Shmita and the Stock Market

Will the stock market crash at the end of this Jewish year?

A book that I picked off the shelf last month in Hudson’s News at Union Station in Washington DC is rather confident that it will.

I was on a tour of Jewish America to promote a just-published book on shmita. From Shuls to JCCs, Federations to urban farms, I met a wide range of knowledge levels and often had to begin by explaining the abc of shmita, the biblical seven-year agriculture cycle.

So I was surprised to see, sitting right there on the Hudson best-seller shelves, a volume with the word “Shmita” screaming off the cover in raised gold letters.

I’m afraid I succumbed to a momentary spasm of writer-envy. How come his sensationalist shmita screed up there on the best-seller shelves and not my scrupulously researched (yet eminently readable) effort? (It’s a translation with an introduction of part of Rav Kook’s great book on Shmita, Shabbat Ha’aretz, since you are kind enough to ask.)

The book, (when I could bring myself to open it) turned out to be by a Jewish-born Messianic Christian preacher from New Jersey named Jonathan Cahan. He argues that shmita is the key to understanding the mysterious geo-political, economic and financial gyrations of our time. Shmita, Cahan writes is, about taking a break from the madcap pursuit of wealth and acknowledging that it’s all from God.

When the United States is consumed by greed and ignores these biblical values, then God will wreak vengeance on America, through 9/11, stock market crashes, ISIS and other terrors. For the author, the United States of America is God’s true chosen nation with which God made a new covenant. The US has inherited the Biblical blessings and curses.

Leaving aside Cahan’s highly dubious theology, (since when did George Washington or the other Founding Fathers have a direct line to the divine?) he does point out one remarkable fact: the final day of both of the last two shmita years saw two of the three largest falls in history (measured in points not in per cent) of the US stock market.

On 29^th Ellul, 5768, 29^th September 2008, the Dow Jones Index fell 777.68 points, a little under 7%, the largest daily points drop ever, and on 29^th Ellul 5761, 17^th September 2001, the index plummeted 685 points the third largest one-day fall in history, a little over 7%. (You can check the numbers and dates here, here and here.) Both dates were the eve of Rosh Hashanah on the final day of a shmita year.

Now, I’m nowhere near as confident as Mr. Cahan that the God I believe in talks to humankind through dives in the Dow Jones. (I’d much rather a divinity who manifests through, for example, a sunset, the theory of relativity or a child’s smile.) But I do believe in a God who communicates with us through the Torah. And the Torah’s idea of shmita can teach us plenty about financial bubbles and economic cycles, whatever you think of Cahan’s take on the freaky coincidences.

Economic theory and policy struggle to understand and effectively address the business cycle. Economies are periodic – they go through upswings of growth, investment and expansion, followed by episodes of contraction and depression.

The stock market follows and amplifies the cycle. As business picks up, people invest, share prices rise, people get excited and invest more, still more investors pile into the market, as everyone seems to me making loads of money so effortlessly; there’s exhuberance and euphoria until a few smart alicks figure that assets are inflated way beyond their real values; euphoria gives way to doubt to anxiety to full blown panic; people runs for the hills, the cycle screeches into reverse, fortunes are lost and the whole thing starts all over again.

The length of these cycles is reliably between six and nine years.

We know that this is true, at least in theory. But in practice, most of us, including eminent economists, forget. This time, everyone says, it will different. There is always some rational, well-grounded economic reason why the current boom whether in South Sea stocks, internet companies or residential real estate will go on for ever and ever. But it never does. There is also a reckoning. And the deeper the illusions, the worse is the reckoning when it comes.

Moreover, the amplitude between the peaks and troughs is growing, meaning that the destructive power of the crashes is also growing. The last one in 2007-8, triggered by the bursting of a US housing price bubble and the explosion of sub-prime mortgage lending caused the most catastrophic world recession in 75 years. Life savings and pensions were decimated, homes were lost while homelessness, poverty and misery grew.

The reason why this never-ending story takes economists by surprise time and again is that it’s an article of faith for most of them that human beings are rational. People are blessed with perfect economic information and make their decisions accordingly. Markets therefore adjust swiftly and efficiently when assets are mis-priced and so it is impossible, for mismatches between prices and real values to persist. People simply cannot be wrong for long.

One sharp observer who realized that this was not how things worked in the real world was the British economist John Maynard Keynes. Keynes, who was also a savvy investor, wrote in his “General Theory of Employment, Interest and Money” (Chapter 12):

Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. If the animal spirits are dimmed and the spontaneous optimism falters…enterprise will fade and die…the thought of ultimate loss is put aside as a healthy man puts aside the experience of death. This means, unfortunately that slumps and depressions are exaggerated in degree.

Or as Keynes himself expressed it more pithily, “markets can stay irrational for longer than you can stay solvent.”

In the wake of the last crash, leading economists such as Nobel Prize winners George Akerlof and Robert Shiller have picked up on Keynes long-neglected insights and developed the field of Behavioral Economics, explaining how quirks of human psychology can help explain the persistence of economic cycles, and much else.

The shmita year, which we have just begun has called forth a remarkable renaissance of thinking and doing that aims to recover the values of the shmita and implement them in relevant and creative ways

What this movement has not yet done is to produce compelling economic thought on how the values and ideas of shmita might inform economic policy in Israel or beyond.

Many would say that this is because it can’t. How can the Torah’s idealistic instruction to cease agricultural labor for one year every seven apply to a 24/7 post-industrial reality?

I believe that nevertheless it can.

Introducing shmita, the Torah suggests that there is a seven year cycle of economic activity: “Six years shall you sow your land and gather in your yield; but in the seventh year you shall let it rest and lie fallow.” (Exodus 23) Then immediately it repeats the idea of Shabbat: Six days you shall do you work, but on the seventh day you shall cease from labor. The implication is that just as there is a rhythm to the work week whereby activity needs to be punctuated by periods of rest, so too, a parallel rhythm pertains over a seven year cycle; we need periods of rest and renewal.

Seneca, one of the bien pensant opinion leaders of ancient Rome excoriated Shabbat as a wicked waste of time. Two-thousand years later, the idea that people need a weekly rhythm of work and rest, has been embraced by most people on the planet. The message of shmita — that a similar cycle applies over seven years – has, so far, not.

Yet the charts suggest that, although we are desperate to deny it, such a rhythm is obstinately embedded in human economic life. We are built to strive and struggle, to invest and innovate, to conceive and create for periods of around six years. During that time we are apt to get energized, excited and sometimes completely carried away by the whole business. The seventh year is meant to be a reset, a return to the real values that underpin our increasingly frantic efforts. If the reset is not expected, (and it usually isn’t), experience shows that it comes upon us anyway, as a nasty surprise.

What if we could engender the expectation that the seventh year will be a year of readjustment in national or global economics? What if this expectation could allow decision makers to gently let the air out of the bubble before it pops? Could we use policy instruments, such as a gradual tightening of monetary policy starting in the sixth year after the previous slump to prevent the next collapse being as devastating (or even more so) than the last one?

It may be too late to soften the impact of the next crash, but let’s have smarter economic minds start thinking now whether we can use this insight to make our economies more sustainable and resilient for the future.