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Repeat of '07 crash
Oct 09, 2008

“If the money market is tight here, it is the same all over the world.”

“Brokers rushed here and there in an effort to unload, and thousands of shares were dumped on the market in less time than the telling of it takes.”

“For the past 24 hours the White House and the Treasury Department have been bombarded by frantic  ... appeals for the government to do something to check the tumbling of stocks in Wall Street and avert a threatening panic.”

“If private lenders who hold mortgages will notify the holders of same that they will extend to them sixty or ninety days grace for payment of the interest due ...”

“Important reforms in your currency and banking systems and an amendment of your corporate laws ... would really be worth much more agony than has been or is likely to be experienced during the present difficulty.”

“The reverberation of New York’s anxiety will soon reach London, but for the moment people on the stock exchange are congratulating themselves on their freedom from American bondage ... At the same time, if the fabric of American credit is disturbed, London will be sure to feel it.”

“How far credit in the United States is bound up in land speculation I am unable to say.”

“This is one of the recurring periodical crises which come to the progressive nation ... A financial crisis arises for the most part from a nation’s having outrun its capital resources.”

Descriptions of the present economic crisis in the United States?

Surprisingly, no. The reports are from newspapers and individuals commenting on the financial crisis of 1907. 

The comments show how little things have changed over the last 100 years.

While some commentators are warning that another 1930s Great Depression is about to hit the U.S. and by extension, the world, there are more remarkable similarities between 1907 and today.

For one, it was a massive bail-out of the nation’s financial institutions that helped ease the recession of 1907. And today, it is a massive government bail-out which has been seen as the only way to keep American financial institutions and Wall Street from going under. The biggest difference is that in 1907, banker J.P. Morgan came to the rescue with $25 million, while the U.S. government recently provided $700 billion.

For his part, Morgan was called the saviour of Wall Street which returned to a semblance of normalcy after the 1907 bail-out, but the bail-out championed by President George W. Bush has yet to calm  the frayed nerves of investors. Today’s financial crisis has seen Wall Street stocks — as well as markets across the globe, including Toronto’s TSE — take a dramatic tumble over the last few days. There has been some recovery, but investors still remain jittery throughout the world because “the fabric of American credit is disturbed ...”

As in 1907, today’s financial crisis is being blamed on alleged fraudulent practices, easy credit and wild speculation.

The advent of sub-prime mortgages was the culprit driving all three risky behaviours. Easy credit was given to individuals who under normal circumstances would be denied a mortgage loan. In turn, the proliferation of easy credit led to wild speculation in the American housing market, egged on by a lax U.S. government and financial institutions driven by greed. The so-called easy money derived by selling and reselling mortgage securities in one of the greatest “Ponzi” schemes ever devised led to the earning of outrageous commissions by Wall Street executives. But when the Ponzi scheme ran out of victims, it was doomed and the meltdown commenced.

In 1907, the Russo-Japanese War (today’s Iraq) and rebuilding San Francisco following a disastrous earthquake (today’s New Orleans) were factors in the financial crisis. The banking system became over-extended as the stock market soared to new heights. The crisis was actually preceeded by 10 years of prosperity.

When the crisis hit, among those being blamed were short-sellers, who  gambled on the price of stock falling. Today, President Bush has hinted at curtailing short-selling, which is still perceived as one of the plagues of the stock market. The powerful Morgan, who more or less held sway over and intimidated other bankers, implied that he would be carefully watching the short-sellers, vowing to “properly attend” to them in the future.

When credit became tight, the constricted money supply plunged the New York Stock Exchange into a March 13, 1907, collapse. The NYSE eventually lost half its value. Banks failed — 25 banks and 17 financial institutions — and the world markets suffered as a result.

For eight weeks in the fall of 1907, Morgan tried to put out the financial fires as they appeared, moving cash to where it was needed. Morgan locked up a group of New York trust company executives in his East 36th St. home until they supported his plan to raise $25 million in private capital to bail out the banks. Essentially, Morgan was acting as the nation’s central bank at a time when the Federal Reserve didn’t exist.

Some are now equating Warren E. Buffett’s actions during the present financial crisis as echoing the moves made by Morgan in 1907. In an October 6 New York Times article by Steve Lohr, Robert F. Bruner, the dean of the Darden School of Business at the University of Virginia, said Buffet is “at the centre of things; he draws headlines and he inspires confidence. Noted as the richest man in the world, 78-year-old Buffet recently swept newspaper front pages by offering $15 billion for the banking company Wachovia, which was seven times the price offered by Citigroup.

Similar to Morgan, Buffet is showing that it is wise to invest in a distressed market. Both Morgan and Buffett planned their moves to instill confidence in the market and tell people there is no reason to continue the panic.

When Morgan bailed out financial institutions in 1907, it took about four weeks before the market confidence was restored.

Morgan and Buffett would agree there is no need for brokers to rush “here and there” and “dump thousands of shares” on the market as was reported in 1907.