As banks look to shore up their balance sheets in the wake of the credit squeeze, Philip Aldrick asks whether it is all short-term trickery
Investors gather in New York’s financial district after the stock market crash of 1929, which heralded the onset of the Great Depression
‘We are in the midst of the worst financial crisis since the 1930s,” warns the eminent financier George Soros in his latest book, The New Paradigm for Financial Markets. It’s a rather extreme view, but the man who broke the Bank of England is not alone in his dark funk. At a recent event, one banker laced Soros’s sentiment with a little gallows humour, ruefully predicting “10 years of depression followed by a world war”.
Comparisons with the great crash of 1929 are inevitable and the parallels manifold. Then it was an over-inflated stock market that burst before wider economic malaise ushered in the Great Depression.
This time, in the words of Intermediate Capital managing director Tom Attwood, sub-prime was merely “a catalyst” for the inevitable pricking of the credit market bubble as “disciplines were bypassed in favour of loan book growth at almost any cost”. Again the talk is of recession, certainly in the US and possibly in the UK.
Perhaps the most intriguing parallel, though, is the crude attempt at self-preservation made by the investment trusts in 1929 and the banks now.
In the great crash, investment trusts with vast cross-holdings in each other tried to stem their collapse by buying up their own stock in what the economist JK Galbraith in his book, The Great Crash 1929, described as an act of “fiscal self-immolation”. At the time, “support of the stock of one’s own company seemed a bold, imaginative and effective course,” Galbraith wrote, but ultimately the trusts were just “swindling themselves”.
Modern economists have compared the trusts’ actions with what the banks are now doing. “They seem to be just papering over the cracks,” says Brendan Brown, chief economist at Mitsubishi UFJ Securities.
Read moreBanks’ credit crisis solutions have echoes of 1929 Depression