. It's only the ones that do. I consider to be great crashes, and there's lots of them to choose from, but the 10 I choose had devastating impact on people's lives. And the worst financial crises are bank crashes, you know, a place you put your savings. It translates those savings into investment. That credit it offers helps you get a mortgage. It helps businesses take out loans, helps them invest. So when the banks go down, that leads to the worst economic outcomes. If you look across countries over a number of years, and banks normally only go under if there's too much debt in the system, they've overextended themselves.

And so I make this distinction between different kinds of crises, so stock markets, housing, banking, and then currencies. There was a massive currency crash in 1992 when the UK crashed out of the European exchange rate mechanism, which is a fixed exchange rate. And then the economy boomed after that. So this is where some of the differences are really worth making. Now, at this point, you might be wondering, Dan, what is the difference between a recession and a depression? Because I mentioned it leads to recessions. Most things don't lead to a depression. So apparently there's no technical definition. So a depression is anything which is significantly worse than a recession. Or the economist's definition, which is a recession is when your neighbor loses his job.

A depression is when you lose your job. Crikey. We talked a little bit about the dot-com crash in the very beginning of the 21st century. There was a huge excitement of the adoption of the internet. And actually, if you go back and look at these companies that were launching, they were all doing what companies are now doing, right? They were just 20 years too early. They were all like, it was video on demand.

It was retail. There were people selling content online. It was all pretty smart stuff, right? But the arteries, the infrastructure wasn't there to support it, I guess. So you can see why investors went crazy and the NASDAQ rose 800%. Extraordinary. Absolutely extraordinary. And you can see why when we say financial bubbles and crashes happen regularly, because you can argue that one difference is timing. Had this company started 10 years ago, they would have had the broadband infrastructure

I mentioned there, they're investing millions into websites that couldn't load, because do you remember dial-up modems? And they were creating 3D imagery, which, you know, most people didn't have broadband. And I think another feature of that is coming back to debt. When there's a wall of money, it means that you can't distinguish between the truly transformative companies and the companies that are just reaping massive increases when they list their shares, known as an IPO. So I detail a lot of companies that went to IPO, saw their stock price increase multiple times. And then within 18 months, the entire dot-com sector had imploded. It was the fastest implosion of a market still in history. And I'll give you an example. Actually, there's two good examples.

One is everybody wanted to be a dot-com millionaire because there was this wall of easy money. So the guys who founded Garden.com, they didn't actually know how to garden. And apparently they didn't even like gardening as a hobby, but they found a Garden.com. That was the thing to do. Everybody had a dot-com.

And then the other example, which I think is actually a story of how you can come out of crises pretty well, is the most famous implosion was pets.com. They had the best name for pets, you know, pet supply store. But, you know, they made fatal mistakes, like they would only charge you like $5 to ship across the United States. You could buy like 10 kilos of dog food, and they would charge you $5. You know, there are business model problems. And they spent millions on a sock puppet that appeared in the Super Bowl halftime show, that spot reserved for Beyonce and cost tons of money. So the money they

were getting from investors, they were spending on a sock puppet. So when they went under, the sock puppet, by the way, survived and went on to hawk insurance. He's actually, you can find him now in the Computer Science Museum in Silicon Valley. But the reason why this is a story of how you do well out of a crash is, yes, he was the 50% owner of pets.com. Jeff Bezos of Amazon.

No. Yes. At the time, he wanted to sell you everything and not just books. So he had invested in Pest.com, but he wasn't running it. The person running Pest.com is actually the person who now runs the secondhand luxury website, The RealReal, which is very popular amongst some segments of shoppers. So they do all sort of come out from it. But the Bezos story is interesting because for Amazon,

he just kept a really close eye on the bottom line and continued to just gain market share as others collapsed. So he ended up to be one of the biggest winners from the dot-com crash. You know, the sector had imploded. But if you have the right strategy, he not only survived, as we all know, he thrived. Amazon now is the biggest e-retailer by many measures. But it's very interesting, isn't it, that these people who start these businesses, they were, I mean, about half the companies that floated their shares went bust.

