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Politicians need a history lesson from 1929

Though I am no expert on the stock market crash of 1929 or the Great Depression that followed, what a pity that senior bankers and politicians did not study this subject and learn some of the lessons. There are so many parallels that it is uncanny and implies that people who should know better never learn their lessons.

In the run up to the Great Depression, ordinary people were allowed to purchase shares, whereas in the past it had been an exclusive club. In doing so, they increased demand and share prices started their relentless rise. This started to encourage more and more people to buy shares and, you’ve guessed it, the prices started to rise even further. The inexorable rise in share prices encouraged people to start to borrow in order that they could take advantage of the wealth creation that the stock market appeared to provide. The vast majority of these ordinary people had absolutely no idea how the stock market worked, it just looked like a one way bet. Brokers extended credit to share purchasers, in what became know as ‘margins’ whereby the purchaser could buy for example, $60,000 worth of shares, with just $6,000 of cash, the rest was borrowed.

The people of America felt rich, lifestyles improved after the austerity of the first world war and few people raised any doubts, those that did, such as President Hoover, tended to keep it to themselves, rather than be see as the Cassandra. Millions of people were encouraged to invest in the new gold rush that was the New York Stock Exchange, with little or no knowledge of the risks and inevitably with a ringing in their ears that you have to be ‘in it, to win it’. Banks and brokers stoked the money fever by extending loans secured on the shares. Inevitably the bubble burst, some were smart enough or lucky enough to get out before the crash, but they were few and far between. The vast majority of people lost all of their savings. There followed
the Great Depression, which lead to mass unemployment and affected virtually every corner of the world and it lasted 10 years. Some would argue that it also encouraged fascism and communism, if true, then it could well have been a precursor to the second world war.

If we exchange shares for houses, the parallels are uncanny. Many people have jumped on the housing bandwagon for fear of being left behind and a concern that if they were not a property owner, then they were nothing. In fact, there is some irony with that last statement because, as we all know, if you went to a bank and were a home owner, even if you owed £300k on your house, you were more likely to be able to secure another loan, than if you had no such liabilities because you rented. Somehow, owning a home had become the primary goal of a good proportion of the people of this country, actively encouraged by the banks. Loan to Value (LTV) ratios increased from around 75% to, in some cases, 125%. This implied that the banks felt that their investment was safe, because house prices would continue to rise, which meant that in a relatively short period of time, their risk would be covered by the rise in house prices.

If the banks felt that way, why would the buyers not? The ratios were also increased, allowing people to buy a house with multiples or 5 or 6 times their earnings, where previously this had typically been 2.5 times joint, or 3 times a single income. If that were not enough, many of the banks introduced ‘buy to let’ schemes, which allowed people with little or no money to build up a property portfolio in no time and of course, lead to an even greater demand for properties, leading to a further increase in house prices. So, everyone was making money, homeowners, the banks, mortgage companies, estate agents and of course, your friend and mine Gordon Brown, in the form of the Treasury.

After the 1929 stock market crash, Hoover introduced the Securities & Exchange commision to regulate US markets, this had the desired affect. However, over the past 20 years or so, the rules and regulations have been relaxed, seen as no longer necessary and much of what we witness in the United States today can be attributed to the easing of those regulations. Similarly, the much vaunted deregulation of the City was also a pre-cursor to the problems we all face today. Light regulation and a hand-off approach by government and the regulators has allowed the banks to enter very high risk transactions which many people struggle to understand. Yet, in doing so, they have clearly bet everything on it, presumably because they also though they couldn’t lose. Now, clearly all of us must take personal responsibility for our respective levels of borrowings, but easy money is difficult to refuse especially when it is being rammed down your throat on a daily basis, in the newspapers, on TV, in the shops and via direct mail campaigns.

However, when people hold senior positions, in banks, commerce and government, we could all be forgiven for believing that they are well read, experienced, shrewd and knowledgeable. In fact, we tend to take it for granted, how else would they have secured senior positions with such huge responsibilities? As chancellor, Gordon Brown in particular and the Labour government in general have let us down, their collective naivety lulled us all into a sense of false security, with Gordon Brown using the oft repeated mantra that his government policies would lead to an end of “Tory boom and bust”.

We can be forgiven for believing that a man in such a position would be best placed to know whether that was true or not, but instead, we have all come to realise, that politicians do not earn their position because of their knowledge, but instead, where they sit in the party. In other words, they learn on the job. Imagine placing a 10 year old in charge of a London bus if you will! Similarly, bankers have created new financial products, which are so complicated, that few, if any, could actually understand the risks associated with bundling mortgage securities. At best their actions could be described as reckless, but a far better description maybe of a desperate gambler playing for high stakes.

