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Causes of Wall Street Crash 1929
- Overproduction in agriculture thanks to
technological progress and farmers struggled to
find alternative employment as demand couldn't keep up and profitability low
- Fragmented weak banking system meant runs always likely
- Buying on margin
- This left investors very exposed when prices fell
- Margin requirements only around 45%
- This left investors very exposed when prices fell
- Information assymetries
- Poor regulation!
- Laissez Fair approach from Republican government
- Procyclical behaviour
- Regulation on issuance of loans to major companies is argued to have encouraged excess equity investment by banks
- Laissez Fair approach from Republican government
- Interest rates too low
- Fueled credit bubble
- Fisher (Debt deflation) (1933
- Austrian School/Von misses
- Asset price inflation
- Reduces stock of sound investment opportunites
- Reduces stock of sound investment opportunites
- Lionel Robbins (1934)
- Fisher (Debt deflation) (1933
- Why were they too low?
- Reliveing pressure on Sterling and other weak European currencies (Clarke 1967)
- Reliveing pressure on Sterling and other weak European currencies (Clarke 1967)
- Disputed by Galbraith (1954) Fed did act by buying $400 million worth of government securities
- Fueled credit bubble
- Troubles in Europe
- Complicated web of war repartions and
loans between Germany, France, Britain and
US
- Complicated web of war repartions and
loans between Germany, France, Britain and
US
- Irrational exuberance
- Common stocks became "scarce" excess demand
- No Stock issued in companies making
saltwater fresh like during South Sea
Bubble(Galbraith, 1954)
- Market boom rooted in existing industries on the whole
- Bubbles usually related to tech inovations
- Bubbles usually related to tech inovations
- Investment decisions based on continuous growth of economy
- Investments became increasingly risky and imprudent
- Stock price growth growth massively exceed dividend growth in 1928 White (1990)
- Common stocks became "scarce" excess demand
- Mismatch between production and consumption
which led to falls in share prices
- Dissapointing results posted on
Black Thursday (Oct 24)
- Investors cash in profits
- Investors cash in profits
- Reluctance of government to step in
to deflate bubble
- Consequences of action
seemed almost as bad as
those from inaction
- Gov wary of being labeled cause of the crisis
- Gov wary of being labeled cause of the crisis
- Consequences of action
seemed almost as bad as
those from inaction
- Noise trading with lots of investors with
little expertise in market place (Rappaport and White, 2009)
- Investment banking operations started within
commericial banks through wholely owned securtiites
affiliates. Cross selling of investment products to retail customers who would not usually invest
- Ex post irrational, ex
ante rational (De Long,
Sheifer )
- Revisionists like Bierman - no evidence of unusually high PE ratio
- Revisionists like Bierman - no evidence of unusually high PE ratio
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