“Wall St panics as stocks crash” – Brooklyn Daily Eagle, 1929
Markets crash, stocks hit a new low – These words have always had a negative connotation to them and rightly so. A drop in the market is drastic to any economic and social system. Over the years we have endured multiple of these crashes and have always emerged stronger that we previously were. In this article I am going to focus on two of the most severe and mighty economic crashes in our history.
1929 – a year we all remember from our history books as to when the famous Great Depression started in the USA. Germany was still reeling from the loss of the first World War, the Weimar democracy was struggling to survive during the crash. India was facing other issues, being under the British rule, prices of commodities were soaring and stringent taxation policies were making it tough for Indians to survive.
In America “The Great Depression” started with a crash of the stock market on “Black Thursday”, October 24 ,1929. Six million shares of stock were quickly sold by panicking investors who had lost faith in the American economy. At the height of the Depression in 1933, nearly 25% of the Nation’s total work force, 12,830,000 people, were unemployed. Stock markets crashed and nearly 700 banks failed in the waning months of 1929 and approximately 3000 in 1930. The economy crippled and bad farming practices led to a year long drought. It was and always will be a major economic crash that affected the entire world, but was it really that bad?
“Everything was all right in those years, but only if you had a job.” ~ Grandmother of Amity Shlaes in The Forgotten Man
When we talk about the great depression we are quick to think about long soup lines, the dust bowl, banks failing, Nazi Germany and some even say World War two. Chicago economist Robert Lucas, Jr., once called the 1930s “one long vacation,” and social historian Frederick Lewis Allen exclaimed, “[T]he American imagination was beginning to break loose again.” There’s an old saying that, “it is the irritation in the oyster that forms the pearl”. The 1930s were no different, people responded to this adversity with creativity.
While the government was making strides in economic policy to get out of this crisis the public came out with massive innovations as well. During the initial years of the depression people had lost confidence in the government and its economic policies. Herbert Hoover’s laissez-faire economics had failed and the public knew that it was time for a change in administration. The economic policies of Franklin Delano Roosevelt were the considered the most beneficial for the economy and proved to be so. FDR in his first 100 days formed a “brain trust” of the brightest men in the country to guide the economy out of the shambles it was in.
The new government came up with the ‘New Deal’ under which multiple federal agencies called ‘alphabet agencies’ were created which provided employment to the youth and tried to ease the transition from the crisis. The present Securities and Exchange Commission (SEC) was created during this time.
These agencies in conjunction with all the other policies laid the foundation for social security in the United States of America and laid the groundwork for the creation of better economies.
The proletariat, on the other hand, took to innovation. The 1930s saw the rise of the world’s first supermarkets, the dry razor was invented and services like the Laundromat shops also came out. The great depression shaped the mixed economic system of the United states of America and policies from that period seem to be at the forefront of today’s political discourse.
Multiple bubbles and a weak banking system were major factors that contributed to the crash of 1929, this period was consequently characteristic of multiple banks failing. This systematic failing of the banks was attributed to lack of regulation and it is a fair assumption to make that the world economies learnt how important regulation was when it came to the banking. It was quite the contrary in 2008.
2008 – A year that clearly proved that we had not learnt from our past which eventually led to a great recession.
In 1939 the Glass-Steagall act was passed in the United States of America, separating commercial and investment banking practices and thereby placing financial institutions under proper regulation. By separating the two, retail banks were prohibited from using depositors’ funds for risky investments. This act was passed as a preventive measure, the government of USA, did not want the 1930s to repeat itself. The 2008 housing bubble and the crisis thereafter, leading to a global recession, was the aftermath of the repeal of this act.
From the 1990s US policy was to increase home ownership. With Americans wanting more and bigger houses; banks and non-banks started finding new ways of lending people money to buy houses. Lenders and loan officers became less concerned with adequate documentation and collateral and made sanctioning greater amount of loans their top priority. The primary reason behind this attitude of the officers was the fact that banks were no longer accountable for receiving the repayment on the loans. The banks bundled up multiple loans as packages and sold these to big investment banks who further sold them to the investment community. This cycle continued till the housing prices started to flatten and loan officers could not give out a loan that financed 100% of the property. People started defaulting on their mortgages and investment banks realised that they were holding onto worthless debt instruments. The economy froze up and the world went into severe recession.
Both the great depression and the 2008 crisis had aspects that were similar and aspects that were different.
The differences were basically two-fold: 1929 saw a stock market crash followed by bankruptcies and market contractions and disruptions of previously unknown global proportions while the 2008 crisis was a result of the housing market bubble bursting that that then began to spill over into the entire economy.
But just like the great depression, retrospectively, this crisis seems useful and necessary. Since the crisis, economic policies have not only developed but major positive changes have come about in the economic systems. The world for one knows that free market capitalism with minimal government intervention is a flawed concept much like various kinds of socialist structures seen in the past. Economic structures have become well-defined and as such we know what kind of economies have the most potential to grow or survive. Political institutions have further improved regulatory procedures, the concept of “stress tests” have been introduced by all central financial institutions and all financial institutions and transactions are now closely monitored by regulatory bodies with judicial power.
We can agree that the 2008 crisis was nothing compared to the great depression.. The 2008 crisis is characterised by the housing bubble, in 1929 there were so many bubbles that you needed a spreadsheet to keep track of them. Collapse of the Lehman brothers plunged us deep into the crisis in 2008 and the great depression was kick started with the drop in stocks on “Black Thursday”. The extent of both events may be different, but both events were extremely similar to each other. Banking failures, foreclosures, government bailouts, corporate bankruptcies and down sizing – these are all characteristics of both the crises. I believe that we still feel repercussions (mostly positive) of these crises today.
Therefore, it is reasonable for us to infer that both these crises, even though they caused massive losses, were essential is shaping our current economic setup. The current global economy and economic sentiment has been moulded by these crises. In my opinion it is necessary for the market to crash after a certain period of time. It may lead to losses , but the fresh start markets get and its repercussions are extremely beneficial in the long run. Smart investors get a chance at buying strong stocks and assets to improve their portfolios. Additionally, every policy has loopholes, a crisis brings that to the forefront. Not only do we get a chance to fix that loophole, we get the opportunity to formulate even better policies.
People and governments hit rock bottom, and in the struggle to survive and emerge from the crisis the most innovative things are created. Austerity as a concept has been adopted by most people in light of these crises , corporations clean their balance sheets, the economy cleans out excessive debt and spending and transparency of all institutions are improved. A market in crisis becomes a pool of positive opportunities, controlled capitalism in conjunction with innovation makes for extremely profitable enterprises during such situations.
In conclusion, it is not fair for us to deem stock market crashes inherently destructive. It is the fall that makes the growth stronger and more reliable and we can see that from the examples of 1929 and 2008. A crash in the market is not something that is recommended but something that is necessary, a necessary evil. A timely crash not only leads to a stronger economy but better governance as well. It’s time we start perceiving the concept of a crash as a time of opportunity and not as a time of loss – as a time for capitalist creativity.