The regulators appear to have either been overwhelmed at the scale of these new securities or, more likely, unable to understand the complexities. As a consequence, those that were entrusted with our financial security, government ministers, regulators and banks, have seriously let the people of this country down, as well as shareholders, many of whom are you and I with pension funds invested in the stock market.

What is particularly galling is the fact that no-one wants to accept responsibility. On top of that, the same people that got us into this mess are, for the most part, still in the same positions. Asking us to believe that they have all the answers. Even though, had they studied their subject matter better and read up on the stock market crash of 1929 and the Great depression, many of the problems we are facing today could have been anticipated and perhaps even avoided. Governments around the world want us to believe that their solutions will work, but how do they really know, what confidence can we have in their solutions? They are spending £trillions on propping up banks, business and economies, but all of this money is borrowed, have they learnt nothing?

The rest of us are having to tighten our belts, but our governments are spending our money in what appears to be a last throw of the dice. They are all frightened of another depression, aren’t we all, but sometimes it is necessary for a period of reflection, instead, governments around the world appear to be thrashing around, panicking in a last throw of the dice. We all find ourselves asking where will it all end, not when?

We must all learn lessons from this. But one fundamental lesson is that no member of parliament should be allowed to take up a position unless they have prior experience. For example, no current cabinet minister has ever run their own business, so what do they know of the problems being faced by business people? When was the last time that an experienced person was placed in charge of the second largest employer in the world, the National Health Service? Take a look at Miliband, he is wet behind the ears, lacks depth and credibility, he may be ‘smooth’ but he does not look like someone that is well read. In fact, he even managed to offend the Indian government on his last visit, are these the sort of people we want to be representing us on the world stage? What of Jacqui Smith, she finds it difficult to string a sentence together has allowed the police and other agencies to trample all over our civil liberties and lacks any obvious gravitas? Little wonder that we are in a mess.

In my view, government ministers and bankers must be called to account because they have demonstrated what appears to be a reckless disregard for the interests, respectively of the people of this country and the interests of their shareholders.

It is a time for change and this must include a look at how or on what basis members of parliament are given key cabinet posts. In no other business or industry I know of do people with little or no experience get elevated to such senior positions based on nothing other than a handshake. Never again should the people of this country be lead by donkeys. We will come out the other side, most likely in spite of this government intervention rather than because of them, but when we do, the people’s voice must be heard. We must demand change.


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12 Comments For This Post

  1. CuriouslyInspired Says:

    Yet I fear that the responsible will go unpunished. There has been no move whatsoever to get these any bankers or regulators to account for their criminal recklessness. The main problem is that in the absence of relevant financial regulation, many of them have actually done nothing “technically” wrong or fraudulent. Unwittingly creating a credit bubble, or any other asset bubble is not something that I believe we have any legal remedy for, this not being fraud. This is why we have seen guys who caused Enron and World in court and convicted, and might not ever see anything happen here. Given the significance of the aftermath of the collapse of the credit bubble, this strikes me as economic history’s bitter irony, but this is the result of ealier deregulation of the financial services industry.

  2. Frustrated Voter Says:

    @ CurioslyInspired: Completely agree with you, I guess if incompetence was a crime, there would be millions of us locked up. That said, we are entitled to expect a reasonable amount of care, skill and competence from those put in charge of our assets and future.

  3. freethinkeruk Says:

    Excellent piece frustrated voter, particularly the analogy with the housing market. I guess that government ministers can be held to account at the next election but the bankers and speculators, that’s another story. They’ll be back!

  4. Frustrated Voter Says:

    @ freethinkeruk: Thanks for your comments freethinkeruk. I agree, we may well be able to hold the ministers to account, but unless people get very angry, there is every likelihood that the bankers, speculators and regulatory authorities will indeed get away scot free. There truly needs to be a public enquiry, given this is the worse economic situation ever to hit these shores. It is not so much about blame, but learning lessons, given no-one learnt anything from 1929. My main fear is that whatever party gets in, we will end up with another bunch of ‘wet behind the ears’ politicians running one of the biggest economies in the world, with little or no reference to parliament. Look for example at the American situation, Bush had to go to Congress and the Senate, meanwhile our ministers committed proportionately more money and only had to ‘inform’ parliament. It is frightening.

