Stock market crash : 1929 and now

[Deleted member 7164]

Personally, I feel like the market issues are a hazard of business. Time and again it has been proven that outside influences (ie gov't) have a negative long term affect on the economy, so when it can be left alone, it should be.  That is not to say that there shouldn't be regulations on it, that is the problem here, and where the government should be sticking its fingers.

I always failed to understand American concept of free market. Key strategical sections should be left under govermental control, especially in a multi-party political system. Basically, if all your private entrepreneurs belonging to, let's say, metalurgical sector, decide to move their plants to some other country only because of costs of operation, you can't stop them, your workers are going to be ditched, and you're going to lose autonomy in that particular sector, and be forced to import.

Businessmen couldn't care less about other people, they're in for the profit. State should care about the welfare of it's people. If it means spending more money for operating various state-controlled compaines, it's probably better because they can have autonomy, industries can work for the benefit of the state, and when that guy ditches 5,000 people out, you're going to have them on your "social" bill. Here, each unemployed person costs.

I like the Russian model that Putin came up with. All of key sectors, military, aerospace, astronautics, petrochemistry, metallurgy, food...are esentially under gov't control. However, bureaus are joined into JSCs (joint stock companies), like Mikoyan, Sukhoi, Tupolev and Yakovlev are now one firm called UAC (united aircraft corporation). They're still separate somehow...like when state tenders for a new plane, each of them is going to compete. They're only unified because the state can more easily release the shares. Therefore, state owns minimum of 51% to retain the whole board, others are just in for the profit. Basically, UAC will be always profitable...each time Sukhoi gets a foreign order for Flanker series, UAC shares go up, and the shareholders profit. That's why shareholders injected the money in, because they know there's little risk of loss. Before UAC, Sukhoi was doing very good because of foreign orders, Mikoyan was going all-time low, Yakovlev managed to survive because of cooperation with foreign companies (Aeromacchi and Lockheed Martin), and Tupolev was on positive zero because of high-profile deals with the VVS needed to maintain the bomber fleet. All of them are doing well now, after UAC was put in place.

The main criticism of state-controlled sectors is the lack of competition resulting in lack of invention or development. That's totally wrong. Russia needs to be equal with US in aerospace industry just for the sake of defense. Russia needs to be equal or better than anyone else in aerospace industry to keep the foreign sales. Therefore, invention and development are going very high.

Paradox can occur in total capitalist free market. The one thing that comes to mind is Microsoft in the ~ 2000-2002 period. Basically, in '90s they established total dominance on the operating system market for x86 platforms, and x86 platforms established total dominance in the home / workstation computer systems in the same period. The development stopped. It took them 3 years to come up with Windows XP, in essence a system with a few more click click wizard capabilities than Windows 2000. The NT5 kernel remained same, basically nothing has changed under the hood. Progression from Internet Explorer 5 to 6 was even more minimalistic.

In essence, one company can kill all competition in the sector. They are monopolists, and that doesn't mean their influence is going to be cutted down. It just means tougher rules from then on. Like, you can't use existing monopoly to induce another (various USA & EU charges against Microsoft and bundling of Windows Media Player). So, one guy, or a board of guys are controlling an entire sector in a whole country. In my eyes it's better to have gov't control, because you have the power to change the gov't in the next elections. You don't have the power to change board of a corporation (we're talking about ordinary people).

 

[LooseCannon]

Ah, but a government sponsored corporation tends to lean towards corruption in the long run, or, worse, if it becomes unprofitable or unviable, it tends to run everything down, require tax dollars to maintain it.  I don't think the government should be much in business and I think what's been done in Russia is a system that will work only in Russia, since it's the same system that was used (or similar to the system used) by the USSR.  One gov't run company.  You're right, the major conglomorate corporations have to compete with the rest of the world, but so do individual companies like Airbus, Boeing, McDonnell-Douglas - companies that are still putting out damn good product without government interference.

I don't think the government runs the market place well.  There is a certain discussion of the strategic industries, like Zare has said, but in the end, I don't see Boeing losing all of their faculties to an area like China.  Some, sure.  All?  Unlikely.  Besides, with this stage of globalization, I don't know if any part of industry could survive a freeze between the USA and China.  In the end, companies have mostly done fine on their own.

