Colin Barry

Stock Market Crash of 1929 // Trouble with a Bubble (CMC, Friday, Week 7)


"Historically, investments made during recessions have delivered some of the best returns." -- some Bessemer Venture Partners report

Ordinary downturns in the business cycle can (relatively easily) turn into a depression.
Tradeoff versus "letting things play out" and "regulatory authority" ==> clearly the optimum is somewhere in the middle

Why did Irving Fisher --- the greatest economist of his generation --- miss the Great Depression?
Or, why did a bunch of smart people think that the late 1920s run-up was "the new normal?" (Comment: stop me if this seems eerily similar to rhetoric around 2000/2008)
-- Radical tech changes
====> electricity, communications, internal combustion engine
====> "different from the past"
====> new R&D capabilities inside firms
====> emerging giants: GE, RCA
====> hard to value R&D and firms' intellectual property

-- Management practice changes
====> Scientific management
====> New, more efficient organization methods for firms

-- Labor utilization/relations
====> virtuous circle: higher standard of living creates more demand creates better firms, etc.

Reasons for the Crash
(1) Federal Reserve response => tighten credit, send contradictory messages
(2) Leverage => one-third of individual investors trading on margin; downturn forces margin calls and mass liquidation
(3) Overproduction => problems forecasting demand; overinvestment in capital goods
(4) Gold standard => interest rates rise, gold flows out of U.S.
(5) Low barriers to stock ownership => fuels bubble in equity prices
(6) Inflexible banking sector => tons of tiny banks; regulations against interstate banking