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August 23, 2007

Comments

Tushar Kumar

The thing I found most interesting about this article was the way the Federal Reserve Bank has learned from the mistakes it has made in the past while dealing with the stock market crashes. The first one happened in 1929 when the bubble finally burst, leading to the great depression. In this instance, the Federal Reserve Bank kept their tight money policy, which in fact propelled the economy into a greater depression. Over the years, they have learned how to adjust both monetary and fiscal policy to help keep the economy stable. This is why when the market crashed again in 1987, there wasn't as big of a depression as there was back in 1929.

Richard Schimbor

The importance of the Federal Reserve in monitoring the economy and preventing prolonged depression is shown by this analysis of the causes of the Great Depression. After the collapse of the speculative market and subsequent stock market crash, the Federal Reserve of New York made open market purchases of government securities to increase the money supply and protect brokers from banks in other cities calling in their loans. This policy was not encoureaged by the Federal Reserve board, and thus the brief signs of life in the economy in 1930 were not fostered by a loose monetary policy. The fact that this mistake was not made again in 1987 is noteworthy, since the crash of 1987 did not lead to the kind of prolonged depression that more or less lasted from 1929 until the start of World War II. It is easy to laugh but also frightening, based on this economic evidence, when fringe presidential candidates like Ron Paul suggest doing away with the Federal Reserve.

Yaoyao Wang

In his article, Eugene White presents evidence and signs that indicated an upcoming economic recession. Galbraith and other historians have always argued for vague causes of the halt of the bull market, though White explains in detail events that may have led stockholders to rapidly sell their stocks. White explains that the Federal Reserve's index of industrial production may be used as a proxy in place of quarterly earnings, and the earnings first dropped as early as July 1929. In August and September, Federal Reserve's other indices fell. Real interest rates in the U.S. and abroad also rose. All these events led to the upcoming recession. When we learned about causes of the stock market crash, most history books attributed the cause of the market crash to various random reasons. White’s analysis provides more direct reasoning than Galbraith’s argument, which means that the Federal Reserve perhaps could have prevented the recession which led to the Depression if correct measures were taken in a timely basis.

Chuong Quach

I initially thought that the stock market bubble and crash was due to over inflated and overvalued stocks without any economic reasons to explain them; however, according to this article, the massive investments in stocks had good reason. These reasons were due to great economic improvements - the systematic application of science to industry, the development of modern management techniques, and mergers that gained economies of scale. The real culprit for the crash was the inexperience of these investors that caused a scare when they saw small downturns in the business cycle. Today, I believe there are still a lot of inexperienced investors participating in the stock market, but with the wide range of information that's available to the public (i.e. the internet) investors are more knowledgeable about the market and are not as easily frightened when they see negative fluctuations in the market. Also, the close monitoring and involvement of the Federal Reserve Bank ensures that the public is well-aware and well-informed of the economies situation.

Jaylum Chen

I chose to read White’s article partly because of its relation to my interest in the Chinese economy. White’s analysis of the factors behind the crash include the expansion of credit, mass speculation, and an enthusiastic, optimistic public. Much of this can be seen in China today, where the mass growth and development happening right now is encouraging many families to invest huge portions of their savings into stocks. White also mentions the possibility that the large amount of new investors in the market contributed as well to the stock market bubble, which is certainly reflected in the Chinese market.

Delara Bastani

The aspect of this article that piqued my interest the most was the discussion of credit in relation to the stock market boom. A hypothesis proposed by many economists is that because stocks could be purchased on credit, “unwise speculation” grew rampant, ultimately leading to the crash. I find this very interesting in regards to the recent Sub-Prime Mortgage Crisis and the subsequent lowering of the federal funds rate. Some argue that the Fed is fostering moral hazard by slashing interest rates. The Fed bailed out investors during the demise of LTCM and now they are aiding in the Sub-Prime Mortgage Crisis. Thus investors are more likely to take unwise risks because they expect the Fed to bail them out in response to crises. Although unwise speculation may not have necessarily caused the crash in 1929, it might lead to problems in the future.

Monica Shih

Even today, the Federal Reserve wields enormous power over the economy by manipulating interest rates and the money supply. Before reading this article, I didn't have much knowledge of the stock market crash. The history classes I took in high school all blamed excessive borrowing and buying stocks on margin as the main contributors to the stock market But the fundamentalists, Fisher and Dice, offer a very convincing alternative explanation. America leading up to 1929 was indeed undergoing a rapid economic expansion, and a large part of the increase in expectations of earnings was justified. In this theory, the main contributing factors the the stock market crash were poor judgment calls by the Fed and the government. When the stock market crashed and aggregate demand dropped, the Fed should have used expansionary monetary policy to counteract the drop in income. An increase in the money supply would have decreased the interest rate, stimulating consumption and investment, which both would have increased equilibrium income (Y). Instead, the government and the Fed allowed interest rates to rise, exacerbating the damage inflicted by the economic decline. Much of the decline in consumption during the Great Depression can be blamed on poor policies and lack of government intervention, rather than artificially inflated prices and buying on credit.

