A new great crash?: Are we seeing 1929 repeating
Saturday, 20 September 2008 03:44
The last week has seen a crash after crash hitting the financial markets, but are we seeing a little bit of history repeating itself?
Daniel Barnes talks to Selwyn Parker - author of The Great Crash - about how 2008 is following 1929.
After a week where Lehman Brothers filed for bankruptcy, US insurer AIG was nationalised, Lloyds TSB bought HBOS, UK authorities banned short-selling and the American government promised to buy bad mortgage-backed securities - Parker simply states it is "unbelievable".
"In the last week we have seen things that even I thought were unthinkable," explains.
"I'm sure over the horizon they'll be a few more unthinkable events occurring."
However, what hits about the current events are the parallels with the crash of 1929 and its aftermath.
"The really startling thing about this - and drawing parallels with the 1930s- is that it is the same in principle, it is the same," Parker says.
"The banks slipped the regulator's leash - although there was hardly any regulation in the 1930s - but we have had a massive amount of regulation since then and the regulators are clearly a step or three behind the practitioners.
"Look at Fannie Mae, it has got its own dedicated government department to oversee the Fannies and they didn't know what was going on.
"Look at AIG for heaven's sake. But the authorities didn't know that was happening. Obviously when the US Treasury went to have a look at the books on Tuesday, it was then they found out they would have to stump up $85 billion.
"It's beyond belief. I think the parallels are really quite precise."
Cheap debt
Another great parallel between the lead up to 2008 and 1929 is the amount of cheap debt around.
"The roaring '20s were a time of very cheap debt and it was the very great age of consumer debt and private sector debt. They had a huge construction boom and residential housing boom in the 1920s, which was exactly like today."
He adds there was a multiplication of debt.
"In the 1920s you had these investment trusts. Which I think were basically just pyramids of debt with a very small amount of capital.
"That is very similar the multiplication of debt the banks have been chucking into the secondary banking or shadow banking sector. That is very similar."
The markets froze in Wall Street eventually because people realised that these investment trusts were hopelessly over leveraged and that is what is happening now with the paralysis of the wholesale money markets, Parker explains.
"People are scared to lend to each other and they know there is lot more of this toxic stuff out there."
HBOS rescue
Parker's book - The Great Crash: How the Stock Market Crash of 1929 Plunged the World into Depression - looks at the movements behind the scenes of the crisis leading out of the 1929 crash around the world.
Today we are seeing a repeat of searches for a solution in the corridors of power and the City. It is reported Gordon Brown's meeting at a City reception with the boss of Lloyds TSB helped to bring forth the deal to save HBOS.
Parker describes the actions today as "measured panic".
"They are floundering about trying to save the situation and making horrendous mistakes, but else could they do?"
However, the government is making progress.
"Six months ago there was no way HBOS would have been folded up and taken by Lloyds TSB. I wrote at the time of Northern Rock, if a government's procedure for saving a bank cannot move faster than the depositors it is not going to work."
He says in the 1920s the then governor of the Bank of England, Sir Montagu Norman, could engineer a rescue of a bank on a Saturday morning by calling in a few City stalwarts.
"The government have definitely learned since Northern Rock and I think the sale of HBOS is a pretty slick piece of work."
Short sellers
As both the FSA in the UK and the SEC in the US put bans on short-selling - betting on the downward movement of stocks - Parker reckons this could be the source of the problems.
"I think the way the short-sellers are working is beyond belief. I think it could be the untold story," he says
"I don't think we have any idea of the extent of short-selling. The odd thing is look at Lehmans. It was bankrupt on Monday but had more assets than liabilities.
"Why would it go bankrupt? Because its share price is coming down.
"You have obviously got this pernicious behaviour in the market. Even though the business is sound, the share price is being driven down. Why is that? To me it means the short sellers are dominating the rational investors."
America and the brightest
A further parallel between 2008 and 1929 has been that America has been the source of global trouble and the brightest and best of Wall Street have caused collapse across the world.
"All these financial cataclysms since the 1930s have come from America. They don't seem able to regulate the financial industry or to eliminate pernicious elements in it," says Parker.
"The European asset backed papers are pretty good, but it has been tainted by the American sub-prime brush."
He also claims the brightest people are caused the greatest havoc.
"The boys that have designed these asset-backed papers that have blown up, these are the most admired and most highly paid people in the banks and have caused the most trouble," he said.
"Most of these crises originate with the brightest boys who thought they had outwitted the market. They were so sure nothing could go wrong."
A further parallel between then and now is the absence of transparency.
"Even in the 1930s you had enormous opacity in the markets, and that was understandable as there was practically no regulation.
"But now we have had all these regulations but we still have opacity. Nobody really knew what the secondary market was doing. That is to me the most astonishing parallel between then and now."
Victims
The victims of both 1929 and 2008, Parker claims will be those at the bottom of the pile.
"I don't see these financial cataclysms as separate from normal life. Banks are at the very heart of the fabric of society. And when they go wrong, everything goes wrong," he says.
"Now as then - the most vulnerable will suffer - that is always the case and the 1930s it was people in the old industries. People on the bottom of the heap - they will suffer.
"Today, people at the bottom are the ones most indebted - I really think it is the ones who are most indebted who will be suffering most now. They will be pursued for their debts."
The Great Crash: How the Stock Market Crash of 1929 Plunged the World into Depression by Selwyn Parker (Piatkus, £12.99) Published 2nd October
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