This Week’s Column
Past Columns
Column History
Subscribe Now
Author

CENTRAL VIEW for Monday, June 22, 2009

by William Hamilton, Ph.D.

The panics of 1907 and 2007: Common Factors

The good news for men is that there are only seven rules for understanding women. The bad news: No one knows what they are. Seriously, it appears that financial panics like those experienced by the United States in 1907 and 2007 have seven common factors, and even some malefactors.

Why didn’t we recognize what was happening in time to avert the panic of 2007? Don’t any of those geniuses on Wall Street or in Washington, D.C. read history?

Two University of Virginia professors, Robert F. Bruner and Sean D. Carr have indentified the seven factors in their: The Panic of 1907: Lessons Learned from the Market’s Perfect Storm. Moreover, the Forward by William J. Bernstein provides such an abundantly clear explanation of credit markets that it alone is worth the price of the book.

Annotated with my comments (not necessarily shared by the authors) are the seven factors:

1. Complexity. In both 1907 and 2007, financial markets had grown so complex the creators of some of the credit instruments could scarcely explain them to others.

2. Buoyant growth. Even though the last four months of the Clinton Era were in recession and even with the trauma and upheaval of 9/11, the American economy regained its footing and was booming into mid-2007.

3. Inadequate safety buffers. Although President Teddy Roosevelt was busting trusts, the 1907 economy was booming. But from the Carter years onward, pressure was on the credit industry to issue sub-prime mortgages to people who could not meet the traditional criteria of: capacity, character and collateral.

Yet, if the Glass-Stegall Banking Act of 1933 had not been repealed in 1999, the panic of 2007 might never have occurred. In addition to establishing the Federal Deposit Insurance Corporation (FDIC), Glass-Steagall separated commercial banking from investment banking. That prevented the investment-banking fox from being in charge of the commercial-banking hen house.

Unfortunately, in 1999, under the banner of making American investment banking more competitive with foreign investment banking, two prominent Republicans wrote legislation repealing Glass-Steagall. President Clinton signed the repeal legislation. Thus, Republicans and Democrats must share the blame for allowing the huge investment banks to take risky subprime mortgages into their portfolios.

4. Adverse leadership. In 1907, two presumed pillars of the financial community tried and failed to corner the copper market. Their greed led to the failure of the supposedly “too-big-to-fail” Knickerbocker Trust Company. The credit markets from London to New York began to shrink. Depositors lined up to withdraw their savings. Many investors would no longer invest.

5. Real economic shock. The financial panic of 1907 was preceded by the 1906 earthquake and fire that virtually destroyed San Francisco. The shock wave damaged the insurance, reinsurance and credit industries. Moreover, the uninsured needed to borrow huge sums that wary investors would no longer offer. The financial crisis of 2007 was preceded in 2005 by Hurricane Katrina. By destroying much of New Orleans and the Gulf Coast, Hurricane Katrina placed an enormous demand on the insurance, reinsurance and credit industries. The managers of those industries became like Mark Twain’s cat: “The cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But he won’t sit upon a cold stove lid, either.” Inevitably, credit availability began to shrink.

6. Undue fear, greed and other behavioral aberrations. These factors feed upon each other. Helped by the Sinistra Media, bad news begets more bad news.

7. Failure of collective action. In 1907, despite heroic efforts by J.P. Morgan to get his fellow financiers to buck up the credit system before it failed, it failed. But Morgan almost succeeded. In 2007, there was no towering figure like a J.P. Morgan to even try.

Unfortunately, financial history isn’t studied with the same enthusiasm as Janet Jackson’s Super Bowl wardrobe malfunction – history’s most viewed video clip.

William Hamilton, a syndicated columnist and a featured commentator for USA Today, studied at Harvard’s JFK School of Government. Dr. Hamilton is a former assistant professor of political science and history at Nebraska Wesleyan University.

©2009. William Hamilton.

©1999-2017. American Press Syndicate.

Dr. Hamilton can be contacted at:
P.O. Box 2001
Granby, CO 80446

Email: william@central-view.com

This Week’s Column
Past Columns
Column History
Subscribe Now
Author