Saturday, September 20, 2008

Stock market history

A commenter wanted to know why taxes will go up and why the markets won't just go back to normal in short order. Let me take a deep breath and explain with a little history both past and just recent. First read the history of the crash of 1929. When you get back I'll give you the rest of the story of our more recent history.


You'll notice from the article that several of the Big Boys of finance tried their best to step in and sure up the markets. Sound familiar? Now jump ahead. When Reagan was in office he put together a similar plan to keep the markets stable. I believe it's called the PPC. It's the purpose of this fund to step in and keep the markets going in the event of financial troubles. The problem is that they have been pumping money into the markets for the last several years at various times and it worked for quite a while.
With the present situation we have many factors coming into play. There's the obvious subprime problem and with it came a deflation of the housing market. What did that do? It's lowering the tax base of nearly ever city in this country. With less revenue cities have no choice but to lay off workers and raise taxes to make up for the loss. Then there's the increase in gas prices that has hit just about all areas of our economy. Obvious was the auto industry laying off workers as well as the airlines. Those workers not being able to get the same paying jobs are creating near ghost towns up there by Motown. The increase in unemployment has a downward sipral effect of the rest of the economy. Lack of demand from layoffs creates more lack of demand and more lay offs. We were lucky enough the last two or three times around to borrow our way out of this situation. Not so this time around.
A few years back Phil Grahm and company voted to deregulate the financial rules for wall street. In essence they put the rules back to what they were before 1929 only this time around things had changed. The numbers were much higher and financial houses were permitted to repackage those toxic mortgages into paper that was sold all over the world. Add to that the shorts and naked shorts, hedge funds and dirivatives and you get some very risky situations. All of these did not exist in 1929.
People saw Bear Sterns as the beginning of the problem but it was actually starting around spring of 07 if not even earlier. That was when the beginnings of the mortgage melt down started. It was easy to hide back then. A bad loan here or there could be buried without much scrutiny. When Lehman went down the tubes people started moving their retirement funds out of the market and were talking large institutional investors here with large sums of money. People for the last few months have been looking for a safe place to put their money that's why gold and other comoditys have gone up so high.
So where does the inflation fit in here? Well all of the money being pumped into the market is borrowed and that bill will have to be paid at some point. You know that when taxes go up that money is passed on to the consumer and when you combine higher costs for fuel and raw material well you get the picture. As I write this the federal debt limit was just raised to over 11 trillion dollars. The problem however is in the neighborhood of 500 trillion. It took 25 years for the stock market to recover from the Great Crash. But you must remember that was when the baby boom started just after WWII. We're now facing an aging population. So many things have changed after the 29 crash and the 87 one as well and they haven't been for the better.
The situation we faced this week was the total freeze on liquidity. It was much like playing monopoly and having the bank run out of money. Our entire nation was about to come to a grinding halt. What ever happens in the coming months will still not be good because the bailout was done with borrowed money and that money will have to be repaid at some point.

I feel sorry for Obama when he takes office as he has a real mess to clean up.

1 comment:

MyInvestorsPlace said...

Share market participants might be knowing the past depression period around 1930's. Similar situation we are facing at present.

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