  5. Norrie Stewart Says:

    One problem to be faced in the future will be to ensure that those up for election in our vaulted democracy are not donkeys. As the candidates coming forward for election seem to consist of more and more career politicians not experienced industrialist, managers or businessmen. Many of these people appear more interested in their standing within their own party than with the health of our country.

  6. Frustrated Voter Says:

    @ Norrie Stewart: Let us hope that the electorate starts to become more savvy when it comes to who they vote for, that of course, assumes that there is sufficient choice in the first place. I really would like to see more independent MP’s, that way politics would be less partisan and MP’s would be more likely to look at what the electorate want. It may lead to a hung parliament, but in a way, that would be a price worth paying to stop a repeat of what we have had for generations.

    Incidentally, I love the drawings on your website.

  7. K Bertrand Says:

    I am an American ex-home owner caught in the real estate scam of the United States. I think it necessary to describe what Americans here have gone through in the last two decades to counter what the world media is telling you. The average American at the start had no interest in buying homes. Rent was inexpensive and affordable and we were happy. To get us out of rentals, ordinary entrepreneurs among our peers were wooed to ‘get into real estate investing’ as a way to finance our dreams. I went to one such seminar. The marketing stress was that once you snapped up homes and multifamilies in your area, you could raise rents because, as our instructor told us, “everyone will need someplace to live”. I asked him, “Doesn’t that sound unconscionable to raise rent $200 (dollars) in a month? to which he replied, “If you don’t want to make money why are you at this seminar?” and the audience laughed at me. When I decided to buy a multifamily, I shopped for property for over a year, shopped for the best interest rate, double checked my budget, asked all the right questions. When the papers were signed and I got home, everything was changed on the contract and I found myself in a subprime loan with variable rate when I was promised a fixed rate. The real nightmare began when I tried to prosecute. In America, laws defend banks not buyers. We had some protections in place which could not hold up in court because of the vagueness of wording. A mortgage company so sued could be fined a penalty by the government regulatory agency but the penalty fees had ceilings of $25,000 and the award went to the regulatory agency, not the swindled owner or the attorney who took his time to prosecute. AND we still had the bad loan because NOW it was a contract sold to another company who had nothing to do with the original agreement. Swindled buyers had nowhere to go, and while we licked our wounds and drained our bank accounts and kids college funds to keep afloat, these same companies changed names and went to work in the same area again. Radio and TV advertisements still told us this was the best time to refinance and/or buy a home. It was supposedly the best time to take out home equity and fix that roof, those gutters. When we did, our identies were stolen from our personal papers, and properties bought under our credit histories in other states, unbeknownst to us. When the market crashed, we were blamed for buying “too much house”, for being stupid when “if it’s too good to be true, it’s too good’ and my favorite: “You were just too greedy.” Homeowners and new home buyers were screwed out of their savings this way and no one did anything to stop it, although we tried and tried to find help. In 2004 alone, the number of websites about mortgage fraud and broker swindles skyrocketed as victims found nowhere to turn but to each other in lament. What I want to know is, where were the oversight committees set in place to protect us? They were established for us. But each refused our calls, or sent us away saying the list was too long to reach us. We are not greedy Americans who screwed over the world. Most of us were swindled out of any housing and they knew it, and did nothing.

  8. Frustrated Voter Says:

    This is an appalling state of affairs, although I am not surprised to find that there are many, many sharks our there willing to dupe people.

    In the UK, there were also many organisations actively encouraging and incentivising individuals to get into the ‘buy to let’ market, even going so far as to show people that had done this successfully on TV documentaries. Many people did this with good intent, viewing any increase in capital as a way of building up a retirement fund, this, after Gordon Brown raided the private sector pension schemes in 1997, raising over £120bn for the treasury in the process. I suspect, it was primarily this buy to let market that discouraged the Bank of England from raising interest rates to ‘cool’ the property market.

    What is really worrying, is banks and building societies on both sides of the pond failed to understand that inexorable rise in property prices had to end one day and history tells us this is normally with a price crash. Our government knew that the property bubble would burst but did nothing about it.

    As always, the mainstream press likes to spout the government line, rather than tell us the truth. I appreciate you setting the record straight. I know it will make no difference to the position you are in, or other in the USA and here in the UK, but perhaps, it will serve as a lesson for the future. I personally believe that most people’s love affair with property ownership will dissipate when this is all over and that is probably no bad thing, given it is ownership that has the capacity to destroy most people and attract the sharks.

