Comparing Crashes

How do you describe the trading action on Wall Street?

A "correction?"  A "Bear Market?"  Or is it more like a slow-motion crash?  A crash that isn't really that slow at all.

Let's take a look at a 2-yr chart on the DJIA:

click to enlarge

And 1929-1930?

The difference thus far is the degree of the fall.  By the end of the crash in 1932, stocks had declined by 91% from their peak.

There are some spooky parallels between 1929 and today. Looking back on 1929, the Pecora Commission was established to try to determine the cause of the collapse in equities and the problems that bank faced subsequently.

One of the major reforms to come out of the 1929 crash and the Pecora Commission was Glass-Steagall:

Following the Great Crash of 1929, one of every five banks in America fails. Many people, especially politicians, see market speculation engaged in by banks during the 1920s as a cause of the crash.

In 1933, Senator Carter Glass [D-Va.] and Congressman Henry Steagall [D-Ala.] introduce the historic legislation that bears their name, seeking to limit the conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds. The new law bans commercial banks from underwriting securities, forcing banks to choose between being a simple lender or an underwriter (brokerage). The act also establishes the Federal Deposit Insurance Corporation [FDIC] insuring bank deposits, and strengthens the Federal Reserve's control over credit.

The Glass-Steagall Act passes after Ferdinand Pecora, a politically ambitious former New York City prosecutor, drums up popular support for stronger regulation by hauling bank officials in front of the Senate Banking and Currency Committee to answer for their role in the stock-market crash.

And what of the current crisis? As reported two days ago:

Radical steps by the Fed under chairman Ben Bernanke - all in the name of seeking to halt the panic sweeping financial markets - are turning it into a financial colossus. They're also putting the government deeper in debt and taxpayers further at risk if the various moves fail.

Once again it is about bank balance sheets, about securities and derivatives of questionable value threatening the viability of our banking system.  

It has taken us 75 years to destroy Glass-Steagall, and now we are seeing our financial systems self destruct as they are overwhelmed with CMO's, CDS's, and an Alphabet-soup of paper of questionable value.

Are we headed for a 1929 debacle?  I hope not, I really do.  But I am afraid that those who pushed hard to deregulate, to get government out of monitoring what banks did, who tried to separate banking and investment activity failed due to the greed of some who sought to maximize profits and stock prices at any cost - so much like they did in 1929.

Comments

[CLH:]

Our 1929 crash was in 2000 not now which is a credit crunch. Stocks were not over priced in 2007. The market will come back soon. Dont throw your investments into the toilet.

In the old days they had a word for what is happening. It was called a panic and was soon over because the gov. stayed out.

2008 Oct 11 08:00 AM