The NASDAQ went from that 800% rise down to 80%. So in 2002, it was at 80% of what it was in 1995, having been up at 800%. But those individuals, well, they're pretty much okay, because they founded new businesses, and they learned from the experience. But the rest of us lost everything. So it's kind of an interesting, interesting. I know, completely. And that's such a good point, because the NASDAQ didn't actually recover to its pre-bubble level until about 2014, 2015. So that's a decade and a half, where if you were just an investor with your pension in a tracker, so that's the equivalent of just putting your money in the entire index, you would have lost out a great deal. But especially

around tech companies, this idea of fail fast, fail often is still very much there. And, you know, we keep talking about the lessons we learn, the lessons we don't learn. One lesson that I've certainly observed is that in the last few years, the wall of money that's gone into tech companies led to another massive increase. So after about 2015, the tech companies, NASDAQ, started to boom again. And then the recent incredible increase in value collapsed around November of 2021. And most of the companies have started to recover. We're now in 2024. So you see that sort of big boom and then bust. But what's absolutely fascinating is just like in the early 2000s with the dot-com bubble, which was around 2000, is if you look at what's driving the stock market today, it's the magnificent seven.

So seven companies, tech companies, so Amazon in there, Nvidia, the chip company, they have driven the increase in the US blue chip index, the S&P 500. If you take these seven companies out, the rest of the index has been flat since this tech crash. And so that tells you, again, some win, but unfortunately, most of us who track the index don't. You listen to Dan Snow's history, we're talking about crashes. More coming up almost certainly. I'm Matt Lewis. And I'm Dr. Eleanor Yonaga. And in Gone Medieval, we get into the greatest mysteries.

The gobsmacking details and latest groundbreaking research. From the greatest millennium in human history. We're talking Vikings. Normans. Kings and popes. Who were rarely the best of friends. Murder. Rebellions.

And crusades. Find out who we really were. By subscribing to Gone Medieval from History Hit. Wherever you get your podcasts. How did we avoid, I mean, there was a mild recession after that dot-com bubble. Why did that not turn into a gigantic systemic bin fire and lead to banking failure and everything like that? So it was an unusually short and mild recession. It only lasted from March until November of that year. GDP shrank probably roughly about half a percent. So it's considered to be mild and it's considered to be short.

But if you think about the year, it was fairly extraordinary. I'm talking about March to November of 2001. So 9-11 actually happened during that time. And despite that, the economy came out of recession in about December for the United States. And the reasons for it were there was a lot of money that had piled into tech companies, but these were coming mostly from venture capitalists. They weren't coming from banks. So it's what we would call today private credit, where actually a lot of them took equity.

So they became the shareholders. So it was VC money. It wasn't the banks didn't have the kind of exposure. The IT sector is pervasive today, but then the IT sector was pretty contained to those companies that were in the e-commerce space or were providing software. So it wasn't widespread across the economy. So you didn't involve the banks. It wasn't a widespread type of crash. For instance, U.S. households used to own a lot of stocks. But these days, actually, most households are not the biggest investors. It's become institutions. So unlike, say, a housing crash like you saw in 2008, which affects across the country,

it was only a segment who were affected. So that combination of factors and the fact that 9-11, I think, really prompted, for instance, companies to offer special deals to buy cars, and interest rates were cut very low to try and support the economy, meant that it was a short and shallow recession, thankfully. Although, of course, unemployment did go up. And of course, there were those, you know, who are impacted, but it wasn't like 1929 that we've been describing. Well, let's talk about an event that did feel a little bit like 1929, 2007, 2008, but the great crash came 2008. People will have heard the reasons for this

rehearsed many times, but can you give us your hot take on kind of what went wrong? How much time do we have? Yeah. And I think it is a good one to touch on because I think for a lot of people, this is the great crash of their lifetimes. I would say millennials and Gen Z, they tell me they're the crisis generation, you know, started with the global financial crisis, and then they've had the cost of living crisis because of the Russian-Ukraine war. Oh, COVID-19. I mean, they've just been subject to crisis after crisis. And I think the 2008 crisis is worth drawing a parallel to the 1930s because it was actually the first systemic banking crisis for advanced economies since the 1930s, by which I mean, at one point, the banks looked like they could all go. And we

haven't seen that since the 1930s. So that is scary. It was scary, I think, for the policymakers at the time as well. So what caused it? A belief in that house prices could only ever go up and up. And you saw that not just in the United States, but over here, the side of the Atlantic and continental Europe as well. And then how do people buy houses? They take out a mortgage. So now you have debt as well. And because there was this belief that house prices could only ever go up and money was pretty cheap. Well, you had things like ninjas. You could take out a mortgage, even if you were a ninja, you had no income, job or assets, but hey, there's 100% mortgage. And so when the bubble burst, it was devastating because the banks were involved.

