The Logic of Pottersville

A person in a face mask walks through an almost empty Times Square in New York City as the coronavirus outbreak continues, March 18, 2020. (Andrew Kelly/Reuters)
It is a wonderful life.

In director Frank Capra’s 1946 holiday classic movie It’s a Wonderful Life, an initial bank panic sweeps the small town of Bedford Falls. Small passbook account holders rush to George Bailey’s family-owned Bailey Building and Loan to demand the right to cash out all of their deposits — a sudden run that would destroy the lending cooperative and its ability to issue mortgages or preserve the savings accounts of the small town.

The villain of the story, Henry F. Potter, who is a cash-laden, though miserly rival banker, played brilliantly by Lionel Barrymore, offers to buy up the depositors’ shares in the Building and Loan — but at a steep 50 percent discount.

Bailey (Jimmy Stewart) tries to explain to his panicked cooperative depositors the logic of their frenzy, with the exclamation, “Potter isn’t selling. Potter’s buying! And why? Because we’re panicky, and he’s not.”

Capra’s post–Depression era movie, even in its black-and-white morality, reminds us that, in crisis, the majority has limited liquidity and cash. And sooner rather than later they must sell assets — property, stocks, shares, and household goods — to operate their businesses or keep their homes until things pick up. In a real depression, those with the least cash fail first and in great numbers.

And the minority who do have cash are always willing to buy, even in a depression, albeit at their price, which is usually steeply discounted. Panic, not logic, eventually takes over the collective mind, as we now see with the downward spiral of the current stock market and the hoarding of goods otherwise in plentiful supply.

The stock market descends in part because sellers need liquidity and think they will have less of it tomorrow, while cagey buyers believe they will sell for even less in 24 hours — and stock managers who sell more than buy conclude that there is not yet enough data or conjecture to convince the terrified public that the virus is either manageable or will turn out to be more analogous to 2009 rather than 1918.

Remembering the Rush to the Bottom

On a small scale, as I wrote in Fields without Dreams, I lived through “the Great Raisin Crash” of 1983. In this crisis, the price of raisins per ton paid out from Sun-Maid’s cooperative pool dived in only a few months, from over $1,400 a ton to a little over $400; break-even for most was somewhere between $900 and $700 a ton.

The panic was an abrupt, if belated, reaction to the 1982–83 recession, the tight-money and high-interest policies of the Fed that broke soaring inflation, the clumsy role of an ossified Depression-era federal “Raisin Administrative Committee” that regulated all sales of farmers’ harvests, and the proto–European Union plan to subsidize European and mostly Greek raisin production on the international market.

Sun-Maid went “broke.” Or rather, in the euphemisms of depression, its management “recapitalized” the co-op, by expropriating the capital contributions of its members in the revolving fund. The CEO shrugged that, in the logic of cooperatives, members had in years past been “overpaid” by themselves, and now they simply had to forfeit millions of dollars owed to them by “their” own co-op. Half the membership quit and were never paid what in the real world was contractually owed to them.

Raisin vineyards fell in price in just a few months from $15,000 an acre to $3,500. Once vaunted varieties of grapes for raisins, such as Thompson seedless, were soon dubbed “Thompson worthless.” Within a year, farmers were pruning off canes, producing no crops, and watering and cultivating just enough to keep their vines alive, and thus diminishing in value capital investments.

Suddenly it was more valuable to have open ground that could be left fallow than to maintain expensive permanent vineyards that could not so easily be idled. In a panic cycle, to farm was to lose more money, and to do nothing was to lose less.

Idiocy ensued from “experts” who assured us that the new globalization was “good for you in the long run” given that subsidized foreign sales that gobbled up our lost market share would make insolvent American growers “more competitive” and “sort out the wheat from the chaff” and “bankrupt Europe through costly subsidies” and ensure “value to the consumer” — all in the abstract arguable for tomorrow, all in the concrete present irrelevant news for the bankrupt.

The vast majority of small farmers who owed money and had a mortgage, and no savings or bank credit line, went broke — at first aghast that anyone would offer them an insulting and measly $8,000–$7,000 an acre for productive marquee vineyards, only within months to sell at $3,500 and be happy it was not $3,000. The logic of the Dutch tulip boom and bust soon spread. In some sense, four decades later, the raisin industry for a variety of outside and self-inflicted reasons never fully recovered.

Some of the today’s small agrarian fortunes in central California were made in the early 1980s by those who either had capital at the time or were audacious enough to risk buying foreclosed properties (the panic soon spread to orchards and other crops) that would likely not show a profit for years. Now such farmland sells at $30,000 an acre and up, depending on the crop. Because the raisin crash affected fewer than 10,000 family farmers, no one noticed much that most were wiped out. Although they were not infected with a virus, a few men in our vicinity killed themselves, a number of farmers and their spouses developed severe physical and mental health issues and died, and families split up and broke apart (including my own).

We wish to avoid such cycles of panic. Panic is not, as the uninitiated write, good. No, it kills.

Reawakening a Comatose Patient

The longer businesses and employees cannot create or receive income (in this case, by de facto government edict), the closer we are to an economic meltdown. The very few who have cash and are willing to risk short-term operational peril for long-term investment profits will always wait until the next day to buy assets, property, and stocks from those who right now must make payrolls, pay mortgages, meet interest payments — and to do so must sell their assets sooner rather than later, at a bad price today to avoid a worse price tomorrow. It is not a morality issue as much as common sense, moral hazard, and self-interest.

