Yogi Berra was rather adept at making statements that stuck in the minds of us all. One of his best was the title of this piece. It happens that the subject of this piece is far afield from what Yogi was talking about.
September of this year, a financier was making a speech to a group of his colleagues when he made the statement that banks all over the world are having serious difficulties. It seems that they lack sufficient funds! It is evident that they have an overage of illiquid assets; they have evidently accepted over-priced real estate as collateral. (Illiquid assets are those items of some value which cannot be readily converted to cash at the level of their evaluation. They are assets, but cannot be sold for the price which was attached to them.) Banks have also made some bad speculative investments by which they have not made returns as high as they had anticipated.
To this you may say, "So what?" Nothing much. Only it's like sitting in on my old economics class and hearing why banks collapsed after the Market collapsed in 1929. The recounting of that financier's speech was like he got my old prof's lesson plan when he was teaching us about the reasons our economic system broke down more than 60 years ago.
During the twenties, the stock market grew far beyond its true value, mostly because of speculators who were playing the market using a 10% margin which allowed them to buy $10 worth of stock by putting up only a dollar. There was no S.E.C. to prevent the marketing of fraudulent stocks, so a part of that over-buying might have been attributed to some fraud. It should also be noted that American companies had learned about installment selling, and they sold a good deal of merchandise on credit which was never paid for by the purchasers. That tended to make them look more profitable than they were, which contributed to the over-pricing of stocks. All of it together, but mostly the speculative buying on the Market, puffed the Market up like a toy balloon. When it exploded, it was like the collapse of a house of cards. Banks found themselves in the very same predicament as described above; too many illiquid assets, too many failed speculative ventures, and not enough money to face the frightened public.
When word gets out that the bank may not have enough money to pay off all its depositors, a situation develops called a "panic", or a run on the bank. When there isn't enough money, people can't get their deposits, and everyone who has an account with that bank will rush to withdraw all their money. If the bank doesn't have it, it has to close its doors. That happened when the Market collapsed. The Federal Reserve should have relaxed its money policies so money could be made available to ease the panic. Instead, it restricted the money supply even more. That caused a lot of banks to go out of business; it also caused a lot of working people to lose their life's savings. It also triggered the Great Depression.
As a part of the New Deal, there were laws passed which were supposed to prevent any of that sequence from happening again. The Glass-Steagall Act of 1933 contained banking reforms which would set levels of money the banks should have on hand. It also established regulations which prevented banks from selling market securities and insurance. (The Glass-Steagall Act was recently repealed!) The Federal Depositors Insurance Corporation (the F.D.I.C.) was established to insure deposits so that people would not lose all their savings again. The Securities Exchange Commission (the S.E.C.) was established to prevent fraudulent companies from selling their stock on the markets. And other regulations were established to keep banks and financial companies from overextending themselves.
Banks were required to have a percentage of their demand deposits on hand at all times. In the early sixties, it was 40%. Only a certain percentage could be used for investments, and there were more stringent rules on what would constitute the value of collateral. As late as the sixties, only $20-thousand could be insured by the FDIC. It became more simple for a bank to maintain an account with the Federal Reserve, and even make short term loans from the Fed to cover a temporary money shortage.
It was important that Roosevelt took us off the domestic gold standard in 1933. If a monetary system has the backing of specie (gold, silver, etc.), only an amount of currency may be printed which can be covered by available gold or silver. Than means the money supply cannot easily be expanded because there has to be more gold or silver on hand to cover it. On the other hand, inflation will not be a problem. In the Depression, the money supply had to be expanded (or so we were told at the time) to get the economy going again. Going off the gold standard made that much simpler, but at the same time brought inflation into the picture. The Fed had methods through which it could expand the money supply, or contract it, by raising or lowering the discount rate, the amount of interest it charged banks for the money they borrowed. The lower the rate, the easier it was to get money; the higher it was, the more difficult it was to get money. That didn't work well with money which was backed by specie.
The margin required to buy securities in the sixties was 70%. Anyone buying securities had to have 70% of their purchase in cash. Rash speculation was not as likely if the buyer stood to lose as much as 70% of his own money. Banks were not free to make speculative investments, so depositors' money was safer. It should be noted that many people didn't trust banks in the Depression, and many merchants would not accept checks in payment for their merchandise. And there were no credit cards. It was important for the banking system to regain the public trust as early as possible. Most banks were members of the Federal Reserve System. Installment buying did not make a comeback until after World War II. Many had developed the philosophy that if you could not pay cash for your purchase, you could not afford it.
We had learned our lessons, economics professors told us. The Great Depression could never happen again. But...
