The stock market peaked on Sept. 3, 1929. Two days later, financier Roger Babson gave a speech in which he warned, “sooner or later, a crash is coming, and it may be terrific.” Later that same day, the market declined by 3 percent in what became known to history as “Babson’s Break.”
Banks issued margin calls to speculators using borrowed money to play the market. The Fed started tightening credit, squeezing investors further.
On Oct. 29, 1929, the speculator’s bubble burst. The Stock Market Crash of 1929 was the very thing the Federal Reserve was created in 1913 to prevent. It was spectacularly obvious to many others besides Roger Babson. Allowing speculators to gamble on credit is a guarantee of disaster.
The Fed should have known – and I believe DID know – that. But the banks (which together own the Federal Reserve) were making too much money off the speculators to put on the brakes when the slide began. Indeed, the only ones to make any money during the Great Depression were the Federal Reserve banks.
Strong banks flourished, weaker banks failed in an economic survival-of-the-fittest contest.
In a speech to mark the 90th birthday of economist Milton Friedman, current Fed chief Ben Bernanke admitted the Fed was responsible for the Crash of ’29.
They should have known better, because they did know better, but they let it happen anyway, in a managed crisis that paid handsome dividends to its Wall Street managers.
The current sub-prime mortgage crisis is another management-by-crisis scenario. It doesn’t take an economic genius to figure out what happens when banks start making 120 percent mortgage loans at sub-prime rates.
Eventually, those rates will come up, and so will the mortgage payments. Roughly $80 per month per percentage point for each $100,000 financed. To a homeowner who can barely afford his house payment at sub-prime levels, a 2-point uptick in his mortgage rates puts him over the limit.
And since he financed 120 percent and has none of his own money tied up in the property, its cheaper just to walk away and let the bank have it. The lenders knew the risk – but the profits were high enough to justify it.
The banking regulators knew the risk. Interest rates are at historic lows as a result of the 9/11 recovery, but rates will eventually have to come back up in order to maintain the dollar’s value. The Federal Reserve knew this. But the profits were high enough to justify the risk.
The Federal Reserve is run, in the final analysis, by the bankers who represent the banks who own it. And it was the banks and the bankers who, then as now, had the most to gain.
This week, Wall Street giant Lehman Brothers filed for bankruptcy as a consequence of the collapsing sub-prime loan market. The Lehman Brothers bankruptcy will be the largest in the history of the world, with losses totaling more than $600 BILLION.
This means that banks around the world that invested with Lehman Brothers are taking a hit. Insurance companies, like the failing AIG, that issued non-performance policies would have run out of money before running out of claims – but AIG was also too big to be allowed to fail, so the Fed bailed them out. The Fed bailed out Fannie Mae and Freddie Mac, but what about all the other banks that have already failed?
Last week, Alan Greenspan called the current financial crisis a “once in a century” event. The former Federal Reserve chairman also predicted that the financial crisis would see the failure of more major financial institutions.
So did Roger Babson, back in September 1929. It took until Oct. 29 before he got everyone’s undivided attention.