Rosemary Lu

Overall this explanation of the stock market crash was very convincing with the description of the policies and the market bubble and then the market burst. Many of the students seem to take understanding the stock crash relatively lightly due to the fact that many students have a basic understanding of this important economic event. However, I think it is important to remember that so much of the depression happened no only due to the hands off policies used by the government before and during the time, but also the policies that were later instated that were supposed to help the recession.

Jerry Hong

I found the article extremely interesting. Eugene White goes into detail why the stock market crashed so heavily in 1929. Originally, I thought that it was due to stocks that were overvalued, so people did not exactly know what they were doing when they bought and sold stocks. However, apparently, there were other more economic reasons. During the 1920's, there were huge economic investments to improve technology, etc. These benefits in the 1920's ended up being a major cause of the recession because investors did not know how to deal with the market at the time. Moreover, the Fed made things even worse by "opposing easier monetary policy after the crash; hence," it was difficult for the economy to recover with the government holding it back too. Instead, they should have adopted an expansionary monetary policy to resurrect the economy. Good thing the Fed learned from its mistake and did not repeat the same mistake in 1987.

Raymond Kei

In White's article, he stated that the conventional argument for the stock market boom and crash is the result of the rapid growth of the 1920s, which result in the irrational mania that induced the public to invest in the stock market. However, the author thinks that easy credit in the form of broker's loans seems strange at a time when the Federal Reserve was pursuing a tight money policy. Therefore, the author looked at the new economy and the stock market in 1920s in a new perspective. In conclusion, the reason for the stock market boom is the technological and structural changes in industry, which promised a higher earnings and dividends. However, this progresses also made stocks difficult to be valued. The Fed took action when the stock market crashed; however, instead of allowing the stock market bubble to expand and burst, the Fed policies helped to push the economy further into a recession. And the Fed did not make the same mistake twice during 1987.

jashoda kashyap

I have always thought that the reasons behind the stock market crash were random and unclear. White does a good job of outlining what the common idea of the cause of the crash versus the more detailed reason. I had thought that it was due to the over valuation of stocks. Allowing the interest rates to rise was a bad idea. This made it difficult for the economy to recover, and sent the economy in a downward spiral. White’s analysis is a lot more direct and detailed than that of Gailbraith.

Ji Y Lee

This article shows how the Federal Reserve plays a role in keeping the economy in check. It talks about the the Great Depression and the stock market crash. Then the actions taken by the banks and Federal Reserve to try and save the economy from this crash. The Federal Reserve bought in securities from the public in order to try and increase the supply of money. It was an attempt to counter the effects of the stock crash.

David Thomason

It’s interesting how White points out the influx of inexperienced investors into the market causing the bubble to happen. In a sense, the roaring 20’s were so “roaring” because larger numbers of people were making money, likely with many getting their wealth from investing in these growing corporations. He says the fact that women were being encouraged to buy stocks, in women’s magazines and such, was a qualitative sign that a bubble was likely. Yet, even so, this influx of inexperienced investors into the market seems like a good thing. Increased wealth for more people, especially women, seems like something that should be encouraged. Inexperienced investors of course can cause bubbles, but it appears that the reason the crash was so bad was due more to Federal Reserve policy more than anything. It follows that if the conditions are going to be made for more people to have access to more wealth due to investing, the Federal Reserve needs to be prepared to act accordingly.

Hanwen Chang

In this article, Eugene White explains the possible causes which resulted in the stock boom and crash of 1929. White cites Galbraith’s explanation of stock crash which involved a bubble in the stock market formed by the economic growth at the end of 1920s and the mania that tempted the public to invest in the bull market. I find Whites argument convincing because I’ve never gone in depth to study the reason behind the stock crash. The ability of the government to adjust economic policies is crucial in making an economy stable. The Federal Reserve learned their mistake and therefore, during the crash in 1987, it followed prior examples and was able to prevent and contain the situation from happening again.

