Two Similarities and One Important
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 9 October
2008, 7.50 am and 7.20 pm)
When a person collapses and dies, we gather around to
say the good that he has done. For some, chanting is practised.
The idea is not only to ease the passage of the dead man’s
spirit into the next world, it’s also to relieve the anxieties
and fears of those still living.
The financial world is no different. There is also the
belief in chanting whenever stock markets collapse. The idea is
to get global leaders to repeat, as firmly as possible, that
the spirit of the dead stock market will not haunt the
Two Mondays ago, on 29 September, the Dow Jones Index
suffered its biggest point drop in history, closing down nearly
800 points. That was after the US Congress voted against the
That collapse is significant because it changed the
mindset of investors from “bullish” to “bearish”. In other
words, global stock markets collapsed and died on 29 September
It will go down in history as the Black Monday of the
21st Century Crash. It is as significant as the last crash of
the 20th century, namely the 1929 Wall Street Crash.
There are many similarities and differences between
these two stock market crashes. But two similarities and one
important difference stand out.
The first similarity is the easy availability of
credit, combined with margin financing. In the 1920s, money and
margin were also available. In 1927, this flow of easy money
became a torrent after the US Fed lowered interest
It was an attempt to help the weak British economy
suffering under the Gold Standard. It was also hoped that the
torrent of newly-created money would flow into the US economy.
Instead, the money found its way into Wall Street.
The second similarity between 1929 and today is the
existence of a financial house of cards. Today, our house of
cards is built up on US sub-prime loans and exotic investment
In the 1920s, the financial house of cards was built
up by the holding companies. These were companies formed to
invest in other companies. And the companies they invested,
invested in yet other companies that, in turn, invested in yet
All went well until cracks appeared in March 1929. But
this was quickly dismissed and stocks surged higher throughout
the summer. The real damage surfaced in late October, reaching
a climax on Tuesday 29 October 1929.
On that day, the mood turned extremely bearish,
triggering the great unrestrained rush to sell. Investors did
not know what hit them, only that they had been ruined or would
soon be ruined.
Following that disastrous day, there were occasional
stock market rallies. But prices continued to fall in the
following three years. The Wall Street Crash of 1929 led to the
global banking collapse, which, together with faulty government
policies, led to the Great Depression of the 1930s.
Now we come to the one important difference between
today’s stock market collapse and that in 1929. This is Ben
Bernanke, the Chairman of the US Fed who is an expert on
financial crises. Because of that, we’re all hoping that he
will be our saviour.
His job is not easy. Just because certain policies
have worked in the past does not mean that they will work this
time round. The US$700 billion Bailout Plan was supposed to
restore confidence and unblock the credit markets.
But so far, it has done no such thing. Financial
institutions continue to mistrust each other because all
continue to hide their toxic secrets. In the 1930s, it was also
This climate of mistrust is very much like the one we
faced during the SARS epidemic in 2003, when all of us stayed
at home out of fear. In reality, the situation might not be
that bad. But no one knows. Ben Bernanke must therefore force
these financial institutions to reveal their toxic
Until we have this knowledge, global leaders will have
to resort to more chanting to frighten away the bad vibes.
After all, for chanting to be effective, it’s not necessary to
have any knowledge.