The Wall Street Crash and The 2008 Financial Crisis

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The Wall Street Crash (WSC) and the 2008 Financial Crisis/ Great Financial Crash (GFC) are two events which completely altered the world of economics due to their profound effects on the stock market- the WSC is 'the most momentous occurrence in the history of the US' according to John Kenneth Galbraith, the famous author of The Great Crash. Despite happening approximately 80 years apart they share many similarities and differences. I have used John Kenneth Galbraith's books: FE and TGC because he is a famous economist who specializes in the WSC which means his knowledge is in-depth and he did not live through it therefore there is no inherent bias.

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I have used TBS as it depicts the GFC and there is no bias because of the many sources they have used in its production and any fact issues have been checked using the articles in the bibliography.

What happened in the Wall Street Crash? On the 25th March 1929- Charles Mitchell stopped a mini-crash but warnings of an actual crash were ignored.

By mid-1929- all products were being produced less e.g. less cars; the stock market still improved. Then in September 1929- investors saw decline in economy and sold stocks, as share prices fell, many investors began to sell their stocks (they could not pay off loans). On October 21st- stockbrokers made 'margin calls' demanding repayment of loans from clients and roughly 13 million shares were traded on the stock market (BLACK THURSDAY). By October 28th- stock market lost $5bn, 'free fall, '- spread to Europe, the following day the stock market collapsed due to mass (panic) selling of all stocks, $10-15 bn was lost due to this and particularly the middle class were affected.

Finally, in mid-November- roughly $30bn had been lost on the stock market as prices dropped.

What happened in the 2008 Financial Crisis? The poor housing market lead to FED getting involved on 22nd Jan. 2008. Then JP Morgan buys Bear Stearns for $240m on 14th March and by 7th Sept.- Freddie Mac and Fannie Mae (US gov't backed mortgage buyers) have problems and the US must bail out them. And on 15th Sept.- Lehman Brothers file for bankruptcy; 17th Sept. - Halifax is bought by Lloyds and big companies like Goldman Sachs come under threat so in October TARP is started which buys bad assets with $700bn. By 13th Oct. - bailouts mount up. Iceland's collapses financially and many banks such as Lloyds are on the verge of collapsing; on 25th Nov.- 1st round of quantitative easing begins but it costs trillions by the 11th Dec.- Ireland enters recession and Fed cuts interest rates to a 0% lower bound and Britain enters recession and 5th March 2009- Bank of England cuts bank rate to 0.5% and on the 26th, the US Treasury Dept. outlines an idea for reform. 21st May- the UK debt rating goes from stable to negative because the banking system needed to be aided and this was costly. Finally, in 9th May 2010- Europe debt crisis starts.

To compare the similarities and differences in the causes of the WSC and the GFC, we must know what the actual causes are: Main causes of the WSC- there are 7 fundamental causes of this: credit boom, buying on the margin, irrational exuberance, a mismatch between production and consumption, agricultural recession, weaknesses in banks and the change in monetary policy by Congress.

1. Credit Boom- there was a golden age for the US economy in the 20s which meant people wanted to invest in the stock market (and buy shares), this meant businesses would prepare for growth by taking loans due to an increase in their shareholders. People got so into the stock market that they were indebted so for example when a stock loses value, many were susceptible to this loss. In 1929, this susceptibility happened, and many rushed to rid shares and redeem debts.

2. Buying on the Margin- consumers were not paying the full value of shares and instead using loans to pay them off. This meant more money was put into shares which made them more valuable and hence prices rose. Many 'margin millionaire' investors utilised this but when prices fell, they were exposed and anyone who lent money needed their money back.

3. Irrational Exuberance- the golden age for the US economy lead to false confidence in it. People saw wealth in the market and bought shares but as prices went up, people borrowed money to invest. However, the stock price became not relative to how much you would get in return but the confidence surrounding it and anyone questioning this value were called "doom-mongers". The average earning per share "rose" by 400% between '23 and '29. March '29- stock market had a small drop in value but there was a rebound. 'The collapse in the stock market was implicit in the speculation that went before'- TGC. And Galbraith also argued that: 'there were then evident all the elements of the euphoric episode.' This was so impactful that even specialists such as 'Irving Fisher, a truly renowned economist at Yale, was caught up by the speculative euphoria of 1929.'- TGC Then on Oct. 24th investors sold their stock to make profits and share prices dropped in the billions. 1930- The share prices fell by $40 bn. in a single day.

4. A mismatch between consumption and production- the demand for products was high in the early 20s and many products were made but this demand dwindled fast and the rate of production did not account for this. Hence, businesses could not make profits and the drop-in share prices was worsened. This was a clear sign of what would happen, but it was ignored- 'the supply of new buyers needed to sustain the upward thrust dried up'- FE.

5. Agricultural Recession- small farmers could not make profits due to new popularity of the market. There was better technology but the demand for food was not increasing. Farmers' incomes dropped and this meant food could not be provided to a nation which was already vulnerable.