Charles Mitchell and the 1929 stock crash
thehustle.co
thehustle.co
Basically bankers make money when money flows. It flows only when "there is something better". So to keep making money there always has to be "something better" and ultimately that becomes unsustainable.
1929 was a re-adjustment, where all the bullshit is cleaned away. It was perhaps the first time it impacted such a large portion of society. An education of the masses if you will. Crashes did, and will, keep happening again - as long as the myth of "forever going up" persists.
In the early 2000s it was property. Today its (maybe /likely /probably) crypto.
At least today society is notably, collectively, smarter. There are a lot more naysayers in general, and whole there will be crashes, they tend to be more limited in scope and reach.
But greed, the root of all of this, will always be with us. Greed offers some to be winners, but most to be losers.
At that point it's appealing to the least sophisticated investors, which to me is the first signal of a bubble.
The nature of a ponzi scheme is that it starts small, but then has to appeal to an ever larger group. This ends with mass advertising to reach the biggest group of all. Then what?
Couple this with the tone. Crypto is being marketed as an investment, not as a utility, not as a currency. Its sole appeal is "it will go up".
Crypto itself is mostly a solution looking for a (legal) problem. While the killer app is facilitating illegal activity (which has some value for moral, but illegal activity - alas a minority of the actual use case) that's a hard sell. Finding a legal killer app though is proving elusive. Most things it _can_ do are already done better/faster/cheaper/simpler another way.
Of course it has some utility, but nowhere near the hype levels.
Tech stocks - yes, they are high, and will likely correct some. But apple, Google, Microsoft, amazon, Facebook and friends are all generating huge amounts of revenue and profit. Their stock values are massive, but their profit levels are unprecedented.
Startups get a lot if attention, but from VCs which is not public money, and not traded to the public, so is a different kind of bubble, unrelated to the 1929 depression etc.
Or for some reason think there is going to be a single event that will finally end cryptocurrencies. Or they have an agenda and want them to end.
It's not a single bubble, that stuff happened several times already. They lost more than 50% of their value in a short amount of time, several times already.
It's a boiler. Its periodic bubbles, over and over again. Price fluctuations, slow climbing, then fast climbing, then it goes down, repeats. It has happened already, and it will be happening again and again.
Every time you will be watching, thinking: this time, this is 'the big bubble' and it will burst and cryptocurrencies will be no more. Except they will continue boiling, prices will go up and down, and you will have to wait for the next time.
There's also the probability of a 'flippening' event in the future, because ETH is no longer PoW. So ETH would switch to be the #1 currency. Or maybe not.
But the cat is out of the bag, and cryptocurrencies are here to stay, and I would even say in any four year period they will still gain more than any other kind of asset for the foreseeable future.
The current level seems to be pitched at "everyone". After that there's not much place to go. There are some territories currently excluded and they may come into the fold, but probably won't.
The root problem is that it's utility is limited, and as yet has not found a way to grow that utility in proportion to its overall growth.
By contrast a stock like say apple seems (and may be) bonkers, but apple has shown consistent utility growth. They improve sales by appealing to more market. People by an iPhone to use it, not to keep it and sell it for more.
Of course crypto may not crash. Red flags don't mean certain collapse. They are, after all, just red flags.
Oh noo... noo how can that be... my wood workshop in Agbogbloshie Dumpsite, Ghana has the best business model known to mankind, how can it be that it can not compete with BigTechCorpo123 ? Oh.. I don't know... maybe because BigTechCorpo123 can sell their product to the whole world at ease while your wood toys have to be shipped by vans ?
Except this time it is worse. It's not about the rising prices of properties, but the idea that there isn't something else more profitable than real state long term that makes me feel the economy is stuck in a bad place.
Cryptocurrencies are noisy news-makers, but their total value is still very small compared to basically anything else.
Just take a gander and how much property in Hong Kong or Amsterdam costs and you’ll start to think it is cheap in the US. It’s only going to get worse. Do you think that people are going to desire living in Santa Monica or Queen Anne less over the next few hundred years?
Our planet is getting smaller relative to the amount of people that live on it and relative to the habitable places that exist.
Plenty of ideas and people trying out there, just not much interest from the every day person.
People want to live at increasingly more desirable places, and that is true even more so for people who cannot afford to: If such desirability was no object in their quest, Detroit would be full of people, the Bay Area wouldn't have so many issues with housing, and housing prices would be a non-issue.