And so it led to the need to nationalize in this country. RBS, now NatWest, and Lloyds were both nationalized in the United States. Banks just literally were absorbed by other banks. So the second phase, credibility. And this is where a lot of the lessons are still being, I would say, delved into. So, you know, the U.S., even though it's the epicenter of the housing crash, their banks actually recovered the fastest. And so what do they do? Ben Bernanke, who was the Fed chairman at the time, is a student of the Great Depression.

So he learned the lessons that I outlined in the 1930s about acting quickly, acting credibly, and they recapitalized the banks. Then the U.S. got back on its feet. The aftermath was devastating. And it was devastating, really, for lots and lots of people because the recession, the Great Recession, which is actually what that recession is called. So you can see the parallel, 1930s Great Depression. And then after the global financial crisis, it was called the Great Recession. Absolutely, people were not just worried about their jobs. They were also worried about their homes because

of negative equity. They owed more on the house than the house was actually worth. So the aftermath, because it was a banking crash, and the fact that policymakers, for different reasons, made mistakes, didn't act as quickly as the Americans, meant that we all suffered pretty much a decade of the Great Recession. recession. So it is an episode which I do hope we have learned lessons from, and going forward, we can not repeat those mistakes of the past. Yeah, well, that's what's really interesting is, despite us at the beginning laughing about how we keep doing this, it does strike me that there's two areas which we can learn that you've laid out. One is credibility in the immediate aftermath. So Ben Bernanke was a student of the Great Depression. He made decisions. I remember the discourse at the time, clever people like you were on the news a lot. We were talking about lessons learned from the past and Obama and Gordon Brown seemed to be listening to those and policymakers listening to those. So that's one important thing. There's things that you can do in the immediate aftermath. But secondly, it's like regulation to stop

happening in the first place. And this has been a obviously very very contested on both sides of the Atlantic do you feel that those regulatory efforts will be successful is capitalism a project that we can refine and if not perfect kind of shave off some of its darker possibilities and probabilities if we get the regulation right so So I'm quite a hopeful person, quite an optimistic person, despite being an economist and economics has been described as the dismal science. But I'm also a firm believer in Mark Twain, who reportedly said, history doesn't repeat itself, but it does rhyme. So one of the problems with regulation is that you are closing the stable doors after the horses have bolted. You're always legislating and regulating for what happened last time. So this is a massive challenge because what I've discovered

is there are some things that regulation can do, and they're centered around the banking system, because regardless of how different crashes are, they do all seem to come down to making sure that the banks have sufficient amounts of money, do not lend too much, and are well regulated. And I think that is something that since 2008, I'm hopeful, where we really did dissect which crises are the worst. I think between 1930s and, you know, the aftermath of 2008, I think putting banks in focus is reassuring. But I would also stress that having an awareness that the next crisis is different is hugely important because credibility is what gives people and financial markets confidence, which is what you need when you are in a capitalist system with what's known as a fractional banking system. So by that, I mean, do you remember Northern Rock

in 2007, when there was a queue outside of its doors to withdraw money? Now, we all know we had deposit insurance at the time. It wasn't that high, but there was deposit insurance. But if everybody queues up to get their money out, Northern Rock would have collapsed. So confidence is hugely important. Oh, by the way, so if you do see somebody queuing up outside a bank to get their money out, it's perfectly rational to join that queue because there's not enough money to go around immediately. But my point is, it is about confidence and therefore the credibility of the policymakers. So the example that I'll give you, a recent one, which I think was really quite astounding, was actually when the euro crisis turned the corner.

So the euro crisis fell in what I call the slipstream of the 2008 global financial crisis because European banks were battered by this. And then the euro itself came under pressure because financial markets questioned whether the euro itself came under pressure because financial markets questioned whether the euro would survive. So this crisis started with Greece in 2010, and then it just kept going. So it wasn't until July of 2012 that the euro crisis turned a corner. And it happened because of a speech. This is the eve of the London Olympics.

