On the Anniversary of 1929 Crash

1OntheAnniversaryof1929Crash,HowIsItDifferentNow?WPD20110/27/2009(956)ByKatherineLewisSpecialCorrespondentWashington—Four-scoreyearsago,onOct.28and29,1929,theU.S.stockmarketcrashed.Thosetwodays,knownasBlackMondayandBlackTuesday,burstabubbleofspeculativetradingandhelpedtriggertheGreatDepression.Onthis80thanniversaryofthegreatcrash,itisstrikingtocomparethemodernstockmarkettothemarketofthe1920s.StockinvestinghasspreadtoeverycorneroftheglobeandintonearlyhalfthehouseholdsinAmerica.Newinvestmentshavebeeninvented,fromcredit-defaultswapstomortgagesecuritizations.Layersofgovernmentandself-regulationaimtoensureorderlytradingandpreventfraud—andwhiletherearethosewhoargueformoreregulationduetotherecentfinancialcrisis,theregulationisachangefromthefree-for-alloftheRoaring‘20s.Atthesametime,manyofthefactorsthatledtothe1929crashremain.Therearestillcycles—somecallthemcyclesofgreedandfear—thatcausespeculativebubblestobuildandthenpop.Andinvestingremainsaninherentlyriskyactivity,inwhichyoucanlosemoneyaseasilyasmakeit.“Thethingthat’smostthesameishumannature.Thoseanimalspiritsarethesametodayastheywerebackinthe1920s,”saidMarkZandi,chiefeconomistatMoody’sEconomy.cominWestChester,Pennsylvania.“Speculationinfectedthatequitymarketasitdidourhousingandcreditmarketsinthiscrisis.”In1929,onlyabout2percentofAmericanhouseholdsownedstocks,comparedtoalmost50percentofAmericanhouseholdsthathavedirectorindirectinvestmentsinthemarkettoday.Onereasonforthedifferenceisthatbuyingandsellingcostmuchmoreinthe‘20sthaninmoderntimes,whenelectronictradinghelpsbillionsofshareschangehandsaroundtheglobeeveryday,accordingtoMichaelGoldstein,professoroffinanceatBabsonCollegeinWellesley,Massachusetts.TheeaseoftradingmeansmorepeoplefromallaroundtheworldareinvestorsinU.S.stocks.“NewYorkmightbe10,000milesawayfromwhereyoulive,butacrashinNewYorkwillstillaffectBelfast,BeirutandBeijing,”Goldsteinsaid.“Itreverberates.”In1929,therewasneitheraSecuritiesandExchangeCommissionnorindependentself-regulatoryorganizationssuchasFINRA(theFinancialIndustryRegulatoryAuthority).TheNewYorkStockExchangecommandedthemajorityoftrading,yethadnocircuitbreakerstohaltasellingpanic,Goldsteinsaid.Todaytherearerulesthathalttradingincasesofextremedrops.Thewideadoptionofmutualfundshashelpedinvestorsdiversify,instarkcontrasttothe‘20s,whenanindividualmightownsharesinjustoneortwocompanies.2Inthe2008marketslump,oneinfourstocksdeclinedmorethan75percent,butonlyonein15,000equitymutualfundsexperiencedalossthatbig,accordingtoDonPhillips,amanagingdirectorofMorningstarInc.,aChicago-basedinvestmentresearchfirmspecializinginmutualfundanalysis.“Itisaverypositivestepthatinvestorsareinvestingmorethroughfunds,whetherit’sactivelymanagedoranindexfund,”Phillipssaid.“Diversificationdoesn’tshieldyoufromeverything,butitmitigatesthepossibilityofacatastrophicevent.It’salotbetterthanbeinginanindividualstockthatwenttozero.”Still,theexperienceofgoingthroughamarketcrisis—theDowJonesIndustrialAverageindexdropped33percentin2008—hasleftmanyinvestorsfeelingburnedandreluctanttoinvestinstocks,evenwhentherearebargainsavailable,saidArneAlsin,aportfoliomanagerwithAlsinCapitalManagement,basedinLaQuinta,California.“Confidencecanbelostinaheartbeat,andittakesyearstorebuild,”Alsinsaid.“It’stoobadbecausetherearewonderfulopportunities.”Sowhilesomethingshavechangedandsomehavestayedthesame,whatlessonscanbedrawnfromthe1929crash?ThemostimportantoneclearlyregisteredwithFederalReserveBoardChairmanBenBernanke,anexpertontheGreatDepressioninhispriorcareerasanacademic.Itiswidelyacceptedamongeconomiststhatin1929,theFedblundereddisastrouslybytighteningmonetarypolicyafterthestockmarketcrash,ratherthancuttinginterestratestoencouragegrowth,andbytakinginsufficientactiontostempanic.ThatworsenedtheeconomiccrisisandtippedthecountryintotheGreatDepression,saidEugeneWhite,aneconomicsprofessoratRutgersUniversityinNewJersey.“OneofthelessonswhicheveryonetookfromthatwastheFederalReserveshouldnottakeitseyesofftherealeconomytofocusonassetbubbles,”Whitesaid.Asaresult,Bernanke’sFedactedswiftlytopumpliquidityintothebankingsystemlastyear,creatingliquidityfacilitiesandinterveningdirectlyinthemarketstobuymortgagesandotherpaperwhenotherinvestorsranscared.Butperhapsthemostimportantlessontotakeawayfromthe1929crash,inadditiontothestockmarketcrashesin1987and2008,isthatnogenerationisimmune.“You’dbefoolishtokidyourselftoeversay,‘Thateventcan’thappentothestockmarket[today],’”Morningstar’sPhillipssaid.“Marketscanbeveryfickle.”Inmoderntimes,investorshaveacceptedasconventionalwisdomthatstockmarketswillaverage10percentannualratesofreturnoverthelongterm.Butifyouareabouttoretireorintheearlyyearsofretirementandthemarkettanks,thehealthylong-termaveragedoesn’tpreventyournesteggfromshrinking.3“Weliveinaworldthat’salotmessierandalotmorevolatile,”Phillipssaid.“It’simportanttostudythesethingsandhopefullyyoucanmitigateyoursusceptibilityto‘fearandgreed.’”WhiteHouseonInvestmentGrantforSmartEnergyGrid(Awardstofostergrowthofrenewableenergysources,promoteenergysaving)(1280)THEWHITEHOUSEOfficeofthePressSe