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AP Photo Eighty years ago today, the stock market took a dive of more than 11 percent, a move that is considered the start of the Great Depression. The crash, like our own, was a wakeup call for change, says Nomi Prins—but Obama isn’t heeding the lessons of FDR and changing the banking landscape.
President Obama would do well to heed the notion of being true to Main Street economic conditions, rather than risk losing the next election by overlooking them and considering the rising markets and stabilizing banks as a sign of general strength.
Call it a dying cat bounce, but we should heed the lessons of Black Tuesday. That stock market dive, 80 years ago Thursday, was a wakeup call for change. Yet today, bank regulation is dialed back to pre-Black Tuesday conditions, as the economy for real people is similarly faltering. If we don’t make lasting changes to the banking landscape now, we will see more pain—not in 80 years, but in the next couple.
Today investors and many commentators seem to be ignoring potential pattern repeats.
The 1929 stock market crash took place over the course of a few panic-stricken October days. Leading up to Black Tuesday, when the Dow Jones Industrial Average dove more than 11 percent on record volume of 16 million shares, the market regurgitated a large portion of the excessive gains it had made during the prior two years, setting the stage for the Great Depression.
Then, as now, signs of economic decay had already hit the general population before Washington, Wall Street, and the stock market got a clue. In the summer before the 1929 crash, residential real estate and consumer goods took severe hits—just as they did before the financial crisis hit the banking industry last fall. Consumer spending declined by 80 percent from the prior year, and employment and commodity prices fell precipitously.
And yet Wall Street was busy making hay while the sun set. Stock prices doubled during 1928—then, as now, fueled by an abundance of cheap credit for borrowing, or “leveraging” stock and other more complex bets. Investors could borrow $95 for every $5 of real money they had, a “leverage ratio” of 20 to 1. That borrowed capital fueled Big Finance, pushing the stock market to a then-record high on Sept. 3, 1929.
The crash of 1929, a month and a half later, is said to have caused the Great Depression, but economic deterioration was already in motion, and simply continued. Similarly today, subprime loan problems may have catalyzed credit seizing up in the banking sector, precipitating a multitrillion-dollar government subsidization of the industry, but credit problems were already rampant. They, and unemployment, have only worsened since the bailouts began last fall. Equally, it was bank leverage that exacerbated the crisis, not the individual loans.
• Jeff Madrick: Why Washington Won’t Prevent Another MeltdownBoth economic declines were set in motion by the shattered illusion that assets inflated by debt, at the individual and, more important, the financial institution level, could float forever. Both occurred due to a profound lack of federal oversight and bank restraint, even as signs of doom grew. As early as between March 2006 and March 2007, foreclosures had jumped 47 percent, yet this information was totally ignored by the exuberant Federal Reserve and Treasury Department. However, Wall Street knew the deal, and accelerated its manufacturing of assets based on those same loans that were failing, paying record 2006 bonus payments off related fees.
Although we don’t have Great Depression unemployment rates of 30 percent and bread lines today, we do have double-digit unemployment in 139 metropolis areas—compared to 15 before last fall’s bank crisis. The national unemployment rate is close to 10 percent, up from 5.8 percent.
During the Great Crash, stock prices dropped more than 30 percent from their then historic peak in September 1929 to their near-term November low. By July 8, 1932, after three painful years, the Dow had dropped 89 percent from its pre-crash high. It took 25 years to regain its high of 382.
Today investors and many commentators seem to be ignoring potential pattern repeats. In 2008, as foreclosures and defaults increased, and despite the implosion of Bear Stearns in March 2008, the Dow cruised to a high of 11,782.35 on Aug. 11, 2008. After a chaotic fall that resulted in a dangerous consolidation of the banking sector, it settled on a near-term low of 6,547.05 on March 9, 2009, a loss of 45 percent. Undaunted, during the past seven months, the Dow has regained nearly 50 percent of that loss, despite fundamental credit and employment declines.
View as Single Page 12 Back to Top October 29, 2009 | 12:29am Facebook | Twitter | Digg | | Emails | print Black Tuesday, Great Depression, Recession, Finance, Business, Government Subsidization, Subprime Loan, Dead Cat Bounce, Stock Market Crash, Glass-steagall, Prins Daily Beast, Nomi Prins, Franklin D Roosevelt, Real Estate Market, Subprime Mortgage, Tim Geithner, Consumer Spending, President Obama, Paul Volcker, Roosevelt, Fdr, Stock Market, Economy, Barack Obama (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: case1234
Obama is called a Radical Socialist and a Corporate Capitalist Pig at the same time often by the same media. I guess this shouldn't be a surprised. He is called Muslim and radical Church member at the same time. Bambi and Nixon at the same time, A peace loving Hippie and bombing war President...at the same time, a radical Gay rightist and Homophobe at the same time, a hyper government activist and do nothing at the same time, and a male chauvinist and a girly-man at the same time. --- This is not even all the rampant contradictions that media doesn't even bother to dispute any longer.
The bill that repealed the Glass -Steagall Act was introduced in the Senate by Phil Gramm (Republican of Texas) and in the House of Representatives by Jim Leach (R-Iowa) in 1999. The legislation was signed into law by President Bill Clinton on November 12, 1999. We have Phil Gramm and Jim Leach to thank for writing a bill to remove bank regulation, a bill that Clinton should have vetoed.
WJC signed it because he needed the support of the banksters to beat the rap for sodomizing an intern. He helped put the financial system on the skids and contributed mightily to the rape of America by Wall Street. Connect the dots, folks. He will go down in history as among the worst US presidents. And Greenspan, Ayn Rand cultist that he is and always will be, will go down as the worst Fed Chairman. Ever. Rubin, Geithner, Summers and Co. were each and every one of them complicit in this major crime against humanity. George Patton
Funny, you have nothing to say about the Republican authors of the bill. What a political whore you are, Patton.
Something doesn't jive. The Market's up and people are still getting laid off. Oh, that's right, Wall Street doesn't seem to give a rat's ass about the American worker, even though we're the one's who bailed out their pathetic asses. Looks like they have a short memory. Another collapse coming ? Another bailout from us the taxpayers ? Another black Tuesday coming ?
Wall Street has an interest in unemployment to some degree. It keeps the bottom line of the companies they own stock in looking good. It is disgraceful.
Investment banks should not exist. It is a contradiction in terms.
The government should take over the job of investing in the economy, since the Monopoly players on Wall Street are incompetent to do that. That's why we need a real national investment bank, and certain other retail and commercial banks should just stay nationalized and be run as a public service. Obama says he "gets it" and understands the depression and lessons of history very well, and in this case I kind of believe him. After all, it's definitely not in his interest to have another big crash on his watch. It's just that so many of these people in Congress are as crooked as corkscrews, and in the pocket of big banks and other special interests, it's hard to get anything done.
"The government should take over the job of investing in the economy..." Yes, that's exactly what United States Government should do. After all, successes of state run economies are indisputable. Just look at Soviet Union. It is the beacon of economic prosperity. Oh, wait, it's not? It doesn't even exist anymore? Please pardon mcmchugh99. He just woke up from a 20 year long coma.
That is a straw man, splinter.
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