Cast your mind back, Dan, to that fantastic moment. And thanks, cast your mind back, Dan, to that fantastic moment. So there was a global investment summit on the eve of the opening ceremony to get all these investors in to invest in the UK. So this is at Lancaster House in central London. I was at Bloomberg News, so I was a TV correspondent standing outside trying to figure out what was going on inside. And Mario Draghi, the European Central Bank president, so he is the central banker for the euro area, he gave a speech and he said, all of you misunderstand the euro, questioning its future.

Believe me when I say, we will do whatever it takes to safeguard the future of the euro. His whatever-it-takes speech, you could literally see financial markets begin to price in, close what we call close the spread between safe bonds and peripheral government bonds like Greece. It turned the corner of the euro crisis. So I'm standing there. I can see financial markets reacting in real time. It was extraordinary. Timothy Geithner, the US Treasury Secretary, then goes to Frankfurt afterwards and goes, tell me about this speech. That's incredible. How did you do it? What was behind it? It turned out Draghi ad-libbed that line. It wasn't in his speech. However, he understood

it was about confidence. And he then had the backing of Angela Merkel and others who realized that the euro crisis, the solution was political as much as it was economic. So that's an example of credibility. Not unlike the fireside chats of Roosevelt. Draghi said, listen, guys, we're going to make the euro work. Whatever it takes, it's going to be fine. And therefore, investors listen. It's fascinating, isn't it?

Yeah, that's why I use this example. Absolutely fascinating. I told you the spreads, which is, again, how much premium investors want to put their money into Eurozone countries they consider to be weak versus safe assets like US Treasuries or the German Bonds. That all happened without the ECB doing anything different in terms of policy. What financial markets wanted was for the ECB to print money and inject it, like what the Bank of England did and what the Fed did. So they created something called a conditional OMT,

which is our monetary transactions. Don't get me started about economic acronyms. So he had this kind of policy eventually there, but it was never used. It was his speech that instilled the confidence that turned the corner. And then eventually the euro crisis fortunately did end a few years later, although Greece really suffered for many years afterwards. But some of the other countries that have been rescued, like Portugal, like Spain, its banking system, like Ireland, they all did bounce back after that.

So on this credibility issue, let's talk about where the next potential crash could come from, which is China. And it's interesting in it with a government. get into the greatest mysteries, the gobsmacking details and latest groundbreaking research from the greatest millennium in human history. We're talking Vikings, Normans, Kings and Popes, who were rarely the best of friends, murder, rebellions and crusades. Find out who we really were by subscribing to Gone Medieval from History Hit, wherever you get your podcasts. wherever you get your podcasts. That likes to celebrate itself as being a sort of pool of stability compared to the anarchic world of the West when people storm Congress and there's hung parliaments and rapid turnover in prime ministers in Britain, for example.

You know, it looks superficially quite anarchic. Is there something about credibility when it comes to China and a government which does not submit itself to the same scrutiny as a democratic government? I think that's exactly the issue. So I write about China as the next crash. I should tell you that when I was starting out in economics, I was given a piece of advice. You either predict the event or the timing, but never both. So I don't know when it will happen. But quite unfortunately, China has a huge amount of debt in its property sector. So the reason why it could be the next great crash, whenever it is, is because one is overdue for one. It's the only major economy that hasn't had a crash. And in some ways, it's not surprising because China well, under central planning before 1979, pretty much

everything. And so it now has enough of a market that you could see property prices. I mean, it's more expensive to live in a flat in Beijing than it is to live in Manhattan. It's not just hugely inflated in terms of property prices. There's also a massive economic link. So if you count property and the wider related services, it's 29% of national output. Just imagine your property sectors, 29% of national output. That's absolutely huge. And there's a huge amount of debt associated with it. So property prices have been coming down in China.

