A Comparison of 1929's Stock Market Crash and Today's Financial Crisis

3019 Words Mar 18th, 2013 13 Pages
Introduction
The most recent financial crisis was an all encompassing meltdown that affected the entire global economy. It is nearly impossible to quantify the distress this crisis put on the American economy and the world has yet to see the long term damage. After any disaster, people are eager to point fingers. This financial meltdown was no different, as critics were quick to blame anything and anyone from Wall Street to fair value accounting. It’s hard to pinpoint exactly what caused the most recent financial crisis, and even time may not tell. Economists are still trying to figure out why the stock market crashed in 1929, and Ben Bernanke recently stated “to understand the Great Depression is the Holy Grail of macroeconomics.”
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These ratings were trusted by investors and fueled the sale of additional CDOs. Credit rating agencies have a fiduciary duty to the public to evaluate debt instruments without bias and with due diligence. A conflict of interest arises however because they earn their revenues from the issuers whose financial instruments they rate. The issuers have the ability to pick and choose their credit rating agencies, most likely based on their willingness to give a favorable credit rating. In other words, it’s in the best interest of the credit rating agency to give favorable ratings in order to receive revenue. With an increase in bonds, and mortgages in 1929 and 2007 respectively, there was more profit to be made and credit rating agencies wanted their cut.
Risky Credit Practices
With increased capital and soaring investor confidence, both eras saw an increase in lending on credit. In 1929, “buying on margin” became very popular. Average investors wanted to get their share of the profits being made in the stock market and would find a stock broker to lend them money to increase their ownership. Sometimes brokers would require 50% down payment by investors and riskier ones only required 25%. Investors would put up the margin capital and the broker would put up the remainder (Bierman). Brokers would then collect a fee on borrowed money. There was no regulation on margin buying, so setting margins was left to the…