Three Crashes: 1907, 1929, What can we learn? Presented by Miguel Cantillo Nov 11, 2008
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1 Three Crashes: 1907, 1929, 2008 What can we learn? Presented by Miguel Cantillo Nov 11, 2008
2 Three Crashes (DJIA = 100 at Top) Bankers Panic 1906: Subprime Crash 2007: Great Depression 1929:
3 GDP Changes Event Boom Change GDP % Contraction Change GDP % Bankers Panic Great Depression Subprime Crash ????
4 Common Factors High Previous Growth Bubbles in Commodities, Real Estate. Preceded by Merger Wave Do all Merger Waves end with Crashes? Merger Wave -> Industrial Shocks. Banking is the weakest (?) link. Political change
5 Notes Debate about Great Depression Friedman and Schwartz (1963): Fed did too little Hayek (1984): Fed did too much Keynes (1936): Exhausted Consumption & Investment Schumpeter (1939): Exhausted Investment Possibilities Bernanke (1983): Banking Crises Eichengreen (1992): Protectionism Will only look at Bankers Panic Concept of Trust is ambiguous Voting Trust Corporate Trust form Financial Trust
6 Merger Movement Big Industrial Corporations (Chandler 1976) Take advantage of lower transport cost (RR) Telegraph Horizontal Mergers 1800 firms make 93 Corporate Trusts Tobacco, Oil, Food, Electric, Telephone. Middlemen eliminated. Lamoreaux (1985) Mergers are rational.
7 Financial Trusts: The Banks of the Rich Made in 1890s under liberal banking laws. Could invest in speculative assets. Avoided by individuals. Insurance companies and Trusts. Insurance deposits with Trusts. Insurance officers invest individually with Insurance loans.
8 Banking without a Central Bank The pecking order was Rural banks: high reserve requirements Reserve City Banks: medium reserve requirements, received rural bank deposits. Money Center Banks (NYC) collected most of the money. Clearing Houses Trusts did not have clearing house privileges Settled with cash
9 Political Climate Republican Dominance post Civil War. Sherman Act of Debate about Gold Standard. Theodore Roosevelt: Antitrust "Malefactors of Great Wealth" speech.
10 The Armstrong Investigation Conflicts of interest of insurance officers. April 1906: forbade Insurance companies Underwriting securities. Buying corporate stocks and collateral bonds. January 1906: Peak of DJIA
11 The San Francisco Earthquake April 18, Money in West temporarily locked European Insurers liabilities means that they must send money to the US. Bank of England Oct 19, 1906: raises rates from 4 to 6% Concerned by the loss of gold reserves Summer 1907: forbids US finance bills Silent Crash (30% from to )
12 The United Copper Corner (10/1907) Augustus Heinze (Copper Fortune) Owner, Otto Heinze & Co. (NYSE seat) Owner, Mercantile National Bank Director of at least 28 financial institutions. Charles W. Morse (Ice King) Controlled National Bank of North America New Amsterdam National Bank Chain Banking Charles T. Barney President of the Knickerbocker Trust Co. Third largest Trust Co. in New York City Gross & Kleeborg: Broker for the Corner
13 Knickerbocker Trust Co.
14 Two Weeks of Panic: Bank Runs on the Manipulators United Corner (12-15 Oct) Fails. Oct 15: Gross & Kleeborg closes Oct 17: Heinze is discovered Otto Heinze & Co. suspended State Bank of Butte insolvent Clearing House stands by Mercantile Bank Oct 21: Morse is discovered Runs on National Bank of North America, New Amsterdam National Bank Oct 22: Knickerbocker discovered Run begins, Strong studies it, finds it insolvent
15 Two Weeks of Panic: Bank Runs on Innocent Bystanders Oct 22 (Tuesday) Run on Trust Co. of America Appeal for help from J. Pierpont Morgan Examined by Benjamin Strong, Bankers Trust $3MM injected in 20 minutes Oct 23 (Wednesday) Morgan convenes with Trust presidents, Trusts unwilling to lend to Trust Co. Westinghouse declares bankruptcy Pittsburgh Stock Exchange closes Run on Lincoln Trust Co. NYC unable to pay salaries
16 Morgan Library
17 Two Weeks of Panic: Liquidity Oct 24 (Morgan Library) Trust Presidents agree to lend $10MM to Trust Co. of America. Banks agree to lend $23 MM to NYSE Brokers 8 Banks fail Call rates reach 100% Oct 25 (Friday) Banks lend $9.7MM to Brokers 7 banks fail Bankers impose 60 day withdrawal notices
18 Two Weeks of Panic: the Weekend Oct 26 (Saturday) Banks: impossible to keep up with bailouts Convince clergy to preach on Sunday. Agree to use scrip to settle in Clearing House. Oct 28 (Monday) Bankers learn that NYC is insolvent Morgan, Citi, First National Bank lend $30MM, backed by Clearing House Certificates
19 Two Weeks of Panic: Moore & Schley Nov 2 (Saturday) Moore & Schley (broker) near collapse Collateral is Tennessee Coal & Iron (TC&I) Proposed that US Steel buy TC&I US Steel executives (Gary & Frick) opposed Need Roosevelt approval (antitrust) NY State Bank Examiner suppresses report Strong presents the state of Trusts Morgan locks library until Trust presidents resolve situation.
20 The Resolution Nov 4 (Monday) London: sharply lower American stocks in LSE Implies massive stockbrocker failures 11 am: Roosevelt OKs US Steel purchase of TC&I. Summary $350 MM have been withdrawn from banks $300 MM stashed by individuals Treasury only had $5 MM Banks create money like instruments
21 Lessons Let insolvent financial institutions fail. Defend healthy institutions. Liquidity important Asymmetric Information Among bankers (medium) With the public (high)
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