Are we there yet, you ask, when is this financial crisis thing going to end? We may be close some say, but that’s been said before! Perhaps not unlike early 1929 when the then Harvard Economic Society declared that a recession was eminent, only to later shift to the firm position of a positive forecast and that a depression was outside the range of probability.

The depression that began shortly after lasted a decade.

The future looking forward of 2008 is a guess where mine will be as good as yours although there is some surety in that perhaps it may be a while before we see the easy street days of simply blindly throwing money at the stock market and reaping rewards with little effort. Risk is back in vogue; perhaps books on value investing may soon be hot sellers as many try to remember how to research!

For many though, including investors, politicians and the general public the last six months or so have been a tumultuous period in regards to all matters financial. From billion dollar bailouts through to corporate collapses and a slowing economy there has been no shortage of bad news.

The market lost billions but who really pays the price?
Some investors will live to fight another day and some wont, some investment firms will, and some wont, and some governments may even have a price to pay at the ballot box next time around. The unlikely person that ends up hurting the most though, is the day to day jo average wage earner.

Investors knew they where taking risks, investment funds knew they where taking risks, banks knew they where high on the risk side and if they didn’t know, they should have – it’s what investment is all about, it’s what they do.

Unfortunately, the average wage earner who was happily going about there day to day life didn’t know, and they are the ones who end up in the unemployment cues looking for work after the closedown, merger, rationalization, acquisition and so on. They are the unwitting bearer of burden in what sometimes can appear to be the dice rolling of a few.

Can I have one of those free markets, with a sprinkle of regulation, and a big dollop of education…
The free market approach isn’t perfect, nor is any natural existence of free choice as there is always going to be unseen challenges and new discoveries. Cycles of boom and bust are a naturally occurring phenomenon throughout life and just like the seasons of the weather perhaps so it is with the economy. Although, over time and just as in other areas of life, knowledge should be gained from past cycles and events to help shelter those most at risk, of course not meaning those who take risk.

And that is where institutions and perhaps even to some extent policy makers may have let that average wage earner down. They may have carried the one but they forgot to carry the knowledge. Recent events are seemingly just a replay of what all took place way back in 1929…

Party Like it’s 1929!
The 1920’s in America by all reports was a good time, production was soaring and unemployment was low. The rich were getting richer faster than ever before and the poor were getting less poor! The stock market was booming through the mid to late 20’s along with a booming property sector particularly in Florida.

But unfortunately and as you may well know that boom came to a crunch, a crash and a depression. A stock market crash that was to become known as ‘The Crash’, and a depression that would last a decade. But what where the events that led to a speculative property bubble, a stock market crash that saw speculators committing suicide and a recession that became the Great Depression.

A book that should be on the shelf of any learned investor or analyst is one written by John Kenneth Galbraith entitled simply ‘The Great Crash’. First published in 1954 it provides an economists analysis of the 1929 financial collapse and events leading up to and beyond the The Crash.

People lined the streets of treasury and the exchange in disarray as markets tumbled

The book tells tale which is far from dissimilar with recent events:
A speculative property bubble that in its heights did away with the need for ownership of property and speculators could hold and sell property with a ten per cent down payment. Inevitably the bubble popped and prices plummeted.

Investors rushing to take advantage of margin lending on stocks, in turn fueling the speculation on the market.

The NY Federal Reserve slashing its rediscount rate to 3.5 per cent flooding the market with funds.

Banks taking advantage of the cheap funds from the reserve and fueling the markets with credit for speculative purposes.

The emergence of investment corporations packaging stocks, debentures and mortgage bonds.

Stories of directors taking huge (at the time) compensations, although being at the head of banks which suffered severely in the aftermath of the crash.

Stories of insider trading and short selling along with investment firms that owned investment firms which owned investment firms and not much else!

In the author’s conclusions of events that led to the crash and consequences thereafter he makes 5 key points where fault may be found:

1. Poor wealth distribution.
2. Bad corporate structure.
3. Bad banking structure.
4. Dubious state of the foreign balance
5. Poor state of economic intelligence

It’s suffice to say that the book is an oldie but a goodie and a must read.

In conclusion, perhaps we need to sink it harder into the psyche that risk never leaves the room. Every October 29th let a bell ring through the markets and through the halls of governance to mark a minutes silence so we can remember those that suffered a decade of depression at the hands of a greedy few.

Features, Macroeconomics
1929 stock market crash, the great depression