  9. Steve Says:

    Reading through all the posts that I’ve had time to get to so far, I feel I’m reading my own thoughts.

    I bought property in the UK, coming up on 4 years ago now. The market was good. I entered into an agreement with a friend of mine and got a joint tenancy freehold deal with a 100% mortgage. I cashed in all my personal savings, investments and endowments to sink cash into our new home. The mortgage was high, but between the two of us, I could afford it, just.
    It was to be my retirement plan.

    My friend lasted only a few months, deciding he’d be better off living with his new ‘other half’ and leaving me to finance this dinosaur alone. I resorted to renting out rooms, trying to make ends meet, but it was not working. I was getting further and further into debt…and then the market crashed.

    I can blame no-one for the fact that I was getting further into debt, but I was sitting on my retirement fund, and in danger of losing everything when I decided it would be better to sell than to sit.

    Like I said, the market took a hit, and the prices began falling. Demand began falling, and selling became a very unlikely way out of my predicament. I am still living there, still getting behind with the mortgage, and still accruing too much debt. I can see no way forward for me now other than throwing in the towel, but I’ve invested over £50k in my house so far, and that is something that I am determined not to lose, but it’s a hard battle to win.

    I don’t blame government, directly, but they were the financiers that along with the bankers led us down this path. In my opinion, therein lies the problem. The Government are financiers, not governors. They have allowed power to go to their heads, as financiers. The greed and lure of financial riches were the drivers. But the fault is ours. We created this, we allowed it to happen. Only we can change it, and change it we must.

    Power to the People is what democracy is all about. It is the cornerstone of our society. The government SERVE the people, not the other way around. I couldn’t agree more.

  10. Frustrated Voter Says:

    @ Steve: If the world was full of sweet things, then there is a good chance that most of us would be obese; some would argue of courser that too many of us are. Similarly, if credit is relatively cheap and easy to get, then I cannot blame people for accessing it, especially if it looks like a one way bet, house price increases etc. The reality is the government DID know the risks and had the tools to cool the credit boom, indirectly through interest rates (via the Bank of England) and directly through credit control, where the government places limits on borrowing, this has been done before.

    Instead, the elected to do nothing, in spite of the risks, now this is a government that believes that we don’t know what is best for us, so they legislate, smoking, green taxes, petrol duties etc, etc. So why not credit. the answer is simple, they had massive spending plans and a commitment to redistribute wealth, they could only get away with this during a boom, you can’t do this sort of thing in a recession. Therefore, they KNEW what was going to happen and chose to ignore it. Yes, the global market has been hit through sub-prime mortgages and asset based securities, but we have been left with nothing in the cupboard for a rainy day and as a consequence, it is likely that we will be the last of the developed countries to come out of this recession.

    Government cannot or at least should not pick and choose what they will govern on and what they will not. Yes, borrowers must accept their share of responsibility and to be honest, those that have over extended themselves will learn it in the most dramatic and unfortunate way. Similarly, bankers have been reckless in their creation of a false market in asset based securities that were sold on for an immediate profit. However, the government was the policeman, charged with looking after our interests in the same way as a board of directors would, they have failed, but, as yet, none of them have admitted any responsibility. Gordon Brown in particular continues to tell us that the problems were created overseas and that is is a “global problem”, at best that is simplistic and at worst a blatant lie.

  11. LabourHater Says:

    I’ve always thought that if you cannot afford to put down at least 50% of the total value of a house you should not be allowed to buy one; those who cannot afford this should be content to rent their homes.

    Their is no reason why houses cannot be built in a warehouse, on a production line and then assembled on site; like they do in America and in other parts of the world; this production method by itself would force down the average cost of buying a house.

    As things are; houses are over valued and the only ones who benefit in the long run are the banks.

  12. Frustrated Voter Says:

    Its a fair point. However, as I understand it, local authorities and the government (MOD) own much of the land in the UK. Now, in terms of build costs I am assured that it is divided into 3 thirds. That is to say one third build, one third land and one third profit. If this is true, then if the local authorites made their land available for new build, they could build a £100,000 house for just £35,000. That would save a great deal of money, providing either, social housing or, affordable homes.

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  1. 1929 stock market is history repeating itself « British Politics’s Blog Says:

    […] article over at the political blog Power to the People, about the similarities between the 1929 stock market crash and our current economic situation and I am finding it difficult to fault the parallels. Clearly […]

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