March 01, 2007

Tuesday's Market Meltdown; Greenspan's "invisible hand"

SOURCE: Atlantic Free Press

Tuesday's big drop in stock market averages and questionable financial market conditions bear an uncomfortable resemblance to the stock market crash of 1929 and the Great Depression of the 1930s.

A great many economic conditions, as well as the structure of the financial markets, are different from those of the 1920s. Not all of the differences, however, are reassuring.

Recent news reports tell us that banks' reserves against risky loans such as sub-prime mortgages are at low points. Money is pouring into hedge funds and private equity groups. The massive prevalence of derivative securities in portfolios of pension funds, insurance companies, and commercial banks is worrisome. In 1998, the cratering of Greenwich's Long Term Capital Management, because of unanticipated consequences of its derivatives investments, threatened to sink the international financial markets.

The first broad parallel to the 1920s is the excessive creation of bank credit by the Federal Reserve. For details on the events of the 1920s, the best sources are Benjamin M. Anderson's Economics and the Public Welfare and Murray Rothbard's America's Great Depression.

Atlantic Free Press - Hard Truths for Hard Times - Tuesday's Market Meltdown; Greenspan's "invisible hand"

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