We are seeing property companies struggle. The biggest indebted real estate developer in the world, Evergrande, which is only the second biggest in China, couldn't really pay its debts. And you're beginning to see some of this really impact financial institutions as well, known as trusts in China. So the bubble could just deflate, or you could have a crash on the back of it. And if the Chinese authorities don't act credibly, for some reasons we just discussed, then I think they could be contending with an aftermath, which is very, very challenging. So some of the things they should be doing are one,

making sure that the banks are properly capitalized. It's too late about the bubble. The bubble's already there. So are they requiring banks to have more money, more buffer? And that's a challenge in China because most of the banks are state-owned and they don't necessarily do what's called mark-to-market. So we don't really know what's on their balance sheets. And then importantly, in all of these cases, government needs to step in to help people when you do have a crash, and then to make sure the recession doesn't get worse. So the Chinese state doesn't actually provide a lot for people. And that is actually something that would be important if they were the next country with a crash. And then finally,

the impact globally would be huge because of the world's second biggest economy. But more for developing countries, I think this will be a immediate worry, which is China's the biggest lender in the world, bigger than the World Bank, who we normally think of as the biggest lender in the world to developing countries. China actually lends more than the World Bank. So it could trigger an emerging markets crisis, which is something we've also seen repeated regularly, unfortunately, over the last few decades. Well, for an optimist, if you're optimistic, I don't want to meet anyone who's sounding pessimistic about this. And let's finish up with that issue of credibility,

that where we started. Does President Xi have the ability to do those fireside chats that Roosevelt did, or that Draghihi did or that Biden did last year with Silicon Valley Bank? Like, do people in China trust? As you say, they don't know what the bank's balance sheets look like. There's no scrutiny. So if he says, don't worry, it's fine, just go to your bank in the morning and deposit all your cash, will the Chinese people do that? Yeah, to me, that is the key question because we know so little about the banking sector. In the case of a crisis, because the state owns the banks, the assumption is that people think their money is safe. But just in case that assumption is wrong, China also has capital controls,

which means that people can't take their money out of the country easily. Some people can, but they can't easily take their money out of the country. So this is my worry that it'll be a great crash. Remember, the definition of a great crash is it leads to a recession and it involves the banks. So both of these things, I think, are quite possible. So that leads to the question, what would a Chinese crash look like? Well, actually, it probably looks like Japan, because that's the closest in terms of having most of the debt being domestically held, which it is. Japan didn't have capital controls when its real estate sector imploded in the early 1980s. China does, which prevents people from moving money out of the country. Japan didn't have capital controls, but for some reason, Japanese people left their money out of the country. Japan didn't have capital controls,

but for some reason, Japanese people left their money in Japan. But the reason I'm drawing this parallel is you ask whether she could be as credible as FDR or Draghi or really any of the leaders that seem to have turned the corner. Japan didn't have a credible policymaker at the helm. And in fact, when its real estate bubble crashed in the early 1980s, it was the biggest housing crash in history up until that point. And the IMF, International Monetary Fund, which studies lots of financial crises, they say the first eight

months of a crash are the most important to get your ducks in order and to act credibly. Japan took eight years. And therefore, not only was their real estate crash devastating, they had to reorder the banks. It then led to three decades of lost growth, known as the lost decades. And Japan's only recently come out of that. We're beginning to see inflation taking hold again and the stock market recover. So the Japanese leaders at that time didn't have the credibility for lots of reasons. They were not on top of it, even though, as I say, there were lots of lessons from history there. And I just worry that's exactly what will happen in China under Xi Jinping, in which case you would look to Japan and say, stagnant growth, lost decades of

opportunity. This is pretty devastating. Do you invest in the stock market? I do. I was about to say, you know, your comment about me being optimistic. Remember, the bar is low. I'm an economist. For an economist, I'm optimistic. Knowing what I know about finance. This is actually my second economic history book. So I also know the first book was about growth. And so I know about growth. I know about crashes. And I also know what I don't know. And so I actually, I do invest in the stock market, but I only invest in the companies where I sit on the board or have stock on the board because I actually know what they do and I know what their balance sheets look like. So that just tells you I'm really cautious.

Okay, well, that's quite a flex. That's not really retail investor advice there, Linda. Oh, no, no. I should have said that from the beginning, Dan. Nothing I say should be relied upon for investment advice. I'm an academic. I love that. I'm only going to invest in companies that I sit on the board of as well.

I think that's a very good idea. Thank you very much coming on the podcast and talking all about it. The new book is called? The Great Crashes, Lessons from Global Meltdowns and How to Prevent Them. Thank you very much, Linda. That was fabulous. Oh, thank you.

What a pleasure. Thank you so much for having me. you