Crash: The Next Great Depression?
The stock market crash on October 29th, 1929 led to a decade of financial hardship for many Americans. Referred to as Black Tuesday, the market fell about twenty percent (sixteen-million shares) and continued to decrease throughout the year. President Hoover’s treasury secretary, Andrew Mellon, pledged “the fed would stand by as the market worked itself out.” A two and half billion dollar bailout plan in 1932 failed to solve the problem. In retrospect, earlier government intervention may have helped prevent the worst economic failure in American history.
On September 17th, 2008, treasury secretary Henry Paulson watched in disbelief as credit markets seized up, banks stopped lending money to each other, and a run on money markets had begun. Paulson recognized that the problem had been building for months and blamed it on subprime mortgage toppling the larger housing market, excessive consumer borrowing, and excessive lending by Wall Street. By this point the government had already stepped in, spending five trillion tax dollars in August 2008 to save Fannie Mae and Freddie Mac from the brink. When the world’s largest insurer, AIG, looked to be the next to collapse, the government deemed it “too big to fail” and stepped in with an 85 billion dollar infusion. Even with all this government intervention, October 10th, 2008 marked the end of the worst week of the stock market since the great depression.
One of the causes attributed to the 1929 crash was a lack of regulation. Andrew Mellon believed the government should keep its hands off business and the market should be given free reign. Since the Securities and Exchange Commission was not yet devised, the brokers made their own rules. Under Mellon, capital gains taxes, corporate income taxes, and taxes on the wealthy are all cut. Similarly, before the crash of 2008, tax rates in the 1990’s and 2000’s for the wealthiest Americans were at record lows. Deregulation became prevalent and banks were allowed to make risky loans. Throughout the 2000’s consumers borrowed against their biggest asset, their homes. By 2008, twenty-five percent of houses were worth less than there mortgage and many home owners found themselves on the verge of foreclosure.
To avoid making the same mistakes that caused the great depression, the government moved aggressively to stimulate the economy. In September 2008, President George W. Bush and Ben Bernanke urged congress to pass a $700 billion bailout plan. In October, Henry Paulson announced that the treasury would purchase equity stakes in a variety of banks, making $250 billion available for financial institutions. With the amount spent on bailouts already reaching to trillions of dollars, November brought another as Citigroup received twenty billion dollars and federal guarantees for 300 billion dollars of troubled assets. Even with all this governmental intervention, whether or not we’ve avoided a full on collapse is unknown.
I have mixed feelings about the crash of 2008. I feel that banks were allowed to take advantage of consumers, make poor decisions, lose money in the process, and then have the people bail them out through tax dollars – with minimal punishment. To me, Wall Street investors and bankers of the 1990’s and 2000’s changed the way America operates. A successful business previously made revenue by offering amazing products and leading innovation. Nowadays, the best seem to profit by tricking those without a mathematics doctorate, through complicated procedures like credit-default swaps and derivatives. I understand that most of the bailouts were necessary in order to maintain and prevent deterioration of the national standard of living, but the financial burden will take decades to pay off. I can’t help but wonder how long it will be until these banks need another bailout, as they instinctively go back to their old behaviors that caused this crisis to begin with. Needless to say, I have little faith in the banking system and this History Channel presentation has effectively deepened my concerns.