Hanwen Chang

In this article, Eugene White explains the possible causes which resulted in the stock boom and crash of 1929. White cites Galbraith’s explanation of stock crash which involved a bubble in the stock market formed by the economic growth at the end of 1920s and the mania that tempted the public to invest in the bull market. I find Whites argument convincing because I’ve never gone in depth to study the reason behind the stock crash. The ability of the government to adjust economic policies is crucial in making an economy stable. The Federal Reserve learned their mistake and therefore, during the crash in 1987, it followed prior examples and was able to prevent and contain the situation from happening again.

Alex Zhong

It is interesting to see how the Great Depression resulted from a chain of events that started with the implementation of new technology and increased production and ended with bungled policy making on the national level. The recession illustrated how having too much of a good thing, in this case being speculation, is deleterious to the system as a whole. Increasing the capacity for lending during the rise of large corporations was very beneficial initially as it allowed for the attainment of a larger capital stock, but when too much credit is put into a market where there is no real value backing it up in the form of actual revenue, bad results obviously must occur. It is interesting how the easy it could have been for the Fed to have prevented the recession from even occurring in the first place, but rather they opted not to proceed with such an action. If they knew to raise the discount rate at the time, would this debacle have ever occurred?

Alex Zhong

It is interesting to see how the Great Depression resulted from a chain of events that started with the implementation of new technology and increased production and ended with bungled policy making on the national level. The recession illustrated how having too much of a good thing, in this case being speculation, is deleterious to the system as a whole. Increasing the capacity for lending during the rise of large corporations was very beneficial initially as it allowed for the attainment of a larger capital stock, but when too much credit is put into a market where there is no real value backing it up in the form of actual revenue, bad results obviously must occur. It is interesting how the easy it could have been for the Fed to have prevented the recession from even occurring in the first place, but rather they opted not to proceed with such an action. If they knew to raise the discount rate at the time, would this debacle have ever occurred?

Yu (Ray) Zhao

The article written by Eugene White regarding the Stock Market crash depicts how far the Federal Reserve has come since the crash of 1929. While people often attribute factors such as stock buying and excessive borrowing as the main culprit of the crash, there were other reasons as well. One of the reasons for this was the Fed’s inability to regulate the situation. Rather than attempting to curb the downward spiral once the aggregate demand dropped, the Feds placed a stricter hold on the monetary reserves. What they should have done in this case was to use expansionary monetary policy to counteract the drop in income. Nevertheless, the Feds have shown that they have indeed learned from this mistake as shown by the .5% interest rate cut they made a few weeks ago as a way to halt an upcoming recession.

Shannon Lee

Before reading this article, I always believed that the stock market crash was purely the people's faults. I thought that they simply invested unwisely in hopes to get rich fast. However, despite the over-investment of the people, it was not purely their fault for the Great Depression. The government could have stepped in to prevent the depression by expanding the monetary policy or using fiscal policy. Although the depression was historically notorious, we still learned from our mistakes and did not let history repeat itself when the stock market crashed again in 1987. Stock markets are unpredictable but at least the government now knows not to let the unstableness of the markets affect us. I think this kind of trial and error method is what helps America be more successful than others as well.

James Wang

The most interesting part of this article to me was the effect of the Fed on whether or not the stock market crashes of 1929 and 1987 led to depressions. In both cases, the Fed did not prevent the boom and subsequent crash, though not for a lack of effort in 1929. However, that effort by the Fed in 1929 led to tighter credit after the crash and prevented any recovery. As a result, the entire economy fell into depression. In contrast, the Fed in 1987 had not tightened credit up to the crash and the market was able to recover without affecting the economy as a whole and avoiding recession. It would be interesting to know whether the Fed in 1987 actually learned from the crash of 1929 or just happened to pick a more effective policy.

Yu Xu

The Federal Reserve Bank have always played an important role when it comes to economic crisis; even though U.S economy today is still driven by mostly private businesses, but we can see that government regulation and impact has grown tremendously. Good thing is that the Federal Reserve have learned to be smarter now, as of recently they just cut the interest point by half point to prevent the economy going into recession; even though it doesn’t seem to be that effective, but it sure will help in the long run.
I disagree with the previous comments about how China’s economy today is similar to the situation we were in with the Great Depression, because after all China is a communist country, government control and impact over business is absolute; second, the Chinese people have always had the habit of saving a fixed amount of money in the bank to prevent emergency necessity. Even though more and more family are putting money in the stock market, but most of them won’t put all their fortune into unstable investments due to the old Chinese conservative tradition. So when the Chinese market do crash, it’s us foreign investors that are going to hurt the most, because both Chinese government and people will always have a good amount of money in the bank and cash under their pillow.

