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s0840867

BUSINESS SCHOOL INVESTMENT AND SECURITIES MARKETS

Topic: Critical book review of “The Great Crash1929”: The classic account of financial disaster’ by J.K.Galbraith

Student: Aidyn Sadibekov Deadline: 12.00 noon 17/11/2010

Content Introduction Causes of Great Crash Great crash Consequences Similarities of Great Crash of 1929 and Banking crisis in 2008 Conclusion Bibliography 3 3 4 6 7 8 9 .

Therefore new investments did not have source of finance and liquidity ratio fell. “Magic of investment trusts” – utopian idea of investments instruments. which promised great benefits as a result dramatically motivated speculation. Strong individuals with pervasive sense of confidence and optimism created delusional trust hence everyone was investing in the stock market. Merges of small companies into large industrial giants. because financial disaster explained there have a cyclical effect.Sadibekov Aidyn Great Crash in 1929 s0840867 Introduction John Kenneth first time published the book “The Great Crash in 1929” telling the overview of the stock market crash before the Great American Depression. that corporate pyramids dramatically increased risks cause once company -3- . Sachs Corporate structure or Consolidation age. However due to huge liabilities on bonds. The reason for republishing “The Great crash of 1929” in 2009 is due. as a result in future world should expect another commodity or stock boom followed by another crash. all incomes went to repay debts. Nowadays the book is fundamental for all people of business world. Purchase and then reissue of own company shares example Golden. In other words. Causes of Great Crash Powers of greed was driving force of American speculative culture. therefore huge packs of attractive corporate bonds could be issued. transferring into highly risking financial instruments. the boom of commodity is mainly caused by speculation. Despite of the difference in time of almost 80 years between two economic recessions. In times of stock shortage in US unit trust companies changed their initial philosophy of existence. According to John K. As a result massive demand caused scarce of common stock. Once unregulated market bubble at peak it will crash with a serious consequences for everyone involved. in time the immunity to speculation wears off. Leverage of the trust. to “Financial crisis” world experiencing in recent years. Unit Trust were attractive because: Created reputation or brand of Investment trust by advertising expertise of its managers. Unit trusts or trust companies are intermediates between investors and companies.. there are many similarities in causes and consequences. and geometrical sequence benefits. To conclude.

investment trusts and government representatives etc. negative of reputation of single unit spreads to Bank name as a whole. incomes and all other indicators fell. Clarence Hatry enterprises Collapsed in England 1929 and Boston -4- . Players such as bankers. prices. Poor economical decisions made by government of USA. US government discouraging imports and encouraging exports policy. Therefore US decided to lower imports so that lead to decrease in production and other economical indicators. That politics created absurd situation internationally. Government in power focused on sort-term by pleasing voters to gain popularity towards following election instead of working on stability of the country’s economy in the long-term. Most of the countries who was trading with US created huge trade deficit to US that they could not possibly repay. in other words banks was way too understanding towards speculators. 22 September. Both fiscal and monetary policies had a lack of diverse intellectual approach. Large number of independent bank units. government. Normally stock market reflect industrial situation while in 1929 vice verse situation appeared when stock market where effecting industries and economy overall. Therefore people had expectations of crash. when production. which basically made an analysis of Boston Edison and Clarence Hatry. The fundamental reason for providing loans was based on increasing or stable prices of Stock Market. New York newspapers published articles with headline “Overstaying a bull market”. Bad banking structure Loans that were good become foolish after prices collapsed.Sadibekov Aidyn Great Crash in 1929 s0840867 will have low income it will fail on coverage of debt repayments and will go bankruptcy. Therefore due to fact that market powers were popular government ignored minority theories and opinions warning of stock crash and potential economical distress. investors. The risk assessment of bank loans was very poor. Government was going along with players of the market wished to believe in the performance of the boom. brokers. Great crash Pre crash Warnings Stock market does not reflect industrial situation.

therefore ideas to recover market were meaningless. when margins of stock went lower than debt that had to be paid for it. banker Charles Mitchell. “Organised support” believe was proposed. To recover the stock market. investment trusts etc. Raskob. Stock market Crash and rescue ideas Change of mindset. Therefore the risk loan assessing of banking system of that time failed. Therefore Unit trusts equities during crash were worthless and it was hard to sell them.Sadibekov Aidyn Great Crash in 1929 s0840867 Edison was refused to split stocks by Massachusetts Department of Public Utilities. -5- . moreover they started investigation of overvalued stocks of Boston Edison. The leverage effect which was gaining great return during rising prices had even higher effect when stock prices were falling. making unit trusts worthless. The negative effect from unit trusts equities were driving good stock out. Moreover it had even greater effect if Unit Trusts had shares of other Trust companies in the portfolio. Reverse leverage and geometrical effect of Unit trusts. Almost all of the officials at that time have started to talk about “fundamentals” in order to make words more convenient. The idea is that powerful people will organise to keep prises of stock at reasonable level. in other words those who will lose most from stock crash. The stock of the established companies of industrial markets suppose to be stable if not overall panic of falling prices of stock caused by Unit Trusts equities. People such as Cutten. Another phenomenon was psychological power of words. hence speculators was being asked for more cash. Durant. To conclude the stock crash rapidly destroyed reputation of everyone who supported market powers at times of boom.

