Tuesday, September 16, 2008

Forward into the Past: October 1929, Part 2 of 6

In the previous posting in this series we looked at a brief history of financial panics, limiting it to the first third of the 20th century. With that in mind, let's take a look at recent events.
• In 2008, touched off by the exuberant wave of speculation in the sub-prime mortgage market and lending by financial institutions to engage in unsound margin purchases of questionable properties financed with small down payments, the housing market plunged . . . followed by the stock market as investment banking houses and their shareholders, over-invested in mortgage-based securities, saw the value of their portfolios evaporate into the thin air from which they came.
Despite all the reassuring rhetoric that 2008 is not 1929 — we know that — the economy is in very bad shape. Advocating increasing levels of State involvement will only make the situation worse, whether you're taking Senator Obama's line that more regulation and fewer bailouts are needed, or Senator McCain's position that fewer bailouts and more regulation is necessary.

The fact is that the underlying productive economy — the real economy, not Wall Street — is in much worse shape today than it was in 1929. In 1929 America's heavy industries and producers of consumer goods had their capacity fully intact. There was even substantial over-capacity in all sectors, a result of the rapid expansion to meet the needs of the war effort barely a decade previously. Europe still had not recovered its pre-war capacity, and represented a seemingly endless market for American goods and services, as did Asia, attempting to develop as rapidly as possible.

The Crash of 1929 did not affect the real economy . . . at first. The potential was there to correct the situation and move forward in a sound and financially secure manner. What happened? We will look at that tomorrow.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):





No comments: