The 1920s and the 1990s in Mutual Reflection

The 1920s and the 1990s in Mutual Reflection

...The glut of investment goods created during the 1920s were to “hang over the market” for the entire decade of the 1930s; as late as 1940 nonresidential structures investment was barely one-third of its 1926 peak, and residential investment only two-thirds, although equipment investment regained its 1929 ratio to GDP by 1937.

Why am I sensing deja vu?

The evolution of the economy after 2000 was, of course, entirely different than after 1929, and we have previously attributed this to the aggressive easing of monetary policy that sustained a major boom in residential construction and in sales of consumer durables sufficient largely to offset the decline of investment in equipment and software. Another major difference was that equities could be margined up to 90 percent in the late 1920s, compared to 50 percent in the 1990s, raising both the level of speculative frenzy and the extent of wealth destruction when the crash finally came. A more detailed analysis of financial fragility in the 1920s is provided by White (2000, pp. 752-7).

Entirely different? A sustained major boom in residential construction? Really?

An aspect of the 1920s that has no counterpart in the 1990s is the weakness of the banking system, due in part to regulations that prevented banks in many states (like Illinois) from establishing branches. In 1924 only eleven states allowed statewide branching (White, 2000, p. 749). Regulations set the stage for the banking collapse of 1930-31, as the prohibition on branch banking created a system of thousands of individual banks with a fragile dependence on the ups or downs of economic conditions in their local community, often tied to particular forms of agriculture (White, 2000, p. 750).

How strong is our banking system today? Strong enough to support positive real interest rates on savings? Or would that break something? Bear Stearns?

This paper was written in 2004. I'm of the belief that the pain of the 2000s isn't over yet. We have simply postponed some of it (as seen in $123 oil and a crashing housing market). I'm also of the belief that perhaps this paper was written WAY too early. It is still the 2000s after all.