I say mostly because I am for fairly strict gov't regulation of most industries, and I think it's important for government to define what's good business and bad business.  In the USA, they stopped doing that.  No other economy in the world deregulated like the US did, and it's come back and bit them in the ass.  Canada's got solid banks and thus we have a good chance of going through this economic slowdown with no major problems.

 

[Forostar]

Bank accounts are Federally insured, up to $100,000 per person, per bank.  The bank can fail, and the funds will (should be) still available.  So, yes, I am separating the banks from the people that have accounts there.  If the Feds can come up with 700b to bail out the banks, they damn well should be able to cover the insured accounts.

And, again, I am asking that if anyone be bailed out, let it be the people that are paying the taxes used for the bail out, not the banks that just fucked everything up.  Reward the ones that are working hard, and trying to keep their houses, not the ones that made the poor choices, then upon news of the bail out go on vacation.   

Money should move between banks again. It makes the economy stronger and offers more financial opportunities.
If there is no credit anymore, financial resources will dry up.

Already some positive results (blue colour in article by yours truly):

US stocks soar after crisis talks

US shares have risen strongly as markets welcomed fresh government moves to end the recent financial turmoil.

The US government said it would quickly implement its financial rescue plan, and summoned bank bosses to a meeting to work out the details.

Wall Street's main Dow Jones index soared nearly 8% in afternoon trading - after earlier gains in Europe and Asia.

The increases came after fresh moves by European governments to inject more public funds into banks.

In Washington President George W Bush said he was confident that the challenges which faced governments trying to curb the market turmoil could be overcome.

"We can work our way through these challenges and America will continue to work closely with the other nations to co-ordinate our response to this global financial crisis," he said.

On Monday US Treasury and Federal Reserve Bank officials were due to meet with the chief executives of some of America's biggest banks, to work out details of the US government's $700bn (£400bn) bail-out package.

The US is also getting ready to follow in Europe's footsteps and purchase stakes in financial institutions.

"We are designing a standardised programme to purchase equity in a broad array of financial institutions," said Neel Kashkari, the treasury official in charge of the bail-out plan.

European governments have said they are putting up to 1.7 trillion euros ($2.3 trillion; £1.3 trillion) to protect the continent's banks through guarantees and other emergency measures.

The sums are a maximum, and might not all be spent if the financial crisis eases.

So far Germany has approved a bank rescue plan worth up to 500bn euros, France will spend about 350bn euros, the Netherlands has pledged 200bn euros, Spain 100bn euros, and Austria 85bn euros.

Italy said it would spend as much as was needed, without giving any exact figures.

The bulk of the European money will be used to guarantee lending between banks - part of a plan agreed this weekend by the 15 nations that use the euro.

The cash will also be used to take stakes in ailing banks.

(more..)

 

[Wästed The Great]

So, the DOW rebounded by 936 points today.  The largest market increase in history.  I think that will end the comparison between 1929 and now; I don't believe that 1929 saw anything like that.  The DOW recovered almost half today of what it lost over the last 2-3 weeks; seems that the market is working.

 

[Onhell]

I was telling my mom the other day everyone keeps comparing this to 1929... I haven't seen people jobless/homeless on the streets, neither in my own town or on the news, like the droves of them in '29. There have been a great deal of reports about suicides, but that was to be expected.

 

[Albie]

Bank accounts are Federally insured, up to $100,000 per person, per bank. 

Is this per banking group or bank? In the UK, we are insured for up to £50k per person per banking group. So if I had £40k in, say, RBS and £40k in Halifax - I will loose £30k as RBS and Halifax are of the same group - although, on the face of it, viewed by many as separate banks.

 

[LooseCannon]

So, the DOW rebounded by 936 points today.  The largest market increase in history.  I think that will end the comparison between 1929 and now; I don't believe that 1929 saw anything like that.  The DOW recovered almost half today of what it lost over the last 2-3 weeks; seems that the market is working.