The downward spiral soon takes on a psychological logic of its own and can be arrested only by data and proof that it is an unfounded panic and that the cause of the hysteria is either nonexistent, no longer germane, or manageable.

The result on a grand national scale is both economic stagnation and a gradual descent into Pottersville. Don’t believe that even salaried elite employees at institutions, universities, nonprofits, etc., will be exempt, given that dividend income from endowments is now in question, assets are declining in value, and philanthropists logically grow scarce.

In periods of panic and plagues, there are no good choices, just bad and worse ones — but we have choices, nonetheless. For now, to arrest the spread of the virus, we’ve adopted an understandable sort of blunderbuss chemotherapy strategy. We have risked sickening the entire economy by shut-ins, shelterings, lockdowns, quarantines, social distancing — as the necessary medicine to deny new hosts to the metastasizing hopping and skipping coronavirus. Chemotherapy, to be frank, can often work but nonetheless is designed to kill the cancer weeks or even days before it kills the sickening patient, and its side effects can linger for years. So too with our present antiviral economic policy.

Very soon — two or three weeks perhaps, at the most — the U.S. is going to have to resume work while retaining prophylactic policies that do not sicken the already ailing and hopefully recovering economy. Both the virus and a looming severe recession are real.

How should we envision, then, our way out of this current crisis?

Understanding the Invisible Enemy

With millions of new tests, we should be able to identify positive cases and collective hot spots, and within two weeks be able to emulate past public policies that extinguished tuberculosis and measles. Or at least we will be able to curtail the spread of such infections by tracking down contacts and sources of infection and quarantining and isolating them, while restarting the economy.

Hopefully, antibody tests could become available cheaply and in numbers. They could determine those who have recovered with assumed immunity, and who therefore might reenter the most hazardous spots in the workforce. Such data might help to obtain a more realistic number of actual cases of infection and the lethality rate of the virus, as well as reminding us that thousands unknowingly may have already had the virus and either attributed it to the flu or discounted its milder symptoms. Doctors could make better choices if they knew whether respiratory patients had already had the coronavirus.

We still are witnessing the number of U.S. cases increase dramatically while the lethality rate nonetheless either stays static or slightly declines daily — for now. This was to be expected, probably because the known positive cases hardly accounted for all those Americans infected, while we have been more or less able to accurately confirm the number of deaths caused by COVID-19.

Moreover, those who test positive (in truth, a small minority of those feeling ill or exposed who received a test) probably represent only a portion of those who go unreported as infected, recovered, or who were oblivious that their milder symptoms were in fact caused by the coronavirus and not allergies, a cold, or the flu. So testing will probably reveal that the actual denominator number of all cases is much larger than in past weeks — and it will probably be larger than even testing can approximate. Thus, given that, so far, there seem to be few serious and permanent side effects among the recovered, the death rate is the key, and it will only continue to decline, and one hopes to levels associated with a bad flu year.

If we can get hard data out and the lethality rates descend to near flu levels, and once Americans see that well over 99 percent of the population survives the virus, then they will have confidence in the return of the economy, buy and sell stocks on the basis of innate worth and return rather than panicked speculation, and again rehire, run, and expand their businesses.

In sum, with the use of new treatment protocols and medicines, wider testing, and the approaching summer, we can get the incidence of infection down to a level that allows most people to work and keep the economy alive. Otherwise, make no mistake, if the present economic somnolence continues, many Americans are going to sicken and die — but from the economic virus in reaction to the coronavirus.

Finally, we must be careful that we don’t reach the point of no return on the horizon after which the psychosis of panic and depression will be so entrenched that we will suffer devastating economic recession or worse no matter what. As that date of decision nears, we should be ready to ramp the economy back up, incrementally at first, to be sure, as we go full-bore with testing and while we make what drugs we think are useful widely available at local ERs along with ventilators. We should also prepare for the naysayers and pessimists — mostly those most insulated from the economic shutdown — to cry “denialist” and then accuse officials of “murder” when the case load and deaths from the virus do not immediately disappear. We can confirm who dies from the virus, not always the greater number who will likely die in a depression.

Then efforts will focus on getting a vaccination into wide-scale tests by autumn. A rebounding economy will be stimulated by cheap energy prices, historically low interest rates, and a national consensus that multitrillion-dollar industries in pharmaceuticals, medical supplies, strategic materials, and defense-related technologies are being incentivized and goaded into returning to the U.S.

The virus in terribly ironic fashion may help “woke” Americans understand that they were hostage to insidious Chinese pressures in ways they never imagined. Trump is trying to square that circle by noting that China is culpable for the virus, while he speaks softly of President Xi, apparently on the assumption that it is stupid in crisis and panic to trash the supplier of vital pharmaceuticals and medical supplies — until you have a certain domestic replacement.

The future is bright. But in the panicky darkness of today, we must not lose our way and end up wandering in endless circles before arriving at Pottersville.

NRO contributor Victor Davis Hanson is the Martin and Illie Anderson Senior Fellow at the Hoover Institution and the author, most recently, of The Case for Trump.

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