Are there any parallels between the margin buying of stock before the crash of 1929 and the rampant ...?

The real parallel is this...

The money and credit supply expansion during the roaring 20s..

The [worldwide] money and credit supply expansion from 1993-2005.

[M-1, M-2, M-3 all that is considered money and credit]

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The worldwide system is now faced with two outcomes.. either

"Inflate and suffer the consequences, OR

Deflate and suffer the consequences..."

With the dollar losing 40% of its core value since the year 2000.. what do you perceive the equation to be?

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Related article:

Inflation, diluting the money supply with worthless tokens, either by borrowing money into existence or by printing it, transfers wealth from the people who produce it to people who use it to buy political power. It's a nasty, pious fraud, but the real harm goes far beyond the immorality of simple theft and power mongering. The most dangerous aspect of inflation is the corrupting effect it has on the character of those who use it.

As in all political games, inflation has winners and losers. The losers are savers, whose wealth vanishes as the currency declines in value. The winners are borrowers who pay back borrowed money in depreciated units. Bankers earn astounding profits. And politicians become colossal borrowers and never pay the money back at all.

Honest money encourages savers to seek out productive investments. Investors look for enterprises that make a profit. Profitable businesses are by their nature productive, efficient, and innovative. That's how they survive.

Dishonest money, on the other hand, promotes speculation. That is, gambling on rising prices, rather than investment in productive enterprise. In an inflationary environment people use borrowed money to bet that some "asset" will become more desirable to the next buyer than it was to the first. It's the Greater Fool investment theory.

In such an environment, productivity means nothing. Consumer goods like paintings, baseball cards, stamps, houses, antique cars or even Beanie Babies can make speculators rich. But such "investments" produce no new wealth. The winner in a crap game is wealthier, but he hasn't produced anything, he's simply redistributed what already was.

Money invested in the hope of price increases is no more productive than money thrown into a crap game. When inflation is as solidly fixed in the minds of people as it is today, there are few who even know the difference between investment and speculation. The chattering classes in the mainstream media call stock speculation "investing" as if it were. Legions of clueless speculators believe them.

People now caught in the fast deflating housing bubble thought they were "investing" in a home they couldn't afford. In fact they were simply gambling that its price would go up and that there would be someone dumber than themselves to buy it. In the go-go years a great many supposedly smart people, from mortgage brokers to investment bankers, invited big debt gorillas into their parlors. Coco didn't look so bad dressed in that suit. And there were enough bananas in the garage to keep him fed for a while.

But now the bananas have run out and the gorilla is getting a little testy. He just tossed the sofa through the bay window and he's headed for the kitchen. Lots of those smart people are looking for help with the big debt monkey.

Gambling on a large scale in any economy is a terrible waste of resources. In the parlance of economists, resources are misallocated. That is, they are put into deeply stupid but wildly expensive stuff like sushi, fast cars, stock in waycoolkillerapp.com and granite countertops.

But markets will not be conned. Left unmolested, free markets reward productivity and punish stupidity. Markets naturally reallocate resources to productive use. They do it efficiently and ruthlessly, without regard to whether and to whom campaign contributions or votes flow.

For that reason, despite a declared admiration for its mysterious workings, politicians despise the free market. Politicians, who themselves lit the inflationary fire, feel compelled to step in to "help" those whose bad bets are now going up in smoke.

People are more inclined to act foolishly if they know there will be no adverse consequences to their foolishness. They are more inclined to be dishonest and irresponsible where honesty and responsibility are punished. It is here that we find what economists call "moral hazard."

A government bailout amounts to a subsidy for foolishness, stupidity, and recklessness. Just as it is a punishment for thrift, productivity, and responsibility. What you subsidize, you get more of. What you punish tends to disappear, or at least to hide.

The Bailout Game is nothing new. In my lifetime taxpayers have performed massive rescues of Chrysler in 1979, the entire Savings and Loan industry in 1989 and the airlines in 2001.

