It's 1929 again: ' From crash to meltdown in 80 years'

by Susan Marie Kovalinsky | November 7, 2009 at 03:37 am

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I am no expert on economics, but I do take a keen interest in parallel historical phenomena. The expert team, William Strauss and Neil Howe, authors of The Fourth Turning: What the Cycles if History have to say about America's Next rendesvouz with Destiny (Broadway Books, 1997) had said the the "fourth turning" phenomena took about 80 years.

That is the exact number that Campaign for America's Future journalist Terrence Heath cites in his essay of last week. It is a thorough analytical piece, complete with interview, video links, and is worth reading: I can only give an excerpt and link here:

TERRANCE HEATH: In his column about the 79th anniversary ofthe 1929 Wall Street Crash, Professor Maury Klein asked, "Is it 1929 all over again?" Is it?
ROBERT KUTTNER: Yes, this is 1929 all over again. For the same reasons. The crash of 1929 was caused by too much speculation, with too much borrowed money, with too many conflicts of interest and too little transparency. And in the 1930's the New Deal mostly repaired that by much tighter regulation of banks, much stricter supervision of conflict of interest, much greater controls on leverage and much grater disclosure for investors.

But it fixed the problem for the known universe of financial institutions, and after the '70s all kinds of new exotic financial instruments were invented. And because deregulation came back into fashion, and the right wing really took over the conversation as well as government regulators did not keep up with the new instruments that Wall Street invented. And so all the same kinds of uses crept back in, and it took about 20 years until the house of cards was so high and so rickety that you then had the same kind of crash.

TH: When did the rolling back of those New Deal measures start?

RK: Well, it's interesting; it happened in fits and starts. Some of it was deliberate and some of it was simply people taking advantage of other things that had happened. For instance, in the period between 1971 and 1973 the Nixon administration dismantled dismantled one of the main pillars of Bretton Woods from 1944, which had created a regime of fixed exchange rates and along the way prevented a great deal of international speculation in currencies

So, after the 1970s little by little you had a whole category of speculation that had been prohibited by the ground rules obtained in the '50s and '60s, namely a lot of currently speculation. You had the so-called eurodollar market of dollars that existed in Europe that are not really regulated by anybody.

Then in the '70s also you had Wall Street taking something that had been the monopoly of Fannie Mae back when Fannie Mae was a public institution and part of the government, namely the securitization of mortgage, and privatizing it, and having lower standards than Fannie Mae did.

Again this was OK from the first decade or so but then when securitized mortgages rendezvoused with subprime and subprime rendezvoused with contracts written against the risk of bonds going bad, the whole house of cards just goes higher and higher and because in the '80s and the '90s Democrats fingerprints were on this, too. Regulators were not really interested in keeping up with these new risk products that Wall Street invented.

So, then in 1999, the capstone of this is the repeal of the Glass-Steagall Act. One other aspect of this was Greenspan's failure to enforce the Home Ownership Equity Protection Act of 1994, which, had Greenspan enforced it, subprime never would have happened, because that legislation required anybody who made mortgage loans to use sound underwriting standards. And you had Democrats and Republicans preventing the Commodity Futures Trading Commission from regulating many categories of derivatives.

So it was in the air, the idea that whatever Wall Street invents is by definition efficient, by definition virtuous, by definition self-regulating, and little by little a whole parallel banking system gets created that is beyond the scope of what the regulators can monitor.

Source: ourfuture.org

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Hugh Askew

at 16:32 on November 7th, 2009

"....... the idea that whatever Wall Street invents is by definition efficient, by definition virtuous, by definition self-regulating, and little by little a whole parallel banking system gets created that is beyond the scope of what the regulators can monitor."

And lots of those people on Wall Street, and lots of those firms with lots those dollars, giving lots of those dollars to lots of politicians, to influence lots of votes, that influence an even greater lot of everyday folks, who get crunched in lots of ways by all those seemingly little things.

