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2 weeks ago
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In 1979, the fiftieth anniversary of the crash, the co-authors Gordon Thomas and Max Morgan-Witts published “The Day the Bubble Burst,” which included the anecdote about the shoeshiner. Now, four years before the hundredth anniversary, comes “1929,” a new book by Andrew Ross Sorkin, a financial columnist for the Times and a co-anchor on CNBC’s “Squawk Box.” As in Sorkin’s previous book, “Too Big to Fail,” a best-selling account of the financial crisis of 2008, he focusses mainly on the financiers and policymakers at the center of the crisis, drawing on private letters, transcripts, oral histories, architectural plans, memoirs, newspaper accounts, corporate filings, and prior histories. His narrative extends from February of 1929 to well beyond the crash, to the failed efforts of Herbert Hoover to revive a stricken economy; the election of Franklin D. Roosevelt; the U.S. Senate’s famous Pecora Commission, which exposed a great deal of Wall Street self-dealing; and the passage of the 1933 Glass-Steagall Act, which curbed some of the Street’s excesses by separating commercial banking (making loans and taking deposits) from investment banking (selling and dealing in securities).
Other reforms introduced under Roosevelt included the founding of the Securities and Exchange Commission, which had a mandate to protect investors and maintain fair and orderly markets, and the federal insurance of bank deposits, which ended a calamitous wave of bank runs. In historical terms, the 1929 crash and the election of F.D.R. marked the dividing line between the untrammelled financial capitalism that had emerged during the Gilded Age in the late nineteenth century, and the managed capitalism of the mid-twentieth century. For several decades, this system delivered strong economic growth and a more equal income distribution, until inflation upended it and ushered in the neoliberal era of financial deregulation. (In 1999, Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed key parts of Glass-Steagall.)
During the nineteen-twenties, Sorkin writes, “Wall Street became like a giant balloon floating above the common people, its self-mythologizing leaders enjoying the comforts of what felt like a privileged realm.” His leading characters include Charles Mitchell, the chairman of National City Bank, a predecessor of Citibank, who, in March of 1929, resisted efforts by the Federal Reserve to restrict bank lending to speculators in the market; Thomas Lamont, a senior partner at J. P. Morgan & Co., who, during the panic selling on October 24th, organized a futile effort to stabilize the market; and Jesse Livermore, a storied speculator who made and lost several fortunes before eventually shooting himself in the cloakroom of the Sherry-Netherland hotel. There are cameos by everyone from Al Smith and William Randolph Hearst to Winston Churchill and Groucho Marx, both of whom speculated heavily in the market and paid the price.
No two speculative booms are exactly alike, of course, but they share some common elements. Typically, there is great excitement among investors about new technology—in today’s case, A.I.—and its potential to boost profits for companies positioned to take advantage of it. In the twenties, commercial radio was a novel and revolutionary medium: tens of millions of Americans tuned in. Sorkin points out that, between 1921 and 1928, stock in Radio Corporation of America, the Nvidia of its day, went from $1 ½ to $85 ½.
Another hallmark of a stock bubble is that, at some point, its participants largely give up on conventional valuation measures and buy in simply because prices are rising and everybody else is doing it: FOMO rules the day. By some metrics, valuations were even higher during the late-nineteen-nineties internet stock bubble than they were in the late twenties. And according to the latest report from the Bank of England’s Financial Policy Committee, which was released last week, valuations in the U.S. market are, by one measure, “comparable to the peak of the dot-com bubble.” That’s true according to the cyclically-adjusted price-to-earnings (CAPE) ratio, which tracks stock prices relative to corporate earnings averaged over the previous ten years. If, instead of looking back, you focus on predictions of future earnings, valuations are less stretched: the Bank of England report noted that they remain “below the levels reached during the dot-com bubble.” But that’s just another way of saying that investors are betting on earnings growing rapidly in the coming years. And this is a moment when many companies have so far seen precious little return for their A.I. investments.
