The Panics of 1893 and 1907 were succeeded by the slump of 1920-21, which was succeeded by the Depression of 1929-32, which was eventually succeeded by the recessions of 1957-58 and later.

Each term described the same phenomenon; each was used in the hope that this time, things wouldn’t be as bad as last time, that some new agency, the Federal Reserve, Keynesian government spending or postwar full employment, would make the THING less dreadful.

This tendency still continues, with the manic relief Wednesday that second quarter gross domestic product was up 0.2 percent and therefore, by the definition of two successive quarters of falling GDP, the United States wasn’t going to have a recession.

Wrong. It’s quite true that the third quarter, containing $40 billion of tax rebates, is unlikely to see a shrinking GDP figure, but the fourth quarter, without tax rebates, almost certainly will and it seems more than likely that the GDP figures in the first quarter of 2002 will be smaller.

The revised THING terminology, however, as well as making the THING sound shallower, also removes any suggestion that it might be over quickly. The nice thing about a Panic is that it sounds unlikely to last long, and indeed often didn’t; thanks to J.P.Morgan, the Panic of 1907 was over in about six weeks. Depressions and recessions, on the other hand, sound as if they can last a decade or so, and in the past (1929-41, to some extent 1973-82, and in Japan 1990-2001) they have done.

The best example of Panic management, in retrospect, was 1893. The Panic of 1893, at its onset, was a very nasty affair indeed; it involved the majority of the railroad system of the United States going into bankruptcy simultaneously, and then violent strikes, a march on Washington and rocketing unemployment.

However, policymakers of 1893 had one enormous advantage over policymakers of 1929-32 or today; the United States was on the Gold Standard with no Federal Reserve System. Consequently, there was no question of Keynesian deficit spending and an increase in the public sector (which in any case had little appeal to President Grover Cleveland.) Nor was there any question of slashing short term interest rates, to prop up the economy and delay the onset of recession. In either case, gold would have flowed out of the United States like quicksilver, and the country would have fallen into default.

In practice, by early 1895, that’s what happened anyway; U.S. gold reserves fell below $100 million, and the president was compelled, very reluctantly, to call in J.P. Morgan. Morgan saved the U.S. credit, underwriting a loan of $40 million in gold from Europe, at the cost, of course, of still more austerity in the public sector.

The result was public outrage, expressed most eloquently by William Jennings Bryan in his famous “Cross of Gold” speech at the 1896 Democratic Convention. However, in the event, McKinley won the 1896 election fairly handily on a platform of the Gold Standard and a “Full Dinner Pail” and by the following year, the U.S. economy was humming along again. Total time, peak to recovery: less than four years. The American people suffered grievously during that period, but the interruption to their life pattern was nothing compared to the decade of misery that was the 1930s.

There is a type of transaction, whether a share issue or a merger, that is common during the latter phases of a bull market. It’s known as an “Investment Bankers’ Deal.” It’s not new, Jay Gould’s deals were generally of this type, there were many such deals in the first merger boom of 1898-1902, and the Insull empire and the Goldman Sachs Investment Trust of the 1920’s were other examples. Needless to say both the merger and initial-public-offering types, as well as a new divestiture type (think Lucent) have been very common in the last five years.

In an Investment Bankers’ Deal, the investment banker gets paid particularly generous fees, the company’s top management gets particularly generous payoffs, these days by means of stock options — and the company then goes bankrupt or near bankrupt, reducing the value of the investors’ stake close to zero, and resulting in tens of thousands of layoffs.

The late 1990s was not only a period rich in “Investment Bankers’ Deals,” it was an Investment Bankers’ Economy. This is not surprising, since it originally took shape under the tutelage of a first class investment banker, former Treasury Secretary Robert Rubin.

In the Investment Bankers’ Economy, earnings, or even the near prospect of earnings, are no longer necessary to raise money through a stock issue; instead “new metrics” allow any valuation, however inflated, to be justified.

Management remuneration is no longer related to skill, or effort, but simply to successful manipulation of the stock price.

Earnings are no longer examined according to generally accepted accounting principles; instead, “pro forma” earnings are displayed and analyzed, allowing all sorts of inconvenient realities to be slipped “below the line” and ignored.

Dividends are no longer considered as an integral part of the return on common stock; they are minimized or even eliminated, because they reduce the value of management’s stock options.

Companies no longer need to fund workers’ pensions, because the rising stock market makes pension schemes “overfunded” — this allows corporate earnings to be further inflated, with consequent benefit to management stock options.

Wall Street analysts no longer attempt to win business by giving good advice to their institutional clients; instead they tout the stocks that the corporate finance department is peddling, or in which the trading desk has a “long” position.

Prolonged and vigorous expansion of the money supply no longer causes inflation, because the “productivity miracle” of the “new economy” allows inflation to be concentrated entirely in stock prices and later in housing prices.

Mass immigration of unskilled labor does not cause unemployment, because the “productivity miracle” of the “new economy” solves the unemployment problem “forever.”