What is new is the almost universal expectation that the government can and should rescue businesses and individuals from their mistakes. Today's market is teaching people who have made dumb financial decisions to behave more sensibly. The market is offering expensive lessons in economics, discipline and character that only unfiltered experience can teach. Government attempts to save people from these lessons are as futile as they are dishonest.

Taxpayer rescues simply delay, but cannot prevent, the market's eventual restoration of sanity to an economy distorted and exhausted by inflationary madness. While they continue, bailouts incline us all toward thievery by temping us into the bailout game.

If only those behind in their payments will qualify for taxpayer help, why stay current?

Government can't help anyone without hurting someone else. Bailouts in the crumbling real estate and mortgage markets will reward recklessness, lying and gambling while they punish thrift, responsibility, and hard work. The free market will act more sensibly and honestly than a gang of politicians ever will.

from: Hal O'Boyle

December 12, 2007

Moral Hazard on the Rise

No real parallel.

The 1929 crash was brought on by a whole lot more than poor margin rules. While the FDIC has changed the margin rule to prevent a similar showing of 1929, the margin levels used then are still actively inforce in the Currency Exchange Market. The Margin levels in 1929 were unsubstantiated, yes, but the main reason for the fallout wasn't everyone using these margin accounts, it was the false reports companies would list on their financials. There was no regulations then that monitored how or what they reported. So people would dump money into these stocks, only to find out the Company lied.

For today's situation, it is not at all similar. The US government started this process called Collaterialized Mortgage Obligations be in the 60s, with Ginnie Mae (a government owned mortgage broker that buys VA and FDA home loans). With a CMO, you pool together mortgages of like term and interest rate, and then slice them up into bonds. Then you issue the bonds to investors. As the homeowners make their monthly payments, a portion of the interest goes to the bank and the investor. The money derived from the Bond issuance is then used to issue more home loans. This keeps the money flowing to issue more home loans and prevents banks from running to the government to buy their mortgage portfolios. This practice of CMOs and Collateriallized Debt Obligations has been going on for about 40+ years now, and is a relatively safe investment.

The problem comes into play when Fed Chairman Greenspan lowered the Fed Funds rate to a historic low of 1%. Interest rates is the time risk of money. When you take out the risk, investors and consumers act irresponsibly since there is no percieved risk. People are not rational actors.

So, people got into home loans they should have and investors pooled their money into securities they shouldn't have. What happened is these home loans were defaulting left and right, which meant that the banks could not issue the interest payments they were required by law to issue. This meant multiple defaults on the part of the banks. Now these CMOs and CDOs are debt securities, like Bonds, and so when these banks started to default, their credit ratings went down. Many of these defaulted securities were rated very highly by the ratings agencies, Standard & Poor, Moody's and Fitch (currently these institutions are facing laws suits and SEC investigations).

With ZERO confidence in the ratings system, no one issued credit...hence the credit crunch.

So, this is a very very different beast with no parallel to the margin levels of 1929 (incidentially, Currency markets use higher margin levels, upwards to 200:1, and the margin levels for equity accounts is 50:1). The growth of the past 15 years in the housing market was largely fake. House flippers were a huge problem to these issues, which is why homes valued over 470K were the largest default risks...and why banks froze up on their credit...

the housing market was about, and is presently correcting, 50% above the historic median price levels...which means speculators and house flippers played a heavy role in the rampant inflation of house prices...so when the system corrected, it corrected hard. When housing levels readjust, many people are going to realize they lost a lot of the home equity and will not be able to refinance, since the amount they owe on their initial loan is more than what their home is now worth...

but hey, we all love those house flipper shows, right?

Right and in 2008 we had a democratic majority that ignored the warning signs of the housing bubble collapse. In a 10 year period the Federal government takes in 30 trillion dollars, the bush tax cuts were 2.5% of that spread out over the decade. The tax cuts had nothing to do with the problem, just like the tax increases being proposed by the current administration are not going to a thing to address the problems we have.