Crashed: 1929 and 2008 Stock Market Crashes

 

        Picture this. It’s October 1929. You are a young businessman with his whole life ahead of him. Everyone and everything around you is thriving. The American "bull market" is in its prime. "Stocks are the new gold rush," you've been told over and over again. Finally you give in. You gather up your life savings of 1000 and borrow 2000 from the bank. Being the logical businessman you are, you decide to invest in Dow Jones. All 3000 dollars go in. 0 comes back out. Little did you know that by the end of the month 16 million shares will lose 40% of their value. Get this. Almost 80 years later, in 2008, we will make the same mistake. These very different years actually have something in common. They hold two of the biggest stock crashes in U.S history.

 

        The first point we will look at is the overall financial health of the U.S in both times. In 1929 the U,S was the business leader of the world.  The Dow Jones company was worth over 8 billion dollars. The U.S. Treasury had a huge supply of gold and the dollar was standing strong. In contrast, in 2008 the U.S. is far from being a leader of anything. The government is in trillions of dollars of debt to foreign countries. However in both instances, the net worth of the stock market as a whole was on the rise. In the years before the crash of 1929 many Americans were putting their lifes savings into the stocks. Some were even taking out loans in the banks. When the stock market crashed, these people could not pay back their loans. Other people trying to take all their money out because of the crash caused many of these small banks to liquidate their assets to pay the people who wanted to withdraw their money. This caused the money to deflate.

 

        John Green from CrashCoarse on YouTube, a distinguished literary critic says "Well, deflation can't be as bad as inflation right? Wrong".(John Green) With a frozen banking system, prices drop. The businesses then, to make up for this loss, have to lay off workers. Less workers means less money flowing into the economy. America was sucked into a economist's nightmare known as a depression. Like quicksand, the more you struggle, the more you get sucked in. You literally have to be pulled out.

 

        In both cases it was the government's fault. Speaking of financial health, another comparison point is government intrusion on the crashes. Quoting Chuck Johnson of Tano Capital news, a Harvard masters graduate in Business says "The Hoover administration was caught like a deer in the headlights". The government had never faced anything like this before and had never interfered with the stock market. Unsure of what to do they decided to exhort private sectors to increase investments to boost the economy. Failing at this, Hoover and his administration decided pull out and let the businesses to snowball their way out of debt.

 

        However, 2008 was a completely different matter. In 2008, the government had the experience and knowledge of previous crashes. Combined with new ideas, the federal government worked with private businesses to pump liquidity wherever it was needed. The government acted very swiftly to not let this turn into a huge global mess. Many experts theorize that if the government had not given financial aid and previous knowledge to the table 2008 very well could have been a Depression. And not just for the U.S...

 

         The government could have very well be part of the cause of the problem. But it was actually a perfect mixture of investment horror that caused this. Americans were living a new lifestyle in the 20’s. They were living a lifestyle where they had debt. They had paper versions of what we call “ credit cards”. People were willing to have debt and pay it off to live a happier life. Well many people borrowed to invest. Since the interest rates were so low, many people could afford them.

 

        About a year before the crash many interest rates were going up due to rapid consumer purchases of expensive goods such as automobiles. Many banks were selling these loans off to private investors. These investors in turn would raise the interest rate for bailing the people out. All in all, in 1929 the stock market was on the rise, and henceforth, the economy was booming. But as the old saying goes saying goes “The bigger they are, The harder they fall."

 

        On the other side of the spectrum, there is 2008. In a way, the causes were exactly the same, except in a modern way. Consumer debt to banks caused the banks to sell their loans to investors. Investors raised the price causing many people to go bankrupt. Bankrupt people are not exactly economy boosters. Even worse, you know what many of these investors did with the money? Put it in the stock market. Unprecedented growth for an extended length of time is "bad karma" in the stock world. This just goes to show that history can repeat itself if given the chance. Coming back to that karma; in 1929 13 million people were left unemployed after the crash. Industrial production was the cause of this. It declined by 45% in 5 years. This stock market crash was almost directly related to the Great Depression. Thousands of people were left with no money to pay their mortgage so the bank would liquefy their assets to pay for their mortgage. When that ran out the bank would sell the house evicting its inhabitants. They would gather in homeless slums called "hoovervilles" after their previous president. Without people having money to buy houses, home building dropped by 80%. It was not until World War II that increased military spending boosted the economy enough to break free of the depression.

 

        It's hard to tell you about the aftermath of 2008 since we are still living in the aftermath of 2008. Retirement has become much harder since then. Many people's 401K retirement funds took a huge hit. Services and goods are on the rise for price. Derivatives for stocks are at a standstill. The stock market is an important piece in the complex puzzle known as the American economy. Just as without a single piece of a puzzle can't be complete. Without the stock market America's economy can't be healthy. After living for 15 more years you; the young businessman have finally gained back your money. Sad as it may be you spent those last 15 years barely able to survive, living off of government handouts you have to fight for. However different these two instances and years are, you still can't help but notice how similar they are. The causes were almost exactly the same. Without the knowledge of the Great Depression in 1929, the government would have reacted in the same way. Even if the after effects aren't as severe, they would have been much worse without the government bailouts.

 

        Finally the financials of the two eras was completely different  but they had one thing in common. A rapidly rising stock market predicts a crash. As Maury Klien Emeritus of The University of Rhode Island says "Prosperity is more than an economic condition; it is a state of mind."(5 Klien). To conclude, history repeated itself. These two individual events were very similar in nature, and we didn't learn a thing. But as it is in human nature we need to be smarter and learn from our mistakes. And just think. If our market crashes fully, not only does our economy go down the drain, the world will...

 

Works Cited

 

Klein, Maury. "Is It 1929 All over Again?" CNN. Cable News Network, 21 Oct. 2008. Web. 06 May 2015.

Green, John. "The Great Depression: Crash Course US History #33." YouTube. CrashCourse, 10 Oct. 2013. Web. 06 May 2015.

Johnson, Chuck. "TANOCAPITAL.COM." TANOCAPITAL.COM. N.p., n.d. Web. 06 May 2015.