The four most dreaded words in financial history are "this time is different".

Supposedly when you hear these words spoken, mostly by some generation as yet not devastated by life’s events, there is the hint things this time will work out differently from what has transpired before in such circumstances.

And thus one heads for the hills to wait out the storm that inevitably follows.

But what if this time is really different? Not of course for the better, but for the worse? Then what? What nuclear bunker will be adequate enough to outwait events?

The 2007-2009 financial disaster is proving to be very different from 1929-1937.

The 1929 event was a straightforward enough bursting asset mania who's global collapse gave rise to mostly standard liquidity problems on the liability side of bank balance sheets (except where banks themselves had also speculated in shares, not an unimportant detail).

Asset values collapsed, margins were called, people were trying to raise cash, confidence was being lost, banks experienced cash drains, there was increased liquidity preference among bank clients and a steadily gathering loss of general confidence took hold, turning to panic.

An old-fashioned run on banks

Thus was set in motion an old-fashioned run on banks. Banks ran out of cash, and folded.

The nature of such a straightforward bank run can be compared to a simple flu. A course of antibiotics would have made it go away in no time. Except, of course, they didn’t have antibiotics in 1929. So the patient died an agonising death.

Very sad, really. To miss the simple tools, understanding and political will to address something as simple as a bank run. All you needed to do was pump in liquidity.

Now, contrast 2007-2009. This was not mostly a simple liability infection, banks running short of cash because of accelerated panic withdrawals by clients.

Instead, the problem this time primarily resided on the asset side of global banks balance sheets (and extended to many other financial institutions with which banks maintained active relationships, such as insurers, hedge funds, money market funds, pension funds and others, including industrial companies and ordinary individuals).

A financial Chernobyl had been created. Toxic contaminated assets had been manufactured on the grand scale and had been spread far and wide in mysterious ways throughout the global financial system, nearly completely hidden from view.

Rottenness of overleveraged balance sheets

Like real overdoses of radiation, global financial institutions increasingly suspected the rottenness of hugely overleveraged balance sheets of those they were dealing with. Thus trust finally dissolved. Completely.

As forced deleveraging got underway, with everyone trying to sell suspect assets, and when necessary even good assets in desperate attempts to raise cash, asset values collapsed, capital was destroyed and credit lending came to a grinding halt, in turn causing economies to hiccup.

Thus, 2007-2009 is really different in nature from 1929. It is also different in size and complexity. Incomparably bigger and more complex.

So far what I have been describing is a global funeral in the making, with no hope whatsoever.

That helps to focus the mind, as the chap advising Nixon decades ago knew only too well. Apparently, when you have them in a vice grip, their hearts and minds will follow.

The stark beauty of 1929 was that it was really only a simple flu which for the want of some antibiotics led to the premature death of the US and European financial systems and economies and contributed to geopolitical changes leading to war.

Awfulness galvanised minds

That awfulness galvanised the minds of succeeding generations, seeking desperately to learn, understand and prevent repeats, even three generations on.

The learning was mostly lost when it came to adequate regulatory safeguards and policing. Though prevention is better than cure, there are some human constants difficult to master and change, even in time.

But at least we learn how to better clean up after making yet another mess, even a big one. That may prove to be an ultimate Greenspan insight for which he will be given no acknowledgement. None. That, too, is very sad, really.

So yet another way in which things are different this time is the understanding and preparedness with which to address events, even if we have to learn as we go, for the exact nature of the problem needs to be diagnosed first, political will mobilized, adequate instruments created if none exists. And all that takes time.

But all of that is completely different from 1929, when the Fed didn’t know what the right course of action was (they had to learn from the aftermath, and it apparently took decades for the full realization to sink in).

Just so politicians and businessmen then didn’t have an inkling of what was needed, guided by simple ideology not to do anything, or worse do the wrong things, such as tightening fiscal budgets as tax revenues fell away.

Inheritor of painful learning

Our generation is the lucky inheritor of that legacy of painful learning. So what is really different from 1929 is today’s unprecedented mobilization of central banks and governments. They all have willingly gone to war, for that is what it takes to successfully overcome a crisis like this.

Declaring war is the hardest bit. There after it becomes a matter of hanging in there, and of course not losing too many battles and becoming demoralized. True grit will see you through, in the old John Wayne tradition.

You may have heard of the “Greenspan put”? Well, something 100 times more powerful has come into being. Call it the “G7 put”. Only this time it is different.

Alan Greenspan became predictable in the way he was prepared to protect the US (global) financial system from downside risk by cutting interest rates as the medicine of choice to address all ills, as compared to not wanting to unduly constrain the upside, as defined by him. Markets learned to rely on Alan, indeed egg him on by threatening tantrums if not timely given their medicine.

Alan was like a medical doctor discovering the wonder medicine antibiotics and prescribing it daily.

Potential of unlimited upside

Greenspan believed in untrammeled progress while backstopping mistakes, apparently not fully realizing the potential of the unlimited upside to become too exuberant and capable of devastating systemic reversals (as Minsky had diagnosed and predicted earlier, something not fully taken on board by Greenspan).

Alan believed that self-interest would ensure adequate self-policing by financial institutions.

Alan Greenspan never had children. A great pity, that. It would have greatly assisted him in learning more fully about life. He would have been disabused of the self-interested self-policing notion earlier on without first having to learn the hard way, but having to experiment with the global financial system to do so adequately.

In contrast, the G7 “put” is not meant to save shareholders, senior management wealth, careers and fancy bonuses. The G7 put is the equivalence of a declaration of global war, aimed at undoing an institutional failure (Clausewitz’s continuation of politics by other means).

The big guns are brought to bear, at enormous cost, to address a terminal condition, thereby undertaking a grand institutional renewal.

Desperation in action

This is desperation in action, not the mistaken notion of simply backstopping the downside in order to give the children unlimited opportunity at upside.

But is this time really different? In the 1930s many decisions were made in the name of addressing things, but many mistakes were made as well, prolonging the agony and interfering with market ability to right itself once past the critical period.

Some of the remedies being floated today makes one think that ideological detours through hell remain possible. But don’t confuse a lively learning curve with a natural inclination to make mistakes.

The old saw about Americans applies. They can be trusted to the right thing after exhausting all other alternatives. It takes time to diagnose, define and execute, mobilizing majority will along the way.

So, yes, this time looks very different. G7 governments and central banks are engaged in a monumental cleanup, but doing so in record time relatively speaking, allowing dead assets to disappear, failed institutions to fold or be merged or as an interim solution to be nationalized, imposing new rules, and generally trying to limit the damage to economies and their performances by daily providing nearly unlimited bank liquidity and guarantees.

We are less than half way through this cleanup, so far 15 months and counting, with $800-billion already written off in failed assets, but where the final bill could be in the $2-3-trillion range, along with a 4-6 quarter global recession and $2-trillion in lost output never to be recovered.

That’s bad, but it ain’t the 1930s followed by WW2.

So, yeah, this time is different.

Cees Bruggemans is Chief Economist of First National Bank.