Simon Zhu

It's always good to read Great Depression articles, since the Great Depression played such a pivotal role in the development of American economics. White presents a theory of overcapitalization leading to a "bubble" leading to a crash. He also blames the Fed for not exercising its powers to prevent the speculative behavior by restricting the money supply. However, although the correct monetary policy is obvious in hindsight, the Fed did not really have any precedent to try to choke the money supply at the time. The untrammeled bull market probably seemed like a very good thing to investors at the time.

Guadalupe Garcia

What is particularly striking to me about White's description of the stock market events of the 1920s is the willingness of people to buy stock on credit. People were taking large amounts of money they didn't have and risking it. Granted, the perceived economic stability of this era made the risk factor seem very minimal to investors, but it seems it was that excessive notion of stability that in the end largely induced the the market crash.

Richard Paek

The stock market crash was more of a bubble effect than fundamentals. Just like the recent housing boom (although the housing boom seems to be at a lesser degree), people saw others making large amounts of money in the stock market. Because everyone was making money, it seemed like the stock market was a sure way to profit. As more money kept getting thrown into the market (with lots of money being borrowed), prices would rise until eventually people got scared and everyone tried to pull out their money.

Patrick Traughber

Looking at the root causes of the Great Depression is an excellent lesson in understanding the effects of policies instituted by the Federal Reserve. I think in order to understand their policies at the time, you also have to put them in context. The Fed had not dealt with an economy like the one of the 20's before. The new industries of radio and automobiles, led by RCA and Ford and later GM, respectively, steered the economy towards fast-paced growth. With investments concentrated in a few industries, and new investors joining in, the economy was growing on a weak foundation. One thing in particular that I found intriguing was that Giannini from Bancitaly warned his investors that he thought the price of his bank's stock was inflated, despite knowing that the warning would drop the share price. I wonder if today's leaders in banking would do the same. Finally, the parallels of the bubble of the late 20's sounds strikingly similar to that of the late 1990's. New industry was developing (IT companies), new investors were entering the market, and the lack of dividends from these companies didn't warn investors about prospective long-term growth. It serves as a reminder that history often repeats itself.

Kevin Chiu

White's article had good analysis of an important event in American history. Reading this article, it emphasizes how much power the Federal Reserve has in how the economy performs and reacts in response to things like the stock market crash. The author claims that the Fed should have done things differently during that time, such as changes in monetary or fiscal policy, in order to prevent the Great Depression. This emphasizes how the Fed is responsible for close monitoring of the economy and making sure it responds in a way that is to the best interest of the US as a whole.

David M. Aviles

Nowadays it seems the Fed is the ultimate reader of the economy. It may have had a tight money policy back in 1929 after the stock market crash but have learned what not to do during such an ensuing depression. It should be hard to understand the effect of interest rates on an economy that is seemingly doing well or doing bad. In any case, the Fed of the 1920's surely had to adjust its thought process after its failure. However, our economy is a lot more complex with more safety nets to ensure consumer confidence. The article doesn't necessarily blame the depression on the crash because of events leading up to it, but fixing it was even harder to explain.

Peter Li

White's paper cites several qualitative arguments for a bubble, as White states that a bubble cannot be proven econometrically at this time. White argues that fundamentals became hard to judge because the industry was undergoing rapid change, which left investors without sound ways to evaluate future dividends. Moreover, he goes on to identify new groups of investors that were easily persuaded to buy certain stocks based on rumor or print. Contrary to traditional literature, White holds that evidence for easy credit as the source of the bubble is limited, as lenders actually became wary of borrowers' demands by raising the interest on their loans. Despite good analysis throughout the paper, I found it slightly disappointing that White does not argue with conviction of a major cause of the Crash. He is steadfast in dismissing traditional theories as weak, but only briefly covers his notion for the Crash - that an oncoming recession was anticipated by the public.

Peter Li

White's paper cites several qualitative arguments for a bubble, as White states that a bubble cannot be proven econometrically at this time. White argues that fundamentals became hard to judge because the industry was undergoing rapid change, which left investors without sound ways to evaluate future dividends. Moreover, he goes on to identify new groups of investors that were easily persuaded to buy certain stocks based on rumor or print. Contrary to traditional literature, White holds that evidence for easy credit as the source of the bubble is limited, as lenders actually became wary of borrowers' demands by raising the interest on their loans. Despite good analysis throughout the paper, I found it slightly disappointing that White does not argue with conviction of a major cause of the Crash. He is steadfast in dismissing traditional theories as weak, but only briefly covers his notion for the Crash - that an oncoming recession was anticipated by the public.

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