Investors can expect stock prices to go on rising ad infinitum because the “productivity miracle” of the “new economy” has produced a “new paradigm” under which stocks are no longer riskier than bonds.

As in an Investment Bankers’ Deal, in the Investment Bankers’ Economy, top investment bankers did extraordinarily well, probably better than at any time since the building of the Great Pyramid.

Corporate management did extraordinarily well, both in the New Economy, where 28-year-old billionaires — on paper — were created in profusion, and even in the Old Economy, where top management had to be content with tens of millions of dollars, or maybe the low hundreds. Democrats, acolytes of the Great Investment Banker and his infinitely persuasive, soothing master, did best of course, but even Republicans benefited. Dick Cheney, a good manager, and Paul O’Neill, a mediocre one, both made levels of remuneration through stock options that their bureaucratic predecessors in Halliburton and Alcoa would only have dreamed of.

Of course, it had to come to an end, and the price now has to be paid. Investors in the New Economy have already had their shirts removed; it is now Old Economy investors’ turn. Layoffs have been profuse, but will get a lot more profuse. Investment bankers and corporate top management are also being laid off, but in their case there is always the golden handshake, the last grant of stock options, and retirement to their lives of wealth so richly undeserved.

In an ideal world, a world in which gold, and not Greenspan, determined the U.S. money supply, we would have had a modest Panic in about 1997, as gold flowed out of the economy through the mechanism of the trade deficit, and we would now be fully in economic recovery.

In the world we live in, it is now time for a much bigger Panic, possibly in October, the traditional month for Panics. During the Panic, a huge percentage of U.S. wealth will be wiped out by crashing stock prices. Further declines in wealth will occur through declining East and West coast house prices, and through default on consumer debt that is now impossible to carry. This wealth loss will cause the Panic to be followed by a THING.

Why now? Because M3 money supply, which expanded at 14 percent per annum from November 2000 to late June 2001, as Greenspan cut interest rates, has suddenly stopped expanding. In the nine weeks from June 18 to Aug. 20, M3 money supply expanded at an annual rate of just 0.41 percent. It’s not that Greenspan’s been pursuing tight money; there have been two further Fed interest rate cuts. But in a THING, money supply expansion becomes impossible, because there is very little money demand.

Greenspan, by expanding the money supply still more rapidly than in the 90s (until he could no longer do so), and George W. Bush, by producing a tax cut timed to take place just BEFORE the Panic hits, have postponed the reckoning, but not by much, and they have removed two weapons which might have been used to deal with the THING after it has arrived in full force. All they have achieved, indeed, is to muddy the question of who is to blame for the THING’s depredations. The first revisionist book, extolling the glories of the 90s economy, has already appeared; there will be others.

The crash in asset values, of course is entirely healthy, given the circumstances. “Liquidate labor, liquidate stocks, liquidate farmers” said perhaps the greatest of Treasury secretaries, Andrew Mellon (he ensured that this was done in 1921-22, but was prevented by President Herbert Hoover from repeating the treatment 10 years later.)

That is not, however, the policy likely to be followed by the Bush administration. Instead of Mellon, Bush has as Treasury secretary the colorless O’Neill, increasingly obviously out of his depth. Instead of Reagan’s Malcolm Baldridge, Bush has as Commerce secretary his old buddy Don Evans, equally so.

If administration officials played Cleveland, and treated the THING as a Panic, they would fire Greenspan, fix the dollar to gold (issuing gold $100 pieces to the populace at large to prevent unfixing), cut government spending to the bone and await recovery. In those circumstances, just as the Panic of 1893 had lifted by 1897, so too the Panic of 2001 might have lifted by the 2004 election (it’s tight, though, even then — the nine months’ delay brought about by Greenspan and the tax cut may be politically as costly as it has been economically.)

In practice, the Bush administration, combined with an increasingly recalcitrant Democrat-controlled Senate (and, after 2002, House) will do what Hoover, Franklin D. Roosevelt and the 1990s Japanese did. They will expand money supply, probably unsuccessfully. They will increase government spending, sucking resources away from the private sector. And, every now and then, they will raise taxes to try to balance the budget.

The result will be a repeat of the 1930s, which will continue either until 2008 or more likely 2012, when an American Junichiro Koizumi is elected, who pursues better policies, or, alternatively until World War III causes a revival of the U.S. economy — for the 15 minutes before nuclear holocaust destroys human civilization.

And the 2004 election? Maybe the administration will leave enough doubt in the voters minds to persuade them that the Clinton administration, and its Investment Bankers’ Economy, does bear some of the responsibility for the THING that followed. In that case, the voters’ path will be clear — a third party candidate, unsullied by the quarrels of the last few years, but with a clear program of nativism (send immigrants home to cut unemployment), protectionism (keep out foreign rubbish) and policies ostentatiously designed to benefit the American worker. Not Cleveland, in other words, but Millard Fillmore, in his 1856 incarnation as a Know-Nothing.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International.