Today’s market problems ring a bell

Alisa Roth Oct 24, 2007


Scott Jagow: I can’t decide if Wall Street has a short memory or a long one. Investors are such a “what have you done for me lately” bunch. But then again, they’re worried about things that happened 80 years ago. Like Black Monday, or Tuesday or Friday.

Today’s the anniversary of Black Thursday: October 24, 1929. Actually, there are some similarities between today’s market and the Depression era. Alisa Roth explains.

Alisa Roth: One of the big problems in 1929 was that investment banks and commercial banks were one and the same. Instead of using deposits for short-term loans, some bankers used them to buy securities. So when the market crashed, regular depositors found themselves in big trouble.

Deregulation in the 1990’s puts us back in a similar position. Today, the worry is that if the investment arm of a bank does poorly, it’ll affect the performance of the parent company, which, in turn, could hurt the commercial side.

Charles Geisst is a professor of finance at Manhattan College. He says another big cause of the 1929 crash was the practice of borrowing money to buy stocks. Sound familiar? That’s how hedge funds work.

Charles Geisst: When combined with the other institutional side, which is the large institutional investors like the hedge funds, it’s a very powerful combination — which could actually lead to the marketplace’s downfall very quickly.

But Geisst says we have learned some lessons from history, and some safeguards would prevent a crash of the same magnitude.

In New York, I’m Alisa Roth for Marketplace.

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