Maybe I'm just plain wrong. The Empire is not in Decline. Perhaps we're in the ascendant part of what turns out to be just another Business Cycle. Signs of Spring are everywhere, flowers are blooming. Floyd Norris over at the New York Times asks Why So Glum? Numbers Point to a Recovery. And nothing gladdens the heart of a close reader of economic indicators more than an uptick in retail sales. Marketwatch joyously reports that the March sales are a fresh signal that U.S. consumers are back. There's excited talk of a new DOW 11,000.
Today I'll focus on the bullish stock market and finance. Let's take the long view by considering the Panic Of 1907.
The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell close to 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and businesses entered into bankruptcy. Primary causes of the run include a retraction of market liquidity by a number of New York City banks and a loss of confidence among depositors, exacerbated by unregulated side bets at bucket shops
The following highly informative text comes from a commentary on Crash, Crash, Crash, the Boston Post's headline on October 18, 1907.
Although the headline referred to events in New York, Boston Post readers knew exactly what it meant. Effects of the financial crisis were certain to reach beyond Wall Street. Financial panics and bank runs were all too common during the 19th and early 20th centuries. Some were more severe than others, but most followed the same general pattern. The misfortunes of a prominent speculator would undermine pubic confidence in the financial system. Panic-stricken investors would then scramble to cut their losses. And because it wasn't uncommon for speculators to double as bank officials, worried depositors would rush to withdraw their money from any bank associated with a troubled speculator. If a beleaguered bank couldn’t meet its depositors’ demands for cash, panic would quickly spread to other banks. Remember! There was no federal deposit insurance until 1933. If a bank failed, depositors had little hope of ever seeing their money again. With far less government regulation of the financial system than there is today and with no government welfare "safety net," many Americans suffered sudden and dramatic reversals of fortune when a panic struck. Even in a relatively mild panic, fortunes evaporated and lives ended in ruin.
I'd have never guessed that it was common for speculators to double as bank officials. Imagine that! And in 1907 there was far less government regulation of the financial system than there is today. Lord Have Mercy, I thought we might be in trouble there for a moment ... but we've got plenty of regulation today, so no repeat of 1907 is possible.
NPR did a story in August, 2007 on the 1907 panic, which led to the creation of the Federal Reserve a mere six years later in 1913.
On Oct. 17, 1907, panic began to spread on Wall Street after two men tried to corner the copper market. In the months preceding the panic, the stock market was shaky at best; banks and securities firms were contending with major liquidity problems.
By mid-October, Wall Street was paralyzed; for days, there were runs on several large banks. Millions of dollars were withdrawn, and banks closed their doors. New York City was on the brink of bankruptcy. By 1908, there was a severe but short-lived recession. The man who saved the day was J.P. Morgan, who brought together leading financiers and banks to bail out the ailing market.
That was all in the days before a centralized banking system — and the Federal Reserve — were created to prevent widespread financial catastrophes.
Praise the Lord for giving us the wisdom to create a Centralized Banking System which prevents widespread financial catastrophes. Again, I have to admit I was concerned there for a moment that another catastrophe like the one in 1907 might happen again.
So, what about the stock market? What happened in 1907-1911? How does that compare to what's happening now?
I said a few months back that the stock market looked wobbly to me, but I forgot, as did a large number of investors shorting it, that the market can stay irrational longer than you can stay solvent.
Will we see a repeat of 1907-1911 in 2009-2013? It's impossible to know. The Dow Jones Industrial Average is tracking it almost precisely so far. But I'll tell you this: the March, 2010 retail sales numbers, taken by themselves, signify nothing. Which reminds me an Onion News Network video I saw recently...
march retail sales are a head fake; its an easy comparison to show the "record" rise...and that's "same stores" not including those that have closed...
and here's where consumers are getting the money to spend:
Consumer Spending Has Held Up Because People Aren’t Paying Their Mortgages – I’ve been somewhat perplexed by how well consumer spending has held up, at least on a relative basis, given that 1) “underemployment” is above 20 percent and the number of long-term employed is at a record; 2) income has not kept pace with consumption; and, 3) the housing industry is nowhere near a recovery (and the foreclosures just keep on coming). No doubt the government has played an important role in underpinning demand, especially through its emergency unemployment benefits programs and certain other stimulus efforts. But that didn’t seem to explain matters fully. Then I read the following post, “How Obama’s ‘Extend & Pretend’ Mortgage Policy Explains The Apparent Disconnect Between Housing And The Consumer,” (citing the excellent HousingWire blog) and, suddenly, it all made sense. The reason why no small number of Americans can afford to keep on spending is because they’ve got one less (big) bill to pay…
http://seekingalpha.com/article/197632-consumer-spending-has-held-up-because-people-aren-t-paying-their-mortgages
Posted by: rjs | 04/09/2010 at 06:11 PM