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Pastimes : Ask Mohan about the Market
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To: Joseph G. who wrote (6836)11/2/1997 1:44:00 PM
From: Zeev Hed  Read Replies (2) of 18056
 
I think we are talking about two different periods. At the onset of the "financial" accident (the crash) in 1929, there was no perception and urgency that a deeper problem is brewing and no concerted action to stem the cascading effects into the economy. Yes interest rate where lowered by .5% steps a number of times, but that was when "no one" was left to borrow. The rate responded to lack of borrowing rather then induced borrowing and liquidity expansion. It took a change in in Government to realize that the fiscal policy was too tight and that under these circumstances the joys of a balanced budget are a luxury. Once the avalanche was set in motion, the house of cards (built amongst other things on extremely heavy leverage with 10% margin) had to come down and then nothing but write off of bad debts could clean the table for the next expansion.

Apart of few islands of heavy derivative activities, we do not have that kind of leveraged situation right now.

I think Warburg did understand what was going on, but he could not persuade Hoover that a multiprong action (both monetary and Fiscal) was required. I think that it was a fear of such an accident that got him and few others to get the Federal Reserve System into being in the first place, but I will let historian comment on this.

Zeev

Zeev
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