Wrong!  6 of the 10 largest percentage gains ever on the Dow Jones Stock Exchange were between 1929 and 1933.  Similarly, until yesterday, the largest single day jump was just after the 1987 Stock Market Collapse or whatsoever the fuck you want to call it.  Anyway, it recovered because the United States is becoming Socialist by buying banks with that $700b.  It worked in Europe, but they're not totally against such things there.  Bush is talking about it right now.  They're going to use at least $200b. to buy equity in banks.

 

[Wästed The Great]

Is this per banking group or bank? In the UK, we are insured for up to £50k per person per banking group. So if I had £40k in, say, RBS and £40k in Halifax - I will loose £30k as RBS and Halifax are of the same group - although, on the face of it, viewed by many as separate banks.

I honestly don't know the answer to that one.  I would guess 'per bank group'.

Wrong!  6 of the 10 largest percentage gains ever on the Dow Jones Stock Exchange were between 1929 and 1933.  Similarly, until yesterday, the largest single day jump was just after the 1987 Stock Market Collapse or whatsoever the fuck you want to call it.  Anyway, it recovered because the United States is becoming Socialist by buying banks with that $700b.  It worked in Europe, but they're not totally against such things there.  Bush is talking about it right now.  They're going to use at least $200b. to buy equity in banks.

Ah.  See all the things that I don't know.  As to the socialism, you are correct.  I don't like the idea.  But I'm not elected to any office, so I only get to choose in 21 days.

 

[Nigel Tufnel]

The FDIC insures each account. If you had 5 seperate accounts, let's say a checking, a business, and a couple of savings accounts, at the same bank, all five would be insured up to $100,000. The FDIC was part of Roosevlt's New Deal and was actualy a tenet of the plan. It would avoid people being personaly wiped out if let's say Wachovia failed. The plan had a more abstract intention of restoring people's trust into the banking system as a whole and give banks the working capital to keep the economy going. Banks can't lend money if no one puts money into the bank. Kind of the same scenario that we find ourselves in today.

 

[Wästed The Great]

According to my finance and insurance training, the FDIC only insures per person, not per account.  If you have 2 accounts in your name, and the total is over 100k, you only get up to 100k.  Banks will recommend that you put one acct in your wife's name, and one in yours.  And if there is still too much, most financial advisers will recommend that you spread the money into more than one bank.  The way you can get around it with a business is to have it in a LLC or some corp type. 

 

[LooseCannon]

But part of the Paulson plan has been to extend extra insurance to the banking industry for new deposits, so it's currently very unsure as to how much we're looking at here.

 

[Onhell]

Anyway, it recovered because the United States is becoming Socialist by buying banks with that $700b.  It worked in Europe, but they're not totally against such things there.  Bush is talking about it right now.  They're going to use at least $200b. to buy equity in banks.

This is what blows my mind yet it makes perfect sense. Part of the reason, if not the biggest reason, why people are so against the bailout is BECAUSE it wreaks of socialism. However, the reason it is a republican president proposing it (the Dems are the ones usually called commie bastards) is because he is helping out his big biz buddies... it's all about the benjamins, not the little people...

 

[Cornfed Hick]

I have been out of pocket for a few days and unfortunately have not been following all the latest machinations.  A NYTimes article I am now reading suggests that the Fed is going to "guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers."  Maybe I'm missing something, but if I'm a bank, and any loan I make is guaranteed, why wouldn't I make the riskiest, highest-return loans I could possibly make?  I get all the upside, and none of the downside risk.  I would hope this isn't the way it really works, though given that the whole point of the bailout plan is to reward and subsidize irrationally high-risk lending practices, maybe it is.  Anyone have any more info/insight? 

EDIT:  This all reaffirms my gut feeling that the question we should be asking isn't what the government should be doing to "fix" the economy, but whether the government is ultimately making things worse in the long run.  And, for all of you who like to blame the Republicans, recall that it was a Clinton administration initiative to push Fannie Mae and Freddie Mac to make home loans more readily accessible to lower-income and less credit-worthy homebuyers.  Those loans were, at the time, considered equivalent to government-issued debt such as T-Bills, which contributed to the rating agencies overestimating the safety of mortgage investments, which contributed to investment banks (and AIG) incorrectly assuming that their risk exposure was lower than it really was, etc.  And, as noted above, it was Clinton who approved the repeal of the Glass-Steagall Act -- there was not a sufficient Republican majority to override a Clinton veto, if he had been so inclined.  Bush is an idiot -- he'll get no defense from me -- but the notion that this is the Republicans' fault is fallacious.  This was a system-wide failure, the scope of which nobody in either major U.S. political party anticipated. 

