It’s the Economy, Stupid! – The Crash of 08 and Beyond
Vol: 85 Issue: 25 Saturday, October 25, 2008
Yesterday was the 79th anniversary of the Stock Market Crash of 1929. The Dow Jones Industrial Average peaked in September, 1929 at 386 — following a bull market that provided that decade with its historical nickname, the “Roaring Twenties”.
The Crash of ’29 was not a one-day affair — the market collapse was a three-phase operation that began on Black Thursday, October 24. But it was the the catastrophic downturn the markets took on the following Monday and Tuesday that precipitated the panic.
The Crash of 1929 came following an astonishing five-year run in which the market’s value increased five-fold.
From its September 3rd high, the market began to decline, losing 17% of its value in a slow but steady sell-off before recovering half its losses in late October. Then came Black Tuesday, October 29, 1929 when the bottom fell out.
The panic was so severe that the volume traded on that day set a record that stood until 1968. The stock market lost $14 billion on Black Tuesday, bringing the three days of losses that started on Black Thursday to a total of $30 billion.
In 1929, $30 billion was ten times the annual budget of the US federal government — more than was spent by the US fighting the First World War.
By November, 1929, the market had fallen from its peak at 386 to what turned out to be an interim ‘bottom’ at 198. After a short rally, the slide resumed.
By July of 1932 the market closed at 41.22 — an 89% decline over three years — and driving the Dow Jones Averages down to levels not seen since the 1800s.
And if you had held on to your stock portfolio and rode out the market, your portfolio wouldn’t have recovered from its 1929 losses — until late 1954.
A Congressional investigation that began in 1931 found that one of the underlying causes of the crash was that commercial banks were gambling in the market using depositors’ money.
In 1933, the Congress passed the Glass-Stegall Act, which mandated a separation between the commercial banks that write mortgage loans and the investment banks that underwrite and distribute stocks and bonds.
The provisions of the Glass-Stegall Act that mandated that separation were repealed in 1999 by Congress and signed into law by President Clinton. The repeal enabled lenders to underwrite and trade financial instruments like mortgage-backed securities and established schemes like Structured Investment Vehicles.
Nine years after repealing the Glass-Stegall Act, on the 79th anniversary of the Crash of 1929, the Dow closed down 312 points on the day, bringing total market losses since the start of this year to 40.3 percent.
The one constant about history is its tendency to repeat itself. Should the pattern hold true, then this is Year One of the Crash of 2008-2010.
There is a fundamental difference between the Crash of 1929 and the current situation. In 1929, the market crashed because the fundamentals of the economy had begun to collapse.
In 2008, it crashed because the public began to believe the politicians on the Left who have been talking down the economy since the start of the first Bush administration.
When John McCain made his much-ridiculed statement of early September to the effect that the ‘fundamentals of the economy are sound’ he wasn’t wrong. The fundamentals of the economy remain unchanged. Fannie Mae and Freddie Mac collapsed primarily because of politicians, not bankers.
The Community Reinvestment Act championed by Congressional Democrats pushed Freddie Mac and Fannie Mae into covering bad mortgages made by local banks under pressure from groups like ACORN who would file nuisance complaints against banks who wouldn’t relax lending standards for minority borrowers.
Lenders make money one of two ways: keeping the paper themselves and getting the interest over the term of the loan, or selling the paper to someone else for a guaranteed short-term profit.
When Fannie and Freddie began buying all of this paper, they created a huge demand for subprime loans and lenders responded by offering easy money to almost anyone who applied.
They threw out income requirements and equity thresholds (such as down payments) and generated tremendous short-term profits for themselves while Fannie and Freddie assumed all the long-term risk.
The Democrats in Congress pushed to ‘securitize’ debt in order to spread the risk. Consequently, investors considered those mortgage-backed securities to be a safe bet, backed by the US government.
As it happens, the head of Freddie Mac was the gay lover of Representative Barney Frank, chairman of the House Banking Committee charged with Freddie Mac and Fannie Mae’s oversight.
Frank’s lover’s golden parachute was directly related to Freddie Mac’s performance and Freddie Mac’s performance was measured by how many mortgages it had.
I’ve said more than once that the crash was a politically-motivated downturn that got out of hand. Shouting “Fire” in a crowded theater will empty the place out quickly, but should panic set in, the situation rapidly spirals out of control.
The Dems have been shouting ‘fire’ for almost eight years. Why would the Democrats want to tank the economy?
For reasons that make no sense to me, the Democrats earned the reputation of being the party of the poor, while the Republicans are seen as the representatives of the rich.
Since the first Clinton administration, the Democrats have tagged themselves with the slogan, “It’s the economy, stupid!” In case you are wondering who ‘stupid’ is, it is the voter who thinks that the Democrats want to fix the economy and restore financial prosperity to the nation.
Look at the number of Republicans who now say they plan to vote for Obama because of the economy. If you are the party of the poor, then what’s the best way to expand your base? Create more poor people. How does one do that?
It’s the economy, stupid!