F.GEMS: MICROS to GO!...

[Francois+Goelo]

Were Shorters responsible for the 1929 Depression...

and possibly for current Market events that are now affecting SEVU?...

http://ragingbull.lycos.com/mboard/boards.cgi?board=GRENSPAN&read=6943

Blade, here is an attempt with the first of what I think will be six parts to post my review of the 1930's.

Market Correction, Recession or Depression?

At the present time we are undergoing a correction in the stock market; or we might so mildly describe it as such. The truth is, we don't really know where this period will lead us. Perhaps we are in the early stages of a recession? Or is it possible we are about to enter a depression? Oh, but it is so unlikely that we could go from a period of extraordinary prosperity to a depression, bypassing recession along the way; or so one might think. But we've been there and done that! A once vibrant economy was destroyed by reckless behavior within the equity markets and callous indifference within the hierarchy of the stock exchanges and among elected and appointed national leaders.
The years leading up to the market disruptions of 1929 and 2000 had so much in common that one must assume the current risk of severe economic dislocation to be high.

The years 1923 to 1929 best represent the decade tagged as the "roaring twenties" for its prosperity and rollicking good times; the years 1993 to 1999 represent the best of the decade just ended. The decades of the twenties and nineties rank high in the minds of many of us because of their climates of peace and prosperity. In both decades, inflation was low and perhaps more important unemployment was low and moving toward historic lows. Compare the 7-year averages for key variables leading up to the market failures.


Key Economic Variables: (Avg. for 7-years before crash) 1923-29 1993-99

Interest rates on short-term commercial paper 4.6% 5.1%

Inflation-adjusted economic growth 4.8% 3.7%

Consumer inflation 0.3% 2.5%

Millions of people employed 44.2 126.9

Millions of people unemployed 1.5 7.2

Unemployed (% of civilian labor force) 3.3% 5.4%


General prosperity rewards many people and in both periods more and more people had the financial means to participate in the markets. And they did participate, even beyond what might be judged as prudent; irrational exuberance popped up all over the place. The folks of the late 20's took advantage of virtually unrestrained margin and the folks of the 90's likewise found little restraint in that regard. Both periods came to an end with the Federal Reserve trying to "make things better" by raising interest rates. Of course, there is no evidence to justify such interference.

But that is not the most relevant argument for this review; the Fed, throughout its existence, has frequently interfered with the natural course of business events without an ensuing depression. The Fed's meddling may have contributed significantly to the "recession" that followed the 1929 crash; but there was another more powerful force in play that created the "Great Depression." And that force was the unbridled short selling of that era. Of course short selling was present during the market recovery after the 1921 recession; it seemingly has been with us forever. But it was not yet refined to the level of "bear raiding" as was present in 1929 and the years that followed. For comparison, consider the overall scene of the 1920's; with wartime inflation in the high-teens continuing into 1920, the Fed pushed interest rates up to six and then seven percent. The ensuing recession (depression?) took unemployment from five percent in 1920 to nearly twelve percent a year later. A quick policy reversal brought rates down and for much of the decade rates hovered in a range of 3½% to 4½%. The economy responded just as quickly with strong growth, record low unemployment (for peacetime, that is), and no inflation; the decade earned its familiar sobriquet, the statistics for which appear in the table above. After the market crash of 1929, the Fed lowered rates just as it had after the 1921 recession (and as we hope it will continue to do in the present case) but to no avail. What was different about the two situations; and does our present situation more resemble one than the other of those two events? I think the jury is still out. For a time during the year 2000 and early 2001, the NASDAQ seemed to be saying we were revisiting the 1930's; and with a seeming aloof SEC, we might go there yet.

http://ragingbull.lycos.com/mboard/boards.cgi?board=GRENSPAN&read=6944

By: Devils_Adv $$$$
Reply To: 6914 by bladerunner1032 $$$$ Tuesday, 15 May 2001 at 5:36 PM EDT
Post # of 6945


Blade, here is tidbit 2.

The Crash of 1929 and the Recession that Followed

The only comic relief offered during the market gloom of late 1929 was that of Professor Irving Fisher of Yale. By early September, as rumors were rampant that "bear pools," led by Jesse Livermore, were preparing to drive the market down with short sales, Fisher was denying the likelihood of a crash. And as the collapse gained momentum during the period from October 14 to 19, Fisher thought the market was just shaking out the "lunatic fringe." And on October 23rd Fisher told a banking group that "any fears that the price level of stocks might go down to where it was in 1923 or earlier are not justified by present economic conditions." Of course, he was far off the mark in predicting the future of the stock market, but how about his assessment of economic conditions? Perhaps Professor Irving Fisher was the only one to understand the potential for the economy. Was there anything to justify the professor's rosy view? When Jesse Livermore and his wrecking crew went to work, the financial situation for consumers, corporations and banks had never been better.

a. In 1929, 46.2 million were employed earning an average of $10,750 in (1996 dollars.) That was up from 45.1 million employed in 1928 with average earnings of $10,248 in 1996 dollars. Consumer purchasing power had never been greater.

b. Consumer inflation of 0.6% in 1929 compared to 1920's overall average of 0.15%.

c. Bank reserves were $3.1 billion; excess reserves were $1.4 billion. (Total reserves were 69.3% of (total deposits plus Federal Reserve note circulation. Banks were flush with money.)

d. The cumulative corporate capital surplus reported on balance sheets filed with tax returns was $60.7 billion for 1929, up from $39.2 billion reported in 1926 (the first year surplus was reported.)

Could the outlook have been rosier? How much improvement did the economy need to ward off the Great Depression? What pre-conditions might have been required to withstand Jesse Livermore's "bear raiders?" Nearly two years passed before people in Congress really began to suspect the "abnormal." Nearly three more years before there was enough understanding to implement safeguards against a repeat of the tragedy; that being the Securities Exchange Act of 1934. In addition to efforts of some stalwarts in Congress, a privately financed study by the Twentieth Century Fund joined in to sort through the suspicions and accusations and the denials of wrongdoing. The director of the TCF study, financed by Edward A. Filene of Boston, summed up the findings with the following statement.

"All the conclusions we have reached on the basis of factual studies converge on one point: speculation-especially when accompanied by manipulation-should be drastically curbed, not only because it actively interferes with the proper evaluating of the market but also it does not exert the beneficial effects it has been commonly assumed to produce. Our recommendations summarizing the accompanying outline are, therefore, primarily directed toward the reduction of speculation." (New York Times, February 9, 1934, page 29.)

Note; In a Wall Street Journal article a half century later, December 5, 1985, page 47, there seemed to be a belated acknowledgement of the truth of the Filene study. The article included the following statement. "Selling short on the heels of a transaction that produced a price decline or no change in price was banned by the Big Board in the 1930's, when it was discovered to be a common way to deliberately depress stock prices."