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Rick Santelli’s rant on the floor of the Stock Exchange made me mad. The switch from blaming institutions, corporations, regulatory bodies and all manor of greed mutating has now morphed into branding individuals and and families as “losers.” Yes, there is a lot of anger and frustrations. It is easier to be angry than to find answers.
Yet it is not that easy to explain. This is a complicated issue. It is not just the Sub-Prime loan crisis. It is not just the Pyramid investment schemes. It is not just the price of oil, food or other commodities. And, most important, it is NOT solely an American problem. This is a global financial disaster.
What I would like to attempt for my next series of posts is to help you find facts, you can make up your own mind and act accordingly. This first attempt might seem a little dry but it is important to understand the facts before you can understand what people had to do to survive, then and now.
Question 1 – If this is a depression how is it similar or different from the one in 1929?
The financial crisis has not officially been declared a depression. To me, this recession has many of the features of a depression and apparently so does Fox Business News. There are many complex reasons why the 1929 Great Depression happened. These are the some of short answers:
- There was an agriculture/environmental problem called “The Dust Bowl” that removed viable top soil from farm land. This affected farmers ability to grow crops and to repay the loans. The banks foreclosed on the farms, sold to the highest bidder and evicted the families.
- This was the age of industrialization. Workers put in long hours for little pay. Businesses not only produced but over-produced commodities. There wasn’t enough customers to buy the products. Yet manufactures kept producing. You also had overseas competition as well.
- There was limited or no regulation regarding the practices of the Stock Market. It was the good old boy club and any money obtained was great for the club members who had no regard whatsoever for their actions, either legal or unethical.
Question 2 – What are the similarities?
1929 – Investors were able to purchase stock on a “margin.” This meant that a person could buy 10% of the value of the stock and owe the rest payable at a later time. Some folks borrowed from the bank to make stock investments. Others took their savings from the bank to purchase stocks. Most Americans had their money in the bank, the same as now.
Now many of the stocks were tied to legitimate companies. Others had purchased a certificate of stock ownership tied to a company no one knew anything about, especially those that were selling it. Millions of shares were being bought and sold for 10% of the value. Then came the day when the banks and financial institutions called in the margin. When they did that the investors around the world panicked. Everyone was trying to sell. No one was buying. The market crashed.
Those that were smart and just had their money in the bank? If the bank did not have the funds to return your deposits you lost them. Your money was gone. There were 4,000 bank and financial institutions that disappeared. This is why some of the great-grandparent are or were extremely fearful of putting money in the bank.
2009 – There were individuals buying and selling mortgages then repackaging the loans and selling them to the next sucker, I mean buyer. In the meantime, institutional investors such as teacher unions, state retirement boards and other companies were buying money market and other types of fund investments to help grow their retirement funds for workers. Some of the bad loans were interwoven into those packages.
Let’s not forget about how easy it was for people to get credit and adjustable rate mortgages. Or that the housing market also inflated home prices. New construction was booming as was the companies that serviced the construction market. Now mix in the marketing campaign to people with less than stellar credit and charging higher interest rates for that population to purchase a home without documentation of income or ability to pay. Common sense did not matter to the borrower or lender. Get the loan, sell the mortgage. There were warnings that were ignored on the local, state and federal level.
Like 1929, at some point
