The Great Crash 1929, John Kenneth Galbraith’s economic history of events leading up to the Depression, can easily be read as the first draft of the history of the great crash of 2008. He describes the manic and crooked activities of the men of the market in a way that would make watertiger proud. Speaking of one Charles Grissinger, head of the Fed, he tells us
He had been trained for his task by serving as General Counsel for the Marion Steam Shovel Company of Marion, Ohio. There is nothing to suggest that he was an apt pupil.
P. 54 (references are to the Penguin Books 1992 ed.). It’s fun to identify the figures of 1929 with their equivalents of 2008.
President Coolidge neither knew nor cared what was going on.
P. 53. OK, that one was too easy. Who are these guys?
These men do not issue orders; at most they suggest. Chiefly they move interest rates, buy or sell securities and, in doing so, nudge the economy here or restrain it there. Because the meanings of their actions are not understood by the great majority of the people, they can reasonably be assumed to have superior wisdom. Their actions will occasionally be criticized. More often they will be scrutinized for hidden meanings.
P. 54. Grissinger might not have been much, but the statements of the head of the New York Federal Reserve Bank, Benjamin Strong, “were regarded throughout the System with only a little less awe than the gold standard.” P. 55. Alan Greenspan and the Fed have doppelgangers.
The Fed took minimal steps to deal with speculation in March, 1929, but the banksters, led by Charles Mitchell of National City Bank (a precursor of Citigroup) rejected their leadership. The board of governors of the Fed resigned themselves to futility: one of them said that nothing could be done but brace themselves for the inevitable collapse. More Greenspan.
Here’s Richard Whitney, who in addition to being vice-president of the NYSE, owned his own brokerage firm. He ran low on funds, due to some pointless and failed efforts to support the prices of stock he owned. When his loans came due, he posted securities owned by his customers as collateral for his renewal loans. That wasn’t legal, even in the Roaring Twenties. P. 180. This guy is a dead ringer for Bernie Madoff.
As investment trusts, the mutual funds of that era, proliferated, they began to look for promotional edges. Many hired economists from prominent universities. These are the quants of our day. Many of the investment trusts were leveraged, which multiplied losses when the market collapsed. There isn’t any obvious equivalent for that: regulation works sometimes.
In the aftermath of the disaster, Congress tried to do its own investigation, with Senators and Representatives asking questions all by themselves. Galbraith thinks that Wall Street reached a silent consensus that it would be best if the cheatin’ and lyin’ that led to the great crash were not seen as an actual cause of the depression but whether or not an actual conspiracy existed, the participants suffered a disastrous failure of memory.
Whitney admitted to no serious fault in the past operations of the [NYSE] or even to the possibility of error. He supplied the information that was requested, but he was not unduly helpful to the senators who sought to penetrate the mysteries of short sales, selling against the box, options, pools and syndicates. He seemed to feel these things were beyond the Senator’s intelligence…. The government, not Wall Street, was responsible for the current bad times, Whitney averred, and the government, he believed, could make its greatest contribution to recovery by balancing the budget and thus restoring confidence. To balance the budget he recommended cutting pensions and benefits of veterans who had no service-connected disability and also all government salaries. When pressed about cutting his own pay he said no – it was very little.
…
Prior to the crash Whitney had heard generally of syndicates and pools, but he could give no details.
P. 175-6 AIG, anyone? Congressional blathering for five minutes, anyone? And when do we get the 2009 version of the Pecora Commission?
(illustration courtesy of Bill McIntyre)
Related posts:
- Bad Distribution of Income Led to Great Depression: History Repeats in 2008
- FDL Book Salon Welcomes George Soros, The Crash of 2008 and What It Means
- Re: Re-Regulation — Got Change?
- Krugman on Republican Health Care Logic: The Great Ignorance Meets the Great Disingenuousness
- Galbraith, in His Own Words, on the Afghan Election and U.N. Complicity
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Oh, I dunno, ever hear of credit default swaps?
Thanks, masaccio.
The crash of 29. The crash of 87. The crash of 08. Followed by the inevitable recession/depression. Gotta be some dots here somewhere.
My library is sprouting an economics section.
My immediate thought was hedge funds.
History repeats itself, the second time as farce.
Them too.
They’re one of the main reasons we’re slapping $3 a gallon again at the pump, despite demand for oil being at 19 year lows.
It is amazing that people do not see present problems as caused by the same thing that caused the great depression, the undue concentration of wealth in the hands of a few. You cannot have a consumer driven economy if the would be consumers don’t have money. The really wealthy for all their mansions, yachts and cars, don’t consume that much, certainly not enough to keep an economy going.
It is also interesting that the bailouts were aimed at lenders rather than borrowers. If the bailouts went to borrowers, they pay off their toxic loans which are no longer toxic. We wouldn’t have to worry about marking to market. Consumers whose homes are now unencumbered use what had been their mortgage payment (or part of it) to buy stuff.
That solution was not considered although the costs are identical, because the powers that be wanted the debt to remain rather than be paid off.