ANOTHER EDIT:  This also suggests that a free market would, in fact, have worked.  Without the government's interference in mortgage lending during the past 10 years, banks would simply have lent to people with good credit.  That would have prevented this crisis from happening. 

 

[Onhell]

ANOTHER EDIT:  This also suggests that a free market would, in fact, have worked.  Without the government's interference in mortgage lending during the past 10 years, banks would simply have lent to people with good credit.  That would have prevented this crisis from happening. 

That is a very big "IF." 1929 happened in a "free market." all other crashes occur in a 'free market.' again, crashes are part of capitalism. SOME restrictions are necessary to prevent/soften them.

 

[Forostar]

"If you'd know the power of money, go and borrow some"
- Ben Franklin

Suuuure. Suuuuuure, suuuuuuuuuuuuuure Ben! Great advice! It certainly helped! 

 

[LooseCannon]

ANOTHER EDIT:  This also suggests that a free market would, in fact, have worked.  Without the government's interference in mortgage lending during the past 10 years, banks would simply have lent to people with good credit.  That would have prevented this crisis from happening. 

Well, the push for Fannie and Freddie goes all the way back to LBJ!  That's where the real push to lend at low rates started.  But Fannie and Freddie didn't really start this whole thing, either.  Again, the repealing of Glass-Steagall is where it starts, and as CFH has pointed out, there's lots and lots of blame to go around there.  However, I don't know if it suggests a free market would work - my opinion is that the regulated market of the 1970s, 80s, and early 90s would not have seen this particular crisis.

 

[Cornfed Hick]

That is a very big "IF." 1929 happened in a "free market." all other crashes occur in a 'free market.' again, crashes are part of capitalism. 

Onhell makes a good point -- in a free market, you occasionally do have "bubbles" that burst and sometimes create a "crash."  In most instances, however, the market corrects itself.  After the initial crash of 1929, however, one of the things that is thought to have worsened the problem was the passage of the Smoot-Hawley Tariff Act, which raised trade barriers and, far from creating new jobs, just made goods more expensive and prompted other nations to impose trade barriers and thereby reduce the market for U.S. goods.  My point is not to prompt an overall discussion about the pros and cons of regulation vs. the free market.  My point is:  even assuming some government involvement is needed to alleviate the latest economic woes (a premise that I accept), my concern is that the government will overreact and make the problem worse.  That is one lesson from the 1930s.  (Of course, other free market economists such as Milton Friedman have argued that the government was too tight with its monetary policy in the 1930s, which made things worse.  So, who knows.) 

As for LC's point, while the regulated markets of the 70s, 80s and early 90s might not have seen "this particular" crisis, let's not forget the terrible state of the U.S. economy in the late 70s and the stock market crash in 1987.  Gregg Easterbrook, who writes for the Atlantic MOnthly (and also writes a weekly column on American football) had an interesting perspective, with which I tend to agree: 

"What is going on is a financial panic, not an economic collapse. Financial panics are no fun, especially for anyone who needs to cash out an asset right now for retirement, college and so on. But financial panics occur cyclically and are not necessarily devastating. The most recent financial panic was 1987, when the stock market fell 23 percent in a single day. Pundits and politicians instantly began talking about another Depression, about the "end of Wall Street." The 1987 panic had zero lasting economic consequences -- no recession began, and in less than two years, stocks had recouped all losses. (See John Gordon's excellent 2004 book on the history of financial panics, "An Empire of Wealth.") Perhaps a recession will be triggered by the current financial panic, but it may not necessarily be severe.

