Crash 3

People like to say that history repeats itself. It never exactly does, but broad themes do recur. The current recession and market crash is a case in point. It bears similarities to previous meltdowns in 1929 and 1987. Debt, speculation based on paper appreciation, and inadequate regulation were the culprits in all three cases. Laissez-faire Republican policies were the abettors. The American people were the victims.

1929 was the year of the Great Crash and the start of the Great Depression. The 1920s were a period of tremendous economic expansion. The stock market grew at the phenomenal rate of 20% to 30% per year. Share prices ballooned out of all proportion to their price to earnings ratios. Values became driven by psychology rather than by account sheets. Investors continued to bid prices up in the belief that they could never fall. The longer one waited to buy the more profit one missed. People borrowed to pay for all the attractive new consumer durables-- automobiles, radios, refrigerators, washing machines--and that great engine of expanding wealth, stocks.

The brokers and banks worked out a plan to sell to those who had run out of ready cash. "Margin buying" allowed would be investors to pay as little as ten percent down on securities. The remainder would be paid for out of the stocks' future appreciation in value. So brokers made commissions, banks made loans, and average folks made, for the first time, capital gains in the market. Everybody won. That is, until the consumer market reached saturation with the new appliances and sales fell. The smart money got out early and raked in huge profits before the crash. But most people were caught unprepared when stock prices went into free fall and began to "correct" to reflect their true values. Paper millions disappeared overnight, panicked citizens made bank runs, cleaned out banks called in loans that no one could pay and foreclosed on property they could not sell, employers slashed staff, and before long 50% of the work force was unemployed or underemployed. There had been few regulations to require sound buying, lending or consumer protection practices. The nation paid in misery for most of the 1930s.

The 1980s ushered in the administration of a new disciple of deregulation. It was the era of leveraged buyouts, junk bonds, corporate raiders and yuppies. Like the title of the Twenties musical, in the financial world it was "Anything Goes." On the theory that benefits would trickle down, the tax structure was slashed for Wall Street and the safety net was slashed for Main Street. As with the previous house of cards, the day of reckoning eventually came. The market lost 20% of its value one day in 1987. Program buying, leveraged loans, including many to family farmers who had borrowed on the expected appreciation of their land or crop prices and real estate deals all went south. The real disposal income of the majority of the American public has not improved since before 1980.

In the 2000s we have been treated to another administration dedicated to the propositions that regulations and consumer security are evil and that what's good for business is good for America. Housing prices have skyrocketed based on the speculative notion that they can go only up and never down. Millions have joined the frenzy to buy, figuring that the cost will only be higher next year and that the debt incurred can be paid by future appreciation. Second and third mortgages are common. The nation is awash in debt at all levels, personal, trade, and governmental. Consumer debt and the wealth gap have reached historic proportions. Home prices have outpaced wages to such an extent as to be unsustainable.

Rather than provide affordable housing, the administration did little but spread bromides about free markets and the structural soundness of the American economy. For its part, the financial sector instituted new forms of margin buying: the subprime and adjustable rate loans. When prices inevitably began to tank due to sheer unaffordability, millions have been left with loans they cannot pay off. As in 1929, these millions face imminent foreclosure and lenders face billions in loans they cannot collect. To save themselves they are now scurrying for bailout loans to Middle and Far Eastern banks and potentates who have amassed troves of dollars from trade surpluses and US Treasury securities. The American stock market has lost over 2,000 points and foreign markets have sustained losses of five to six percent in a single day. Based on this recurring cycle of myopia one thing seems clear: we don't learn from history.