It should also be clear that expecting the guys who made the mess to clean it up is not realistic. We need an alternative to the present political system. It’s time we started talking about it.
Sadly, wasn’t each of these crashes preceded by deregulation in order to get “the burden” of complying with government demands off the backs of business entities. Always crashes are preceded by Rethugs convincing the populace that “the government(us)” is the enemy.
OK. What did you have in mind?
Take the quiz! – Blue Texan is upstairs!
Which Left-Winger Made the Following Anti-Semitic Remarks: James von Brunn or Richard M. Nixon?
I prefer direct electronic democracy, but that’s not in the cards in the immediate future. We are too steeped in hierarchical thinking. Many think the unwashed masses won’t be interested. That was the argument the Tories made against representative democracy in the 1770’s. For the present, and I’m not sure this is even possible, we need something to generate a massive, national demonstration, nothing illegal or confontational, but sufficient to show a great many of us subscribe to progressive ideas.
Here’s how I would begin. I’d create a local (town) web site that could be copied for every town. That site puts the town’s check book on line, so citizens see where every public dollar goes. My town will provide the information on an Excel spread sheet, but I have no idea what to do with it. This might be of sufficient interest to get citizens to vist. The site could compare per pupil costs, police and fire costs with similar communities, and other matters of local interest. In my state any town that objects would, I believe, violate the Freedom of Information Act. We don’t know for sure until the judges weigh in on it.
Assuming you have this sort of network, how do you get people talking about say single payer health care? You can create a wikipedia kind of page with people listing links and accumulating all the information on single payer health care they can muster-Then, and here’s the hard part, get people to demonstrate their will to Washington. Maybe pick a day when no one buys gasoline or goes to a movie. If the demonstration is successful, it gives us confidence. Perhaps we can get an idea of the number of potential participants using the vote mechanism on this blog. If it fails, that’s another matter. I have no idea how to get something like this, or something similar, started, but I’d like a dialogue. The internet is an immense tool which we don’t use for anything other than conversation.
OK, you’re advocating a transparent govt based on a technology that didn’t exist 30 years ago. I can get behind that. I don’t think cities all have to use the same template but the same information should be available (it would give local web developers a job.) Folks would more than likely access the sites knowing they don’t have to jump through hoops for information. We have to rely on the younger crowd because much of the baby boom gen is computer/intertoobz illiterate and not willing to change. For the federal govt, however, there’s lots of change in how it works that needs to be done before we can think of making it transparent and truly answerable to the citizens.
Good call. Galbraith sees this, post coming.
Galbraith makes a similar point, maybe more clearly, in in his book “Money” where he discusses the extension of bank loans for margin lending to buy speculative stock. I think his point was that certain actions by the Federal Reserve to increase interest rates had no effect for the banks when they could lend it at 12% on a margin purchase of stocks which everyone “knew” only went up. I read Galbraith to say that this excessive pooling of the nation’s money reserves in speculative loans had a reverse spiral effect once the stock bubble burst and created runs on banks. This was when the nation was still on a gold standard. When you had lenders demanding their loans back in specie and depositors doing the same, something had to give. We got rid of the gold standard, established the Glass-Steagall Act and other reforms separating banking from investment banking and so on. Roosevelt and the New Dealer majority he got in Congress reformed Congress to some extent to get these bills passed.
Something like that has to take place today. As far as political reform is concerned, I think the answer has to lie somewhere in the reform of Congress and our political institutions and how those institutions manage money especially in how they get themselves elected and re-elected. It’s all well and good for the Supreme Court and defenders of our bankrupt political system to intone that money is a form of free speech but then money is also a form of property, a contract, it is a means of storing wealth, etc. Under the Constitution, Congress is given the money to coin money which also means to print it. This financial crisis is about political mismanagement of money in the sense of allowing financial institutions to buy people to govern the country in their interests and then failing at it. Even free speech may be regulated when there are compelling circumstances requiring protection of the public weal. At some point, if there is to be an honest accounting of this, the funny money system which has brought these things to pass has to be replaced with something that does not allow these atrocities to occur.
The reason for one template is that it makes it easier for most people to use, but that impacts people’s feeling of individuality. I suspect it impacts yours since you seem to prefer something less standardized. I was booted off a Red Hat discussion list some years back. The topic was getting Linux into schools and government. I yield to no one in my distaste for Microsoft. I believe Linux is infinitely superior and the sooner we switch the better, but I also insisted we need one Linux rather then the several distributions out there today. I think we’d be better off with one web browser, word processor and operating system. People on the list thought that the death of creativity. That’s not the case, but that’s another argument.
It boils down to who decides. Take the quarrel about the supplemental. My representative Himes ran as an anti-war candidate, but he’s going for the supplemental. I’m not sure why, but I assume he takes the generals at their word-they are the experts after all, and then there’s pressure from the White House saying they will hurt his reelection chances. If you want to abdicate decision making, and most people do, following a leader makes sense. There’s only two possibilities-either we follow the leader or we do what we think best. If we want the latter, we need to get organized.