If that sentence seemed endless, it is still shorter than the list of wrongs that have been perpetrated by those in both Washington, and in the Wall Street boardrooms.

djermano

at 06:02 on November 7th, 2009

Wall Street was invented to rob good people and companies to exploit the Military Industrial Complex. They exist and constantly remind us....that without the Military there would be no America....is one of the greatest lies of propaganda on the American people. Deals and mergers suck off taxes that go to support the Military Club in the USA... You are either with us or against us.... We see how the military who does nothing except make up trouble and wars....to justify their wars & Institution..... to kill a bunch of people to make their illicit Institution a serious one...is the cornerstone to the American Nighmare. ... Words like crash to meltdown....are soothing words in my book....when it means the Military is being left without for once.... I guarantee if Congress passed a law that the US Kilitary needs to be downsized when the economy prospers.....We will find true GDP numbers, true corporate and Small Business stocks....and friends around the world who support American Enterprise. As long as the Politicians and Wall Street hoodlums garner and feather the nest of the Kilitary....we will have no economic security....and be Prisoners of War in our own country.

The Rev.

Rory Cripps

at 08:14 on November 7th, 2009

SMK: Great article! Many parallels can be drawn to what's occurring in today's economy and what occurred in the Great Depression. No doubt that the crash of '29 had much to do with the depression, however it was only one factor and perhaps more of a leading indicator than a cause. A number of economists from the monetary school, such as Milton Friedman, believe that the Federal Reserve, at the time, did the complete opposite of what it was set up to do and that its actions (or inactions) exacerbated the situation. Other economists believe that FDR's economic policies made things worse and that without his economic tinkering, the economy would have improved on its own at a faster pace. And other economists believe that without FDR's economic policies, things would have gotten much worse. The facts are that it took over a decade and a world war before the American economy got back on track. This begs the question: Do economic policies on the part of the Federal Government actually help the economy or just the reverse?

"And you had Democrats and Republicans preventing the Commodity Futures Trading Commission from regulating many categories of derivatives."

" . . . the whole house of cards just goes higher and higher and because in the '80s and the '90s Democrats fingerprints were on this, too."

I have no doubt that a combination of macro economic policies (fiscal and monetary), if timed properly, can be used as effective tools to manage the economy, just as hydraulic engineering principles can be used to redirect or throttle and increase the flow of fluids. But unlike engineering principles, these economic tools are precluded from being used effectively due to the introduction of ideology and politics into the equation. And as long as ideology and politics continue to get in the way of sound economic principles, I don't see how government policies can effectively prevent recessions (and depressions) and maintain the economy on an even keel.

a211423

at 09:20 on November 7th, 2009

We have discussed economic cycles here many times agonizing over the current crisis with liberal and conservative points of view. These cycles are best described by Hyman Minsky who disagreed with main stream economists of his day, but his theories are being proven now.

The following is from Wikipedia

Dr. Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.

This slow movement of the financial system from stability to crisis is something for which Minsky is best known, and the phrase "Minsky moment" refers to this aspect of Minsky's academic work.

"He offered very good insights in the '60s and '70s when linkages between the financial markets and the economy were not as well understood as they are now," said Henry Kaufman, a Wall Street money manager and economist. "He showed us that financial markets could move frequently to excess. And he underscored the importance of the Federal Reserve as a lender of last resort."[citation needed]

Minsky's model of the credit system, which he dubbed the "Financial Instability Hypothesis" (FIH), incorporated many ideas already circulated by John Stuart Mill, Alfred Marshall, Knut Wicksell and Irving Fisher.[3] "A fundamental characteristic of our economy," Minsky wrote in 1974, "is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."[citation needed]

Disagreeing with many mainstream economists of the day, he argued that these swings, and the booms and busts that can accompany them, are inevitable in a so-called free market economy – unless government steps in to control them, through regulation, central bank action and other tools. Such mechanisms did in fact came into existence in response to crises such as the Panic of 1907 and the Great Depression. Minsky opposed the deregulation that characterized the 1980s.