"Politicians and pundits are competing to see who can act most panicked and use the most exaggerated claims about economic crisis -- yet the fundamentals of the U.S. economy are, in fact, strong. Productivity is high; innovation is high; the workforce is robust and well-educated; unemployment is troubling at 6.1 percent, but nothing compared to the recent past, such as 11.8 percent unemployment in 1992; there are no shortages of resources, energy or goods. Here, University of Chicago economist Casey Mulligan shows that return on capital is historically high; high returns on capital are associated with strong economies. Some Americans have significant problems with mortgages, and credit availability for business could become an issue if the multiple bank-stabilizing plans in progress don't work. But the likelihood is they will work. When the 1987 panic hit, people were afraid the economy would collapse; it didn't. This panic is global, enlarging the risks. But there's a good chance things will turn out fine.

...

"Economic problems are likely to be with us for awhile, but also likely to be resolved -- the 1987 panic and the 1997 Asian currency collapse both were repaired more quickly than predicted, with much less harm than forecast. Want to worry? Worry about the fact that the United States is borrowing, mainly from foreign investors and China, the money being used to fix our banks. The worse the national debt becomes -- $11 trillion now, and increasing owing to Washington giveaways -- the more the economy will soften over the long term. It's long-term borrowing, not short-term Wall Street mood swings, that ought to worry us, because the point may be reached where we can no longer solve problems by borrowing our way out. [My] former Brookings Institution colleague Peter Orszag, now director of the Congressional Budget Office, was on "Newshour" last week talking about the panic. Orszag is a wicked-smart economist -- for instance, he is careful to say pension holdings have declined, not been lost like most pundits are saying, as if there were no difference between decline and loss! The below exchange occurred with host Jeffrey Brown. Remember these words:

PETER ORSZAG: One thing we need to remember is we're lucky that we have the maneuvering room now to issue lots of additional Treasury securities and intervene aggressively to address this crisis.

JEFFREY BROWN: Wait a minute. Explain that. Lucky in what sense?

PETER ORSZAG: That people are still willing to lend to us. If in 20 or 30 years we continue on the same path, with rising health-care costs and rising budget deficits, we would reach a point where we wouldn't have that ability."

 

[LooseCannon]

Yes, I can see that, except in this case we did approach a dangerous global tightening of credit. Luckily swift action by the G8 countries has moved to release some credit.  That should prove to be enough wiggle room for the markets to recover.  Today's stock market issues have little to do with the credit issues, and it's important to remember that.  I agree with CFH - it will recover.

When it comes to the state of the US economy in the 70s, etc., it's important to remember that the market was little different then than it was in the 1940s and 50s, when the US was encountering boom times.  The only difference was the level of exports - as Europe & Japan reindustrialized there was less foreign market for US goods.  I, for one, think the economic panic of the 80s and then the strong markets and economy of the 90s were part of natural flow and ebb.  The markets seemed to do quite well on their own is my point, the way they were.  Canada's economic safeguards were, if anything, slightly more stringant than those in the USA.  We had a bad Depression but strong times after, except we're still growing, even with this current credit crunch.  So, I tend to believe that we would have not had this crisis, or panic, or what have you, if the late 90s, early 2000s deregulation hadn't occurred.

Another thing to remember is that while deregulation has a lot to do with what's happened financially, what regulation still exists in the US was barely enforced by the Bush administration.  Enron had a similar thing occur - the governmental bodies supposed to exercise oversight were loaded with people from the industry itself, thus, little oversight was done (little else of the Enron collapse is comparative, but this is).  So, there is plenty of blame to go around here, but I think the big lesson is that government after establishing safeguards that generally have worked, shouldn't fuck with them.  Establish a guideline for the market, then let the market go, but enforce the damn guidelines.

 

[____no5]

10 billion in aid to ING for 500 million of damages

To the club of «problem» banks seem to enter Dutch group ING, which is preparing to accept aid $ 10 billion versus 8.5% of its share capital, according to the publication «Santei Times». The ING, which is the largest listed bank in the Netherlands, is expected to announce 500 million loss for the third quarter. Because of concerns about its financial situation, the share of ING fell last Friday at 27.5%, to 7.33 euros.

What a shame ! This situation seems to represents the whole world, not just Netherlands

 

[Genghis Khan]

Do you have further news on ING as far as other banks are responding to this bailout, No.5?