Some are speaking of similarities in the current markets to conditions seen in 1929 before the big market crash that led to the Great Depression. Recessions are inevitable, but few people time them precisely and they vary considerably in severity. Today there are some red flags around the extreme concentration of wealth, speculative assets, debt, etc. It's important to note that while the 1929 crash was bad, it may have been the policies following the crash that made things much worse such as the contractionary policy of the Federal Reserve and its failure to act as lender of last resort, the 1930 Smoot-Hawley protectionist tariffs, several ill-conceived interventions that discourage business investment, and the top rate of income tax that was raised from 25% to 63% all made matters worse. In 1929 around 3-5% of Americans owned stocks. Today it's around 62% and accounts for around 45% of all household assets. So what is different today compared to the conditions that existed in 1929 when the markets crashed? Lots!
1. The Securities Act of 1933 requires that companies offering securities to the public disclose essential, accurate financial information.
2. The Securities Exchange Act of 1934 created the SEC to enforce federal securities laws and regulate stock exchanges, overseeing market intermediaries like brokers and prohibiting market manipulation.
3. Federal Deposit Insurance Corporation (FDIC) insures bank deposits up to $250,000 per depositor preventing bank runs, where mass withdrawals by fearful customers can trigger bank failures.
4. The Glass-Steagall Act (Banking Act of 1933) separated commercial banking from investment banking (which underwrites securities) to protect depositors from losses due to speculative investment activities by their banks.
5. The Dodd-Frank Act of 2010 instituted major financial regulatory reforms, more stringent prudential standards for large financial firms, regulated the derivatives market, and created the Consumer Financial Protection Bureau (CFPB), although this department has been decimated recently and its future is questionable.
6. In the 1920s, buying stocks with borrowed money (buying on margin) required as little as 10% down. The Fed now regulates this practice, requiring a minimum of 50% equity, greatly reducing the risk of massive, debt-fueled speculation and life-altering margin calls.
7. Trading curbs (circuit breakers) temporarily halt trading across all U.S. equities markets if the S&P 500 index declines by 7%, 13%, or 20% compared to the previous day's close, all designed to slow panic selling and give investors time to reassess the market.
8. The Limit Up/Limit Down plan is a trading curb for individual stocks that prevents trades from being executed at prices outside a specified range, halting trading for a brief period if a stock's price moves too drastically. This curbs excess volatility in single securities.
9. Regulators impose strict capital and leverage requirements on financial firms, particularly those considered "too big to fail" forcing banks to hold sufficient capital reserves to absorb losses, preventing failures from destabilizing the entire system.
10. The Dodd-Frank Act gives increased safeguards and financial rewards to individuals who report financial fraud to the SEC incentivizing the exposure of illegal and misleading practices.
11. Beyond new securities issues, publicly traded companies must file detailed and periodic financial disclosures with the SEC (e.g., quarterly 10-Q and annual 10-K reports) to ensure ongoing transparency.
So yes, while those speculative MEME coins and stocks and some crypto endeavors combined with huge government and personal debt levels, potential over-spending in areas, etc. are all good reasons for concern, the most notable difference today is that we are talking about risks, "before" they happen. That's the best time to seek out opportunities to prevent big shifts from happening as they always hurt the poorest most. Also important to remember that while 25% were unemployed in the Great Recession, 75% remained working. And yes, there is one thing worse than inflation, "Deflation". After 1929, consumer prices fell by about 25% by 1933, and wholesale prices fell by 33%. While some might call that 'improved affordability', most would see enormous damage that can take many years to recover from.