dramatically increased levels of unemployment. Sense of utter hopelessness. however after crash people become opposite to speculation with characteristics such as cautious.Sadibekov Aidyn Great Crash in 1929 s0840867 Consequences Consequences of Great Crash are significant because every single American who witnessed that times separated life to before and after that events. Other main regulatory changes were implemented in Stock Exchange markets and New York Stock Exchange Market in particular. Therefore higher responsibilities were burdened on Federal Reserve System for the future times. mean people and immune to speculations. Those changes were mostly about increased requirements for listed companies and creating practices to evaluate stock of some difficult financial instruments. The Stock market crash changed lives of ordinary people so dramatically therefore most of them had a feeling that they moved to different country. The Stock market crash obviously resulted in significant changes in exchange market and banking regulations. Economic recession decreased many overall economical indicators. Newspapers created myth of suicides of many famous people who was involved in trading. The Great Crash followed by the economic recession in the USA. questioning. However statistical facts suggest that there was no increase in overall suicides. For media in particular psychological pressure on people from stock market crash was important. During Stock market boom whole country was in great speculative orgy or greed. Although people were old enough to remember the 30s. The regulatory and decision making powers of Federal Reserve System increased because due to silence from them no-one blamed it for stock crash. thus newspapers overstated the numbers of suicides by focusing of suicide theme. misanthropic. suspicious. increase in inequality. pessimism and lack of enthusiasm were the moods in America and people believed that nothing could be done. -6- . for many of them boom of 1929 become myth of good life. decrease in national levels of income etc. decline in volume of production (GNP). For example. Psychological change or reversed mindset of American people’s.

Sadibekov Aidyn Great Crash in 1929 s0840867 Similarities of Great Crash of 1929 and Banking crisis in 2008 Banks is one of the main source of financial crash. Negative or low solvency ratios of companies are another reason of financial distress. As a result securitisation instruments such as adjustable-rate mortgages. as a result new listed companies of New York Stock Exchange were overpriced and unregulated. Leveraging is huge problem that caused crashes in and 2008. In both scenarios in case of rising prises those loans are more profitable and carried higher risks in case of crash of markets. 2009 3 Whitehouse archives.. 1 2 Federal Reserve System. 2008 4 Bob Ivry. debt become cheaper. so as a result some companies fully financed by borrowings. while in 2008 banks credited housing speculators. In 1929 US government have not regulated the Stock market’s trading instruments. 2008 -7- . low requirements and rates for loans1. The difference is that in 1929 banks credited speculators of equity. Government failed to control and create regulation framework of financial instruments. encouraged speculation and where greedy enough to be involved risky investments. credit default swaps. mortgages2. In 2008 the liquidity shortfall in the United States banking system 4 caused bankruptcy of several financial institutions. In both 1929 and 2008 crashes Banks had: poor evaluation of risks of loans borrowed. Similar situation happened in 2008 when Governments did not adjust their regulatory practices to address 21st century financial markets3. In 1929 the companies were covering they financial liabilities with income therefore did not have available liquidity. collateralized debt obligations. In both cases there were companies and banks which in spite of being profitable had to declare bankruptcy because of short-term solvency. However when prices drop debt burden or over-leveraging5 and falling price of equity leverage companies significantly. for example is equities of Unit Trusts. 2008 5 Stephen L. derivative instruments etc did not have any accounting regulations and could be written in company books at mispriced levels. 2010 PRI's This American Life . The reason is that leveraging is assumed to be good idea in times of boom.

Sadibekov Aidyn Great Crash in 1929 s0840867 Conclusion The significance of the book Great Crash 1929 will not diminish over time. -8- . However they are completely different matters for ordinary people because as a matter of the fact financial crisis 2008 did not dramatically changed mindset as it did in 1929. The financial crisis of 2008 and Great Crash 1929 have similarities in terms of characteristics. because as long as world operate in capitalism driven by powers of the market humanity will have to live with fact that booms and crashes are unavoidable.

gov/news/releases/2008/11/20081115-1.nytimes. Paulson Seeks Mortgage Value That Eluded Bear.federalreserve.com/apps/news? pid=newsarchive&refer=home&sid=aGT_xTYzbbQE Federal Reserve System. http://www. Giant Pool of Money wins Peabody. Public radio international. http://www.pri.bloomberg. viewed 16/11/2010. 2008. Monetary policy. “The Great Crash1929: The classic account of financial disaster”. 2009.K. Bloomberg official website. http://www. viewed 16/10/2010. viewed 16/11/2010. Declaration of the Summit on Financial Markets and the World Economy. Lehman. http://www. 2010.org/business/giant-pool-ofmoney. viewed on 16/11/2010.html?_r=2 . Agency’s ’04 Rule Let Banks Pile Up New Debt.html STEPHEN LABATON. 2008. New York Times.htm George W.com/2008/10/03/business/03sec. viewed 16/11/2010.gov/monetarypolicy/openmarket. Board of Governors of the Federal Reserve System. 2009.Bibliography Books J.Galbraith.archives. Publisher Penguin Web-sites: Bob Ivry. http://georgewbush-whitehouse. 2008. Bush administration Whitehouse archives.html PRI's This American Life .