The most recent financial crisis was an all encompassing meltdown that affected the entire global economy. It is nearly impossible to quantify the distress this crisis put on the American economy and the world has yet to see the long term damage. After any disaster, people are eager to point fingers. This financial meltdown was no different, as critics were quick to blame anything and anyone from Wall Street to fair value accounting. It’s hard to pinpoint exactly what caused the most recent financial crisis, and even time may not tell. Economists are still trying to figure out why the stock market crashed in 1929, and Ben Bernanke recently stated “to understand the Great Depression is the Holy Grail of macroeconomics.” (Bernanke) Most of the discussion aimed at identifying causes of the crisis is focused on the financial structure of our economy. This has led to incongruent conclusions by many financial experts. It may be more important to direct attention to the social mechanisms that could have influenced not only this most recent crisis, but also the stock market crash of 1929 that threw the United States into the Great Depression. While these two crises have their differences, at the very core we can find striking similarities. Both the state of the economy and pre-crisis attitudes and behaviors are similar in the two meltdowns that are separated by nearly a century. After seeing the devastation that these attitudes and behaviors caused in the 1920s, it can only be described as a social phenomenon that we allowed the recent financial crisis to occur. One of the most notable factors seen in behavioral and social mechanisms that led to the crises is greed. Instead of choosing to learn from past mistakes, the economy and its willful participants, blinded by greed, happily succeeded in repeating the past. In addition, some mistakes may never be learned from if the government continues to bail out large public corporations. The repeat in financial catastrophes can be summarized with a quote by George Santayana that says, “A man's memory may almost become the art of continually varying and misrepresenting his past, according to his interests in the present". Consumer Confidence
Booming economies characterized by tremendous growth, optimism and prosperity characterized the time periods leading up to both the 1929 Stock Market Crash and the Global Financial Crisis. During the Roaring 20’s, the invention and widespread use of electricity and radios by average citizens was an indicator of economic growth. Gross National Production was growing at a steady rate and stock prices were ever rising. In post-war America, industries that had been expanded to accommodate war time production thrived and produced large amounts of capital (Taylor). This increase in capital led to an increase in investment in the stock market. It became easier for middle class Americans to own stock. It seemed that times could only get better and a 1929 Business Week article predicted an upswing in the summer of 1930 (James). The 2000s boasted similar attributes with increased home ownership, an increase in spending, a decrease in unemployment and a rise in the value of real estate. Investor confidence was at an all time high. The number of homeowners soared to a percentage the nation had never seen, and investors were looking for ways to capitalize on the seemingly ever expanding real estate market. A Conflict of Interest
If there was any indication that the markets would fail during either time period, it didn’t show in the asset prices being traded. Stock prices rose from 1925 until the third quarter of 1929. Furthermore, credit rating agencies such as Moody’s and Standard and Poor’s downgraded less corporate bonds in 1929 and 1930 than before 1921, or after 1937 (James). The credit ratings issued by these agencies take into consideration the issuer's creditworthiness. The large volume of high ratings gave investors no reason to...
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