Sunday, July 12, 2009

An Engaging History Lesson About The Panic Of '07

It's always a good idea to study previous market crashes to self-inoculate against the mania that precedes one. Mark Perkins over at Stock Pursuit wrote an essay on the causes of Panic of '07, with an interlaced biography. It's not only an interesting read in its own right, but it also was written in 2007; it ended with a forecast of trouble:
As an avid commentator and investor in equity markets I see parallels from 1907 to 2007. The trend of horizontal consolidation is still alive and well in the banking industry today though now flirting with anti-trust law. Big U.S. banks like Bank of America and Citigroup, though limited in their market share are making up for it by diving into speculative areas like mortgage backed securities. This is exactly like what the trusts in the late 19th early 20th century were doing. They were diversified but ended up taking on too much risk. The Banking Act of 1933 sought to limit banks in the scope of services like commercial and investment banking. When key financial institutions are involved in risky investments like in 1907 and the mortgage arena in the years leading up to 2007 there is going to be trouble. With portions of it lifted in 1999 this trend may have serious consequences.Risky, manic speculation driven by greed existed in the years before both. The current U.S. sub-prime loan crisis, which relates to risky loans granted during the recent housing bubble, is having an effect on the large financial institutions. This is strikingly similar to the risky loans issued by trusts in 1907. No one is sure how much the current crisis will spread into the credit markets. Where was the Federal Reserve and government regulation to reign in the capitalist environment? How can all these ridiculously risky loans be approved? Speculative investments fueled by greed will always exist. We cannot forget the Panic of 1907.
If only we'd been there at the time. The full article is here.

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