posted on Feb, 4 2009 @ 01:03 AM
Asset Bubbles – first in the stock market during the 1990s, then in real estate during the 2000s, pretty much mirroring the stock and real estate
market bubbles of the 1920s.
Securitization – although not in the very “ultra-modernistic” form and shape of the 2000s, with slicing and dicing of pools and tranches of
seniority, it was widely recognized in the 1930s that securitization during the 20s drove the domino effect in the U.S. financial system during the
Excessive Leverage – just like in 2008 the topic du jour is “deleveraging”, so the unwinding of leverage during the 1930s was the driver of
forced liquidations and financial pain. Of course, it was very clear back then that the root of the problem was not deleveraging per se, but the
excessive leverage that took place prior to the deleveraging process. “Investment Pools” were then instrumental in both the securitization and
excessive leverage, just like the Hedge Funds of today.
Corrupt Gatekeepers – we know well that the Enrons and Worldcoms were aided and abetted by the accounting firms – those same firms that were
supposedly the Gatekeepers of the financial community, yet handsomely profited from the boom while neglecting their watchdog functions. In the current
financial crisis, we also know that the rating agencies were also making hay during the boom. Very similar were the issues during the 1920s that led
to the establishment of the SEC and other regulatory bodies to replace the malfunctioning “gatekeepers” at the time.
Financial Engineering – we are led to believe that financial engineering is a rather recent phenomenon that flourished during the New Age Finance
Era of the last 15 years, yet financial engineering was prevalent in the 1920s with very clear goals: (1) to evade restrictive regulations, (2) to
increase leverage, and (3) to remove liabilities from the books, all too familiar to all of us today.
Lagging Regulations – just like the regulatory environment lagged the events of the 1920s and regulations were introduced only after the Great
Depression had obliterated the U.S. financial system, so we are yet to see new regulations addressing the causes of the current crisis.
Understandably, regulations should have foreseen today’s financial problems and should have been introduced before the crisis.
Market Ideology – back in the 1920s, just like in the last two decades, the market ideology of “laissez faire”, which Soros quite appropriately
described as “Market Fundamentalism”, has swept the financial markets. Of course, the free market knows the best, but the reality is that the
money market is not really free – when the Fed determines the cost of money (interest rates), and can fix this cost for as long as it wants, then
all sorts of financial imbalances can be sustained without the discipline imposed by the market. This can lead to all sorts of problems that we
actually have to face today.
Non-Transparency – back in the 1930s, it was widely recognized that businesses and especially financial institutions lacked transparency, which
allowed for the accumulation of significant imbalances and abuses. Today, financial markets and institutions have intentionally compromised
transparency in a number of ingenious, or better disingenuous, accounting trickeries and financial gimmicks, like off-balance-sheet entities (SIVs),
hard-to-understand derivatives, and opaque instruments with mind-boggling complexity. Today CEOs and Chief Risk Officers of major financial
institutions cannot figure out their own risk exposures. Originally, lack of transparency was designed to fool the markets; ironically, modern-day
financial executives have gotten to the point of fooling themselves.