1929 Redux: Heading for a Crash?

[babylonsister]

1929 Redux: Heading for a Crash?

By Robert Kuttner, AlterNet. Posted October 8, 2007.

The parallels between then and now are frightening.


The following is Robert Kuttner's testimony before the House Financial Services Committee on October 2.

Mr. Chairman and members of the Committee:

Thank you for this opportunity. My name is Robert Kuttner. I am an economics and financial journalist, author of several books about the economy, co-editor of The American Prospect, and former investigator for the Senate Banking Committee. I have a book appearing in a few weeks that addresses the systemic risks of financial innovation coupled with deregulation and the moral hazard of periodic bailouts.

In researching the book, I devoted a lot of effort to reviewing the abuses of the 1920s, the effort in the 1930s to create a financial system that would prevent repetition of those abuses, and the steady dismantling of the safeguards over the last three decades in the name of free markets and financial innovation.

Your predecessors on the Senate Banking Committee, in the celebrated Pecora Hearings of 1933 and 1934, laid the groundwork for the modern edifice of financial regulation. I suspect that they would be appalled at the parallels between the systemic risks of the 1920s and many of the modern practices that have been permitted to seep back in to our financial markets.

Although the particulars are different, my reading of financial history suggests that the abuses and risks are all too similar and enduring. When you strip them down to their essence, they are variations on a few hardy perennials - excessive leveraging, misrepresentation, insider conflicts of interest, non-transparency, and the triumph of engineered euphoria over evidence.

The most basic and alarming parallel is the creation of asset bubbles, in which the purveyors of securities use very high leverage; the securities are sold to the public or to specialized funds with underlying collateral of uncertain value; and financial middlemen extract exorbitant returns at the expense of the real economy. This was the essence of the abuse of public utilities stock pyramids in the 1920s, where multi-layered holding companies allowed securities to be watered down, to the point where the real collateral was worth just a few cents on the dollar, and returns were diverted from operating companies and ratepayers. This only became exposed when the bubble burst. As Warren Buffett famously put it, you never know who is swimming naked until the tide goes out.

more...

http://alternet.org/workplace/64684/

[Viva_La_Revolution]

1. oh, boy. that's heavy reading this early in the a.m.

Thanks!

[Mugsy]

2. Safeguards in place ensure it can't, but damn close.

The parallels to 1929 are undoubtedly there, no question about it.

The economic boom of "the Roaring 20's" due to a Land Speculation bubble similar to the Tech Bubble of the 1990's, followed by a bursting of that bubble led to a quick decline into Depression. But after that, economic safeguards were put into place that ensure a full blown "Depression" can never happen again.

There was no SEC back then. No FDIC or FSLIC insurance. And "automatic" trading ("electronic" trading today) is immediately suspended if the market falls too quickly too fast... things that, had they of been in place in 1929, might of prevented a full blown Depression and saved people from losing everything.

However, today, with a Federal Reserve and a currency no longer backed by gold, if a similar event occurred today, the Fed would just insure all those deposits by printing a ton of worthless cash, pushing inflation into the stratosphere. Money would be worth LESS but not "worthless".

I could go on, but point is, we've made sure another full blown "Depression" will never happen again. A decade long "Recession" with "hyper-inflation"... that's another matter.

[gateley]

5. I've never understood the difference between Depression and Recession. I've

heard the explanations, but I think why it doesn't sink in is that I haven't heard an explanation of how each would affect us as individuals, in our day to day lives.

Care to educate me? :7

[mark414]

7. well...a depression is basically just a severe or extended recession

and a recession is when the GDP (gross domestic product) shrinks instead of grows (as in, negative economic growth)

[DubyaSux]

8. It's easy...

....if your neighbor is out of work, it's a recession. If you are out of work, it's a depression.

Hope that helps...;)

[gateley]

9. Thanks to you both! nt

[MattSh]

10. Sorry, must disagree with you here...

I could go on, but point is, we've made sure another full blown "Depression" will never happen again.

I don't buy that. Just because we put in place ten doors last time to make sure a full blown depression will never happen again, then in the preceeding decades removed seven or eight of those doors does not make me confindent it can't happen again. Even if all ten doors were still there, someone, somehow would find a way around all ten of these doors.

I do believe the hyper-inflation scenario is likely but that's only hiding the fact that there's a depression going on at the same time.

[madrchsod]

3. the country has been drained of hundreds of trillions of dollars

since the 1960`s because of the military spending in this country. two major wars in 60 years that were waged without any monetary sacrifice by the american public and american corporations.

all of what he is saying can be "fixed" but what can`t be fixed is those trillions that will be coming due in this century without a fundamental change in our relationship to the world and ourselves.

[Lasher]

4. Leveraging is borrowing to invest

A home mortgage loan is a form of leveraging. Here is how hedge fund managers have been making a killing off risky subprime mortgage loans:

Take a shabby sub-prime mortgage; chop it into "investment", "mezzanine" and "equity" tranches. Bundle it with other equally suspect mortgage backed securities (MBS). Decide (arbitrarily) what the CDOs are worth Tell your banker. Leverage at a ratio of 10 o 1. Take 2% "off the top" plus salary for your efforts. Buy a summer home in the Hampton's and a Lexus for the wife. Wait for the crash. Then repeat.

Congratulations: you are now a successful hedge fund manager!

Oh yeah; and don't forget to prepare a few soothing words for the investors who just lost their life savings and will now be spending their evenings squatting beneath a nearby freeway off-ramp.

"We're so very sorry, Mrs. Jones. Can we get you some cardboard-bedding to keep off the rain?"

http://www.smirkingchimp.com/thread/8891

Just thought I'd throw this in for those of you who are not fluent in Greenspan-bonics.

[DemReadingDU]

6. evening kick

[Totally Committed]

11. Okay... that was scary.

I worry for my kids and grandkids for SO MANY reasons now. Pretty soon they're gonna have to have someone come in and hit me in the head with a hammer to get me to sleep.

Jeezuss.

TC