Thursday, December 18, 2008

The Great Crash: 1929" Series 1

Aren’t markets supposed to have rational decision-making from individuals who participate in them so that irrational, herd behavior can be precluded?

I wish... but the Great Housing Bubble of this decade is a perfect reminder of just how irrational and unthinking markets can be. The root of the current market demise can be traced to any number of incidents.

But we can look at the ’90s when Republicans relegated government-sponsored mortgage firms like Freddie Mac and Fannie Mae to the doghouse due to huge losses and handed banks a free reign in extending credit to low income people.

What followed was an orgy of mortgage lending by the banks that resulted in the evolution of ever-looser credit standards, a temporary home price bubble and now a corresponding revision to the mean (a bust) that is threatening to take down the North American economy.

This latest crisis is just one in a long history of periodic speculative bubbles and resulting panics: The tech bubble of 2000; the Asian Crisis in ’97; the market crash of ’87, and the S&L crisis of the ’80s. All have come and gone with remarkable consistency.

People never learn and only in bad times do we know who has been swimming naked.

I love this classic "The Great Crash: 1929" written by John Kenneth Galbraith. There is a wealth of information contained within which is worth analysing by thousands of investors now and in future.

This is the first series where we look at the sanity of people in the midst of a bubble.

From the Introduction

The people who remained sane and quiet

"Even in such a time of madness as the late twenties, a great many man in Wall Street remained quite sane. But they also remained very quiet. The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil.

Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live.

To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them."