If the alternative is "everywhere sucks equally", which is the likely outcome of a national-level central planning, I doubt you will find many takers.
You don't even need centralized planning. Just implement a proper land value tax [0] so that the desirability of a plot of land has to be commensurately paid for by the owner.
Yes...but property values are way up all over. Boise, Phoenix, Nashville...even middle of nowhere Kansas.
El Paso is having it rough. They've always had super cheap houses to the point of unbelievable...what most would consider a decked out mansion for 300k or so, and a 3+ percent property tax. Guess what's happening now that everyone's regular ol 150k house is now worth 400k?
Valuable property will always have value, but the vast majority of US property is not so desirable. It's already stalled, and it's going to be a bloodbath next year.
The real question is what happens when all the buyers of the last 3 or so years are underwater? We either end up in 2008 again, or tons of bailouts which just pushes inflation further towards the houses being worth it again.
Why also would builders not keep prices high buy produce less?
2008 was bad loans coming to head. I don’t think it’s going to be the same.
In many cases, they don't, they just walk away.
Would you stay in a 500k 2000sqft house that you have no equity in, when a 300k 2000sqft house was for sale next door? In a non-recourse state?
And even for principled people, when you lose your job or fall behind on something you overpaid for, it's really easy to just walk away.
Milwaukee and Detroit were pretty desirable not that long ago. Cuba was quite nice 80+ years ago. Hong Kong was desirable globally just 10 years ago. What is “desirable” changes from many other factors so property investments absolutely aren’t a given.
Land in the middle of nowhere barely beats inflation and has varying degrees of ongoing costs depending on the jurisdiction.
Figuring out the most appropriate use of a good or service given that its scarce and has a multitude of "other" uses is the core problem that capitalism tries to solve.
The expectation that every individual is trying to swallow the economy whole is actually impossible and the only reason why any individual would even consider pursuing that path is because for some reason the marginal cost of effort to obtain more utility is zero. In other words there is infinite demand for freebies but not infinite demand for things that require effort.
There is no such thing as a cost of zero, someone else will have to pay for it. It turns out the government offers a lot of free services that scale up with how much property you own and other people without property have to pay taxes to pay for those services.
Why would any sane person even run a business if the government pays massive subsidies (public services) to make your land more valuable? Just buy more land.
> the government pays massive subsidies (public services) to make your land more valuable
Most of us have to pay taxes on property we own every year, pay for many of the public services (water, sewer, trash, etc.), and the benefits returned from taxes (like roads and police) are generally not worth the amount paid in a strict sense.
If you think a plot of land is oh so valuable, may I suggest you invest in some remote plots in Nevada, as there is no shortage, and they are quite inexpensive...
This is where the Georgist idea of land value tax comes in.
If you don't think the benefits aren't worth it, why do you keep owning the property? Choosing to continue to own the property implies a revealed preference that the benefits outweigh the costs.
The biggest benefit from owning property is the right to exclusive use of a certain location for infinite time [0]. And the value of this right is proportional to how desirable living there is, which is made up of factors like economic liveness, proximity to nature, government services etc. The thing to note here is that while not all of these are due to government subsidy, all of these are the result of "other people's work"; you can just sit there and if other people do good work, the gains go to you.
Also, as a sidenote, most local services are not funded exclusively by property taxes: there's usually funding from things like sales and income taxes (either from that area, or transferred from higher levels of govt).
[0] - Minus property tax of course, but property tax is rarely equal to the benefit you get; if it was, the purchase price of the property would be 0.
For example, the federal govt's total revenue is 6 times the total property tax collected in the US (and this ignores state income/sales taxes).
In California specifically, just the personal income tax alone is more than the property tax collected. Once you add in the other sources, property tax revenue is half of non-property tax revenue.
Really? Are you referring to eminent domain? Unless you are going up against a highway, landowners have a ton of protections, in the US anyway.
The financial system just isn't completely levered to housing that way today. Today, an economic slowdown might lead to a dip in property prices, but to find an event that would cause widespread and long-lasting damage to the financial system I think you're going to have to look elsewhere.
Is that really true?
My pessimistic view will say greed will wipe out any "collective" smartness and the cycle repeats.
