Monday, November 24, 2008

Which is the Best Analog- 1929 or 1873?

I was first introduced to perhaps the more appropriate historic analog of the 1870's by Bob Hoye, CEO of the market research firm, Institutional Advisors. Mr. Hoye's research has always attempted to place the current market environment inside a broader historical context. The belief being that the market forces that are currently present have been operating since the advent of the civilized marketplace. You could argue it is just another example of nature in the nature verses nurture argument. If you really want to wax philosophical, you could say there is very little free-will to the collective marketplace, since it is evident throughout history that we recreate the same market conditions associated with fear and greed. The stock chart is just our double-helix to that psychology. I have free-will to individually guide myself through the collective, but standing from space I am lost in the crowd.

In any case, here is a piece by Paul Kedrosky at the Infectious Greed blog.


Get Your Banking Crises Correct: 1872/73 vs. 1929

I've been saying this privately for some time, but only now finally getting around to saying it here: In many ways, the banking crisis of 1872/73, less so the bank failures around the Great Depression, is the right mental model in which to think about the current crisis.

The context: A banking crisis in Europe took hold in 1872 after a mortgage lending boom, one in which house prices climbed endlessly, houses became loan collateral, and all sorts of dubious banking and lending behavior went on, much of it pushed by return-seeking banks. Everything came unglued in late 1873 as the European economy unwound and housing prices began falling, thus causing European banks to fail in a cascade, and interbank lending rates to soar as no bank knew which other bank would fail next. The problems spread to the U.S. in 1873, where debt-needy railroads began failing as European banks withdrew funding, this after a long boom had produced an over-levered mess, and then large numbers of U.S. banks followed afterward.

The whole thing took around four years to unwind in the U.S., and slightly longer in Europe. Admittedly, there was little done at the federal level to ameliorate things in any meaningful way, and there were widespread labor troubles at the same time, both of which helped cause the economy to stay down for the count, adding to the woes.

Nevertheless, people need to focus on the right things. And to my mind that is the banking crisis of 1873, and less so the causes and fixes of 1929.


What history provides us with is a mirror to realize that however unique and different we appear to be, we are just another version of our parents, grandparents, great-grandparents and so on down the line. As the saying goes, "the apple doesn't fall far from the tree".

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