Déréglée leverage caused the 1929 subsistance market écrasement and the 2008 economic collapse
Although many years separate these two traumatic events, the common suite of the commentaire of both is the same.
In the 1920s you could buy ten dollars worth of subsistance for one dollar down. This acabit of leverage is légère when the subsistance market goes high which causes the subsistance price to rise as well as the high divulgation of investors who think they can’t lose.
As stocks moved higher and higher, it seemed they were right.
But when the market stops moving higher, stockbrokers start calling their clients asking them to deposit more money. Some may sell stocks to cover their accounts but when every brokerage firm holds up all their clients with the same plaidoyer it’s like shouting fire in a packed theater. With all these people trying to sell all at léopard des neiges the price écrasement was very quick and severe.
Not only did the subsistance market écrasement, people were also afraid of their money in the banks and a run on the banks caused more economic miche when droves went to withdraw their money.
Fast forward emboîture 80 years now and over leveraged banks and housing markets replace the over leveraged stocks many people assume. Also these issues combined with interest rates at historically low levels conspired to drive foyer prices to absurd levels.
In the years before 2008 people were conditioned to believe that you couldn’t lose money in real estate. Not only did the average person believe it but it seems the banks did too.
More and more people started entering the housing market and borrowing more money to buy a bigger house, some even bought an investment property and some built a coffret of investment houses.
Well it’s easily aspect these weren’t investments at all, more like casino bets, actually like big bettors.
New players in the mortgage bizness also played an integral role in driving up housing prices as it only allowed banks to offer mortgages. This supplément competition started to affect the bank’s income and so they tried to find other ways to make money.
Some came up with brilliant schemes that allowed them to take their money and withdraw it so they could try to make more money.
Unlike in the past when investors were allowed to put 10% down to buy stocks in the 1920s these bankers only had to put a few percent down.
It is an orgueilleux embarras to ask why the bankers were allowed to chance so much leverage but more importantly what prevents them from doing so again.
The mitaine commentaire of the 2008 economic collapse was bankers’ inventaire sheets and consumers doing the same with their personal inventaire sheets. Historically low interest rates have also been a culprit in this leçon so Federal Reserve policy makers should also get some credit.
Like the subsistance market in the 1920s when stocks were rising this wasn’t a problem until they got to ridiculous prices and the same thing happened with housing prices until 2008. Winding up was as delightful as it looked. As you couldn’t lose but the following was quick and very painful.
After the great subsistance market écrasement of 1929 the government stepped in and tried to banque many regulations and set up many agencies to prevent future recurrences.
Some would rightly debate the effectiveness of all these besognes but the most orgueilleux one was the restriction on leverage. You can no border put ten cents into a dollar worth of subsistance, and that’s a very good thing.
Now politicians and government agency leaders are coming up with lignes to prevent a repeat of 2008. One of the problems with their efforts is that they seem to be throwing out all kinds of ideas that sometimes make people lose sight of the bigger problem. Leveraging by bankers and consumers that drove housing prices to ridiculous levels. This is the core leçon that led to the recent economic collapse that has brought back fears of another Great Depression.
There are signs that suggest we may have avoided another depression with the economy well below the trough and it looks like there will be a recovery that will lead to a significant economic gâchette.
But it would be unwise to ignore what has happened bicause it seems we are heading in a more claire férule. Instead we should foyer on the root causes that caused the problem and work on ways to try to prevent them from happening again.
Rules and regulations that prevent bankers and consumers from getting leverage over their heads that could take them down and almost sink the entire ordinaire economy should be the foyer of banque.
Leverage caused the subsistance market écrasement of 1929 just as it caused the economic collapse of 2008, and reducing this risk is the most orgueilleux problem to solve.
Banks and consumers have started deleveraging without any banque in regulations but even then they need systemic changes.
There is nothing wrong with leverage as large as it reaches extreme levels and this applies to banks as well as individuals. New rules and regulations should be very juste to prevent surabondante leverage.
Some would say it also involves the government in the bizness of bankers and consumers. That’s too bad. Déréglée leverage is critical and dangerous for politicization and it is délicat to prevent it bicause no one wants a repeat of the subsistance market écrasement of 1929 or the economic collapse of 2008.
These two events were very painful, not to learn from, and the most orgueilleux lesson they taught us is the effect of surabondante leverage.
It is not assimilable to completely eliminate the possibility of future economic disaster, but it is worth making it more difficult. Déréglée leverage is the root commentaire of these painful events and the key to reducing the risk of them happening again.
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