By COURTENAY BARNETT
History repeating itself in 2020 and as the song asks – when will they ever learn?
The 1929 crash
Until 1929 the US stock market had been buoyant for an extended period. There came a juncture where stock values did not relate true value and were significantly overpriced. Some ordinary people who did not have complete cash to purchase stocks bought into the market on ‘margins’ ( i.e. they paid for a part of the stock value and borrowed from banks to pay for the remaining value).
The stock market crashed; people ran to the banks to withdraw their money; many bank officials had invested money on the stock market and so could not repay the cash; and so there were runs on the banks and massive bank failures.
There was the great depression; no jobs and the American economy was adversely impacted for many years after the crash.
So, what did the U.S. Federal Government do to address the problem?
There were regulatory (i.e. via legislation) and governmental ( via expenditures) solutions applied.
A core piece of legislation of 1933 was the The Glass-Steagall Act ( a banking Act). It separated commercial banking from investment banking and established the Federal Deposit Insurance Corporation whose purpose was to insure banks.
Then President Franklin Delano Roosevelt on the government expenditure side implemented his ‘new deal’. It invested government money in works programmes and large scale construction; basically, a central government scheme was used to put the ordinary people in the U.S. back to work.
So they learned – or did they learn from the solutions deployed?
Removal of The Glass-Steagall Act
In roughly two phases, under the Presidency of Ronald Reagan and then under the Clinton Presidency the Glass-Steagall Act was removed. Clinton’s repeal was effected in 1999.
So when the protective legislation for the financial system which regulates institutions and protects the risk of loss for people who deposit money in banks is removed – what is likely to happen?
The 2008 crash
Let valueless trading and ‘fake mortgages’ take place and derivatives thrive and then? So, the house of cards came crashing down in 2008.
What I found absolutely astounding under the Obama Presidency was his response. Since it was not the shareholders or legitimate investors at fault but those who governed and those motivated by greed, who had produced financial investment packages that were doomed to fail – who were primarily at fault – shouldn’t they be regulated and punished? But, who got the bail-out and benefited from ‘quantitative easing’ ( i.e. printing more money)? The C.E.Os. and Wall Street folks who caused the crash in the first case.
To my astonishment, my economic mind simply could not fathom then the sense in that. The U.S. government paid the Wall Street folks and went further and printed money. Thus, the impact has to be that the ordinary shareholders lose and the Wall Street folks remain rich and get richer, while the deficit increases ( i.e. it is taxpayers money used to fund the bailout).
What then happens with that kind of solution being used?
2020 – what next
I may be wrong on this – but I will hazard a guess.
While the Corona virus is a global pandemic medical reality, it is not the virus in and of itself which is the real underlying economic problem – but the virus is a trigger which serves to expose and confound and exacerbate already underlying macro-economic and financial fault lines.
How this crisis is addressed?
Well – when will they ever learn?
* COURTENAY BARNETT is a graduate of London University. His areas of study were economics, political science and international law. He has been a practising lawyer for over thirty years, has been arrested for defending his views, has been subjected to death threats, and has argued public interest and human rights cases. He has published several articles in the Effective Learning Report. He lives and works in the Caribbean.