Okay, I'll bite.
Why 1873 and not 1819 or 1837 or 1857 or 1879 or 1893 or 1907?
Posted on 10/06/2008 6:05:42 AM PDT by Big Guy and Rusty 99
What we are about to face will make the Great Depression look like a birthday party.
That’s because the Euro is melting down FASTER than the dollar. The EU-zone banks were levered up more than our banks were, and now the wheels are coming off in Europe.
Unlike the US, they don’t have a Federal Reserve with a wide latitude for open market operations. The job of the ECB is to maintain currency stability and price stability. That’s it. Co-ordinated rescues of banks is not within the scope of the ECB.
So Iceland, Denmark, Ireland, Greece all have been doing one-off bank bailouts last week.
Last night, Hypo Real Estate, a big issuer of “covered bonds” (remember those as a proposed ‘solution’ to the US debt crisis?) was insolvent. Germany stepped up with a guarantee of all the deposits in all German banks — some 500+ billion Euro’s worth, and they pumped 50B Euros into Hypo.
It isn’t enough.
That’s why the dollar is going up vs. the Euro. It isn’t that we’re so good.
It is because as bad as we are, we have a single country, a single national economic policy, a single central bank, and by comparison to the EU, we look like we’re on the ball.
No, they’d just sell them into the open market.
The real issue we’re worried about with the PRC is that they’ll sell $330B of agency debt (ie, Fannie/Freddie paper).
It is largely MSM hype, but in the financial world, perception often trumps reality, at least in the short term.
This is also The One’s Reichstag (sp?) fire. The Nazis set that fire and blamed their enemies for it with full complicity of the German press. Hitler then used that as an excuse to sieze more power with the support of a majority of the German people.
The Democrats set this financial fire and are blaming their enemies (Republicans and capitalism) for it with full complicity of the American press. The One is using that as an excuse to sieze more power with the support of a maority of the American people.
but it seems like people are buying it.
Every 5-7 years the stock markets go into a bear market, losing 20-30%. This was due. The news will always point to this or that crisis to explain it, but its just the business cycle.
The market is a leading indicator of the economy, telling us what the investor class sees ahead for the economy. Expect a mild to moderate recession.
That makes me feel better, now. Whew. LOL
Nobody knows, really. Hope for the best and prepare for the worst.
Brevity is the soul of wit,....or in the case of my remarks, sh*t.
Okay, I'll bite.
Why 1873 and not 1819 or 1837 or 1857 or 1879 or 1893 or 1907?
Because (long story short) European money flowed into capital investment in the US after the Franco-Prussian war (as a result of the reparations paid to Germany by France). A couple of American banks failed, which then caused a few European banks to fall, which then bounced back over to the US, causing many more banks to fail.
The riskier debt backing railroad development in the late 1860’s and early 1870’s was dependent upon European capital to prop them up. When the European investors lost their appetite for risk, American investors were in the tail end of a speculative bubble in railroads.
Then in September, 1873, a small financial firm that were invested in railroads in the mid-west went insolvent because the railroads were not re-paying the debt on time. (Sound familiar so far?)
On 17 September, 1873, New York & Oswego Midland Railroad failed to meet $1,000,000 of its paper and suspended operations.
Two smaller financial houses now went belly up. The index of the leading stocks of the day went down 3%.
On 18 September, Jay Cooke & Co. closed. This was the Lehman of its day and that panic. An index of the leading stocks of the day (remember, this is prior to Charles Dow) fell 4.8%.
On 19 Sep 1873, the decline intensified as Fisk & Hatch, another major banking/brokerage firm, ceased operations, again because railroads were not meeting their debt payments.
Now things started getting REAL familiar to us: At this point, the banks ceased trusting each other and would not cashier checks from other banks.
On 18 & 19 September, 1873, 23 broker/dealer/bank firms suspended operations, the index of stocks went down 7.9%.
On 20 September, (which was a Saturday — and the exchange used to be open on Saturdays a long time ago), the volume spiked, stocks dropped like rocks (over 11%) and the principles of the exchange closed the exchange after only an hour of trading - the carnage was so severe that it was clear there was what we now call a “market dislocation.”
The Treasury injected millions of dollars and bought up $24 million in bad bonds (sound familar again?) and ended up injecting over $10 million in “clearinghouse certificate” which were like what the Fed is doing with the TAF today - injections of capital into banks.
It took until the end of October until the banks were converting deposits into cash again.
Now, what came out of this collapse of a speculative bubble in railroads was called the “Long Depression” or “the Real Great Depression” by people who lived through both the 1873 and 1929 melt-downs.
But the banking collapse is very similar to what we see today — the whole thing was brought on by a GOVERNMENT-DRIVEN asset bubble (sound familiar?) of REAL PROPERTY (railroads) which was financed with dubious debt, which was sold in both Europe and the US.
Oh, and the meltdown happened in September and October. But by now, that seems to be par for the course in meltdowns.
I found Scott Nelson's article about "The Real Great Depression" online.
I hope the stuff about giant companies buying up all the little guys, and financial power moving to China and India aren't true.
It does look like the effects of that 1873 depression were great indeed. But still, when you look at how the Second World War came out of the Great Depression of the 1930s, that looks like the more catastrophic one.
In geopolitical terms, yes, I completely agree with you - the 30’s Depression had more far-reaching, lethal consequences that literally changed the world and economics for decades to come. I was referring to purely the economics of 1929 to 1935 or so, when bank failures begot an economic Depression for years, and the way the couplings happened between the US and Europe. There’s a lot of similarities there to reflect on today - both periods of low/no regulation (esp. if we’re considering the effects of the CDS linkages, which are wholly unregulated), the issue of the governments goosing a whole asset class, etc.
The first geopolitical effect of this crisis might be that Iceland gives military basing rights to Russia, where we (the US) and NATO used to have basing rights in Iceland.
Iceland’s sovereign debt is now in question.... and they’ve just re-established a hard peg between the krona and Euro, after seeing hyper-inflation against the Euro last night.
I think after the last week, we can all agree (with the possible exception of the head-in-sand permabulls) that we’re not in Kansas anymore, and we’re now living in interesting times.
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