Markets, and Fed Chairmen too, Evolve   

The Principle of Understanding History (one of my seven stock market principles). 

The 1930s Vs. Today.  I just started reading another stock market book.  This time it’s 100 YEARS OF WALL STREET (2000) by Charles R. Geisst.  Turns out it’s a fast and easy read.  Thank goodness because that other book on RISK I’m also reading, by Peter Bernstein, is a bear to read.  I’m only making headway very slowly.  Anyway I have to say the comparisons from the 1929 market crash and what happened afterwards and today’s current huge losses from the global margin call emerging from the US housing bust are flowing like water.  Let me see if I can give you a feel for what the market was like way back then and then relate how things look similar and different (thank heavens) today.

The Crash’s Effects.  After the October 1929 crash, few thought it would have the large negative effect it did.  As evidence of this, the book The Art of Speculation by Philip Carret was published after the crash and became one of Wall Street’s most popular books.  On its back cover, a bunch of other books were advertised, even an analysis of the crash itself.  Then we had movies like Bottoms Up coming out afterwards, showing a world slightly shaken but still in a comedic manner.  And Will Rogers told stories about the NY hotel clerk asking guests whether they wanted a room “for sleeping or for jumping.”  To many the crash was just another panic (which were more prevalent back then).  So for many months, we still joked about the crash.  Author Geisst writes that:  “The immediate reaction on the Street and in the press was that Wall Street was having a bad quarter but that things would get better.”  And that:  “Wall Street did not feel the full brunt of the economic downturn immediately, but the force of it was building quickly.”  Schwartz View:  My point above is that it’s hard to fathom the seriousness of any market problem right after it hits.  If it comes right after a boom, people still feel happy, funny and positive.  Thus today’s billions of dollars in losses might still have a bearish domino effect, now some nine months later.  Especially because today’s problems didn’t result in an immediate stock market crash and an immediate margin call which wiped out investors right away.  We had a rally to new highs in October and the margin calls to hedge funds are still going out.  Geisst’s book says the serious effects of the 1929 crash began showing up “within a year.”  Again, this time around the resulting problems may be slower in showing up. 

Moving on, let’s look at some more of what unfolded back then, after the Great Crash.

·         As the 1930s began, bank crashes became common.  Many because loans were made to margin traders and weren’t being repaid.  And runs on bank were caused as depositors lost confidence.  Schwartz View:  Today, bridge loans to banks to temporarily carry mergers are still problematic.  And banks have and are still writing off huge losses from their many securitized investments.  Not totally the same happenings but very similar in net effect I’d say. 

·         The property boom of the 1920s ended with the stock market crash.  Schwartz View:  This time around the housing bust came before problems showed up in related investments which eventually caused the problems for banks.  Similar again but not exactly the same.

·         Customers withdrew money from the banks after getting scared the banks would fail back in the early 1930s.  Schwartz View:  This time around some hedge funds are failing while others are seeing big withdrawals as investors fear they are going to lose more that they already have.

·         Investigations were launched back in the early 1930s to see what went wrong and who to blame.  And found out that during the boom many reputable big names on Wall Street weren’t paying income taxes, large pools were manipulating stocks, brokers were trading in their wife’s names and selling their own companies short.  Eventually massive new regulations were put in place, regulating previously unregulated activities.  Especially after President Roosevelt came into office and ordered a bank holiday to sort out the mess.  Schwartz View:  Congress today is talking about launching their own investigations.  And we will soon have a new president without any loyalty to what’s gone before.  Plus I’m now reading articles from college professors and others that Wall Street expects much heavier regulation as a result of the billions of losses.  So as to not let this happen again, similar to the reason behind the numerous new government regulations imposed in the early 1930s.  Today’s new rules will probably come down heavily on the previously unregulated hedge fund industry.

·         Commodity prices fell along with stock prices in the early 1930s.  Today, commodity prices are holding up as we live in a globalized world and demand outside of the US remains strong.  Countries need to secure their energy futures.  There’s a major difference and a big plus for investors and global economic activity.  Schwartz View:  Now if commodity prices start collapsing, not just pulling back, that would be increased cause for concern.

Schwartz View:  Current Federal Reserve Chairman Ben Bernanke specialized in studying the 1929 crash and Great Depression which followed.  So he knows very well all the above stuff.  As a result he’s making all these many government intervention moves now, not waiting as would be the natural road for any free marketer if he wasn’t such an expert on what went wrong in the early 1930s.  That means he’s likely the perfect person to head up the Federal Reserve Bank at this particular point in history.  (Even though myself and others have been criticizing him.)  Thus, gotta give President Bush extra credit for selecting and appointing Dr. Bernanke.  Did Bush know what lay ahead?  After his multiple tax cuts.  Nah.  My larger point?  The Federal Reserve has learned from the past and today is using that knowledge to help investors.