Well yes and no. The common root of all evil behind all the bank runs and market crashes throughout the last 100 years is monetary inflation. It is not a coincidence that the worst economic crises happened after the installation of the Federal Reserve.
For a good general overview on this topic I recommend reading „The Ethics of Money Production“.
Greed isn't the root of all this, because greed was present at times when the market did crash, didn't crash, generated enormous real value and at all other times. Greed is just a mindset that makes people act, a bit like a fuel for activity. Fuel is associated with forest fires, but fuel isn't really a root cause.
5 years of confusion in the stock market isn't even that interesting. We shouldn't be talking about it almost a century later. Our stock market isn't even connected to the performance of the real economy like it was back then, modern markers went up during COVID and down with the recovery, because central bank policy has successfully dissociated reality from returns.
Definitely history worth studying.
Intelligence has gone up, Wisdom has declined
Stay in school.
That line sounds like it could be straight out of The Big Short (2015), essentially nothing has changed in the best part of 100 years.
[1] https://web.archive.org/web/20070905000359/http://www.time.c...
BTW, I stuck that phrase into Google Scholar and found https://www.cambridge.org/core/journals/business-history-rev...
> Extremely successful both as an investment and as a commercial banker, Charles E. Mitchell was identified by contemporaries as the epitome of the unscrupulous “money changers” whose speculative dealings they felt played a major role in the Crash of 1929 and the ensuing economic collapse. This portrayal has been echoed and elaborated by historians and commentators down to the present day. In this article Dr. Huertas and Dr. Silverman demonstrate that Mitchell's activities, while sometimes ill-advised, were motivated by the economic “good sense” of the day and were not attributable to either rampant immorality or ungoverned greed. At the same time, they direct the attention of economic historians to the monetary policies of the Federal Reserve system in the 1920s and 1930s—in which Mitchell also played a role—and suggest that a more potent source of the Great Depression lies therein.
Please let's talk about the interesting bits now.
The Glass-Steagall Act, passed in 1933, forced commercial banks to refrain from investment banking activities in order to protect depositors from potential losses caused by bank speculation in stocks. Glass-Steagall was largely repealed in 1999..."
https://www.investopedia.com/articles/03/071603.asp
As far as this headline, it's the worst kind of nonsense, comparable to "This is the pebble that caused the avalanche!".
https://www.youtube.com/watch?v=Hhy7JUinlu0
Essentially, the dissolution of Glass-Steagall allowed investment banks to create complex financial packages, each one constructed out of dozens if not hundreds of home mortgages. Each individual mortgage was graded but the packages were built out of a mixture of low-grade and high-grade mortgages. Since trading (gambling) with these packages was very lucrative, the investment banks worked with shady mortgage brokers to increase the number of packages by pushing adjustable-rate mortgages on gullible people who probably were not that familiar with compound interest calcululations. These unlikely-to-succeed mortgages were mixed in with the high-qulaity mortages to create a wide variety of highly leveraged financial products, and then bets were placed on the outcomes of trading in these products (derivative markets, synthetic CDO squared nonsense, etc.). Once people realized that many of these mortgages were not going to be paid off, then the avalanche of collapse began.
Glass-Steagall, if retained, would have made all of that impossible.
Mortgage-backed securities have existed for over 50 years.
Glass-Steagall separated commercial banking from investment banking.
The movie Margin Call depicts an investment bank that sells mortgage-backed securities. I don’t remember anything in the movie about commercial banking.
I think Glass-Steagall got somewhat mythologized after the financial crisis, because there was a desire to hold related political figures responsible. It meant that people who endorsed the repeal had their fingerprints on the Great Recession.
There’s some truth to the claim - Lehman was both an investment bank and a commercial bank, so it wouldn’t exist in its final form without Glass-Steagall repeal. Lehman’s demise didn’t seem to be closely related to its commercial banking activity, but that increased the blast radius.
Neither AIG nor Bear Stearns did commercial banking at all.
See https://en.m.wikipedia.org/wiki/Brooksley_Born#Born_and_the_...
I’ve slept since then but that’s how my brain seems to remember it.
Even with that act, there is an argument that it merely codified the existing situation and the crash would have happened without the law being passed.
https://en.wikipedia.org/wiki/Clarence_Hatry
Economist John Kenneth Galbraith described Hatry as "one of those curiously un-English figures with whom the English periodically find themselves unable to cope."
When are we going to start going after these rich assholes in a serious way?