The State of the Global Economy: Historical Lessons Learned from 1907, 1929, 1987 and 2001Aug 09


Historical Lessons Learned from 1907, 1929, 1987 and 2001
Prepared by: Ryan Coleman and Kevin Walsh

Guest: Peter Anderson

GCG explores the causes of the Panic of 1907, Crash of 1929 and the Bubble of 2001 to uncovered key lessons learned. Based on historical knowledge and precedence, GCG explored the various opportunities that were capitalized on after each “Bust” and attempts to identify and determine the major opportunities that exist after the 2008 Credit Crash.

Key questions include:

  • What major themes are present throughout the the four different periods?
  • What were the key triggers of each of the events?
  • What opportunities were taken advantage of and profited from after the bust?
  • Looking forward what major opportunities exist after the events of 2008?

Supporting material:

Causes of the Panic of 1907:

Cause of the 1929 Crash

The Cause

There are five proposed reasons as to why the stock market crashed. One of the reasons was that stocks were overpriced and the crash brought the share prices back to a normal level. However, some studies using standard measures of stock value, such as Price to Earning ratios and Price to Dividend ratios, argue that the share prices were not too high. Another reason is that there were massive frauds and illegal activity in the 1920’s stock market. However, evidence revealed that there was probably very little actual insider trading or illegal manipulation. (1929…;)

Margin buying is another reason why people believed that the crash happened. Though it is not the main reason, there was very little margin relative to the value of the market. The new President of the Federal Reserve Board, Adolph Miller, tightened the monetary policy and set out to lower the stock prices since he perceived that speculation led stocks to be overpriced, causing damage to the economy. Also, in the beginning of 1929, the interest rate charged on broker loans rose tremendously. This policy reduced the amount of broker loans that originated from banks and lowered the liquidity of non-financial and other corporations that financed brokers and dealers. Lastly, many public officials commented that the stock price was too high. Herbert Hoover publicly stated that stocks were overvalued and that speculation hurt the economy. Hoover’s statement suggested to the public the lengths he was willing to go to control the stock market. These kinds of statements encouraged investors to believe that the market would continue to be strong, which could be one of the causes of the crash. (1929…;)

The Crash and The Depression

After the crash, production fell nearly 50% from the business cycle peak in August 1929 to March 1933. Meanwhile, the overall price level of stocks dropped by about 1/3. Many people blamed the crash for the economic collapse. Some people held responsible, fairly or not, were President Hoover, brokers, bankers, and businesspersons. The cause of the depression cannot be linked to one individual or even a group of people. It is also unlikely that the crash of the market would have been large enough to lead the US economy into the depression by itself and to sustain the downward spiral in business activity. (1929…;)

The Cause of the 1987 Crash

2001 Bubble Bust

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