Black Tuesday
By bigbrother ~ October 24th, 2008. Filed under: Bonus.
What You Need to Know Today, October 24, 2008:
Today is the 79th anniversary of the Crash of 1929. Big Brother had manservant Marley go through some old composition books from 8th grade and thinks this early show of brilliance can provide a depression era perspective on a modern predicament.
The Great Crash caused multiple new regulations to be enacted by the Federal Government. Back then, when financial markets were immature the sudden drop in prices of investments bought on credit could cause further selling, depressing the market even further. In such a situation, one price decline feeds on another and pretty soon everything everyone owns is worth significantly less than before.
After the Great Crash came the Great Depression and then the Second Great War. To stave off a recurrence of the Crash and Depression certain safeguard were put in place. We sadly have no regulations preventing war. Some would argue that these three “Greats” were not necessarily related, but the three of them being coincidental seems unlikely.
First the government said you were not allowed to borrow too much to buy assets. It was understood that you might be purchasing something at an inflated price, if the price went down you could owe more than it was worth, you would then be forced to sell and everyone else who owned assets like yours would then be forced to sell because of the downward spiral in prices.
Second, the guys who loaned you the money were not allowed to borrow too much. If a few of their investments went bad you wanted to make sure that the company could stay in business to continue providing insurance or investment banking or commercial loans and not leave their clients or workers in the lurch.
Third, if a company provided insurance, it was not allowed to engage in activities too similar to commercial or investment banking. Similarly an investment bank was not supposed to do insurance or commercial banking and a commercial bank was supposed to stay out of investment banking or insurance. That way if companies in one industry really screwed up badly and went out of business, at least the other two industries might not be affected.
Because of the Great Crash and the Great Depression, America learned a valuable lesson and never has not had to deal with a widespread panic or depression again.
That is All,
Big Brother
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