The last time I checked, you could buy securities with only 50% of the cost of them, but you would be assuming a debt for the other fifty percent to your broker. (The same thing was possible in the twenties, and that debt was on a call loan; the broker could notify you to pay up within 24 or 48 hours, for whatever reason he chose.) Speculators play puts and calls, buying securities and speculating (a nice word for gambling) those securities will either go up or down a certain amount in a specified time. Hillary Clinton claims to have made around $100-thousand in a short period of time in cattle futures. She had never done that before, and even long-time experts in the futures field would have difficulty pulling that off. But again, speculators are allowed to have at it on the market.
It should be noted that since the advent of computers, buying and selling can be done at such a rapid rate, special rules have been made to place restrictions on computerized trading. If trading gets too fast, the computers are programmed to shut down to slow down the trading. Large blocs of securities can change hands so quickly that investors can be wiped out before they have a chance to respond. The restrictions are supposed to keep that from happening.
Insider trading, the practice of people within the system who learn of big trades before hand and use that information to make profits for themselves, is supposed to be impossible to do, and heavily punished. Still, we have seen insiders make literally billions, and not have to forfeit all they made, nor spend an appreciable amount of time in jail for their misdeeds. One recent example was a young man who made billions using his insider information, and was fined in the neighborhood of $6-billion, and he even had to go to prison for 2 or 3 years. All he lost was his hair. When he came out, he still had several billion salted away. Some firms have been punished in a similar fashion, but they are still in business.
The Market is at an all-time high, with Dow Jones indexes around 10,000. Yet it is rather common knowledge that securities are greatly over-valued. And the speculation is going on as always, even though buyers may have to use more of their own money to make purchases. Private savings are at a low ebb, which means that banks don't have that money to use in their own forms of "investments", and it also means private individuals don't have a cash cushion in the event of another crash. Installment buying was a big reason for the over-valued securities in the twenties, and today people use credit cards to make large purchases so they can have at least some cash around. The interest rates on those credit cards is so high that loan sharks would have been put in jail for charging lower interest 50 years ago. In the thirties and forties, if someone charged 20% on a loan, it was considered usury, and that person would stand a good chance of spending 10-20 years in prison! Now, banks routinely charge 16-18%, plus late fees, plus annual fees, and anything else they can think of to add on, and it's okay! (Now give me your most convincing argument bankers don't have any influence on our lawmakers in Washington!)
One of the interesting things that happened in the twenties was there was a gold mine - the biggest one yet! - "discovered" in Canada, and people invested all kinds of money in that mine...only suddenly the mine wasn't on the market any more! Upon closer examination, the mine had been salted! Real gold was shot into the walls of the mine with shotguns! And the ones who "owned the mine" were nowhere to be found!
Ho ho! That would never happen again! The SEC would see to that! But in recent months, another gold mine was discovered in Canada - the biggest strike yet! - sold over $200-billion worth of stock, even to the very astute mutual fund directors, and just as suddenly as before, the mine was shown to be a hoax, and the ones who had put it on the market were nowhere to be found! If you check that story out, you'll find some heads rolled over that! Fidelity lost a large amount of money on that venture, as did a number of the other large mutual funds.
What was it Yogi said?...
Many financial experts have been warning for months that a crash is on the way. One indicated that the key will be when inflation goes beyond 5%, that will be the key to brace yourself. You have to know that is an area where a person can be a "hero" or a "goat"; if he predicts the crash and it happens, he is a hero, and if it doesn't happen he is a goat. Put the shoe on the other foot, and if he predicts a surge he's a hero, and if it crashes, he is a goat. As the Old Fella of Flatbush once said, "Ya pays yer money, and ya takes yer cherce!" Rest assured the Establishment will have their money out of the Market before it collapses, just as they did in the twenties. And they will buy more controlling interests of vital industries for a song, after the crash, just as they did in the thirties.
Don't forget that in the twenties one of the most respected financial observers noted that the market was very over-valued. Not long afterwards, the big-monied folks started pulling their money out of the market...just weeks before it collapsed. Within recent months, Alan Greenspan has made statements to groups he was addressing in which he stated the market is greatly overvalued. He has done that twice. Would you think the prudent investor might take heed and start moving his funds out of the market? There is the adage, taken from a quote of a Spanish historian: Those who fail to learn the lessons of history are doomed to repeat them.
The word around is make sure you have a year's supply of food of some kind stored up in a safe place, and if you don't have weapons for defense of your homes, get yourself some protection. This crash won't be pleasant.
Now there is the threat of Y2K. A flaw in computers may cause them not to advance into the dates of 2000 A.D., which will cause, we are told, all kinds of record-keeping problems. Power grids may not function properly; water supplies may be affected, and a whole series of other problems may occur which will cause a panic. Again, the public is being urged to store up a supply of food, water, and fuel to protect against a worst-case scenario. It has been the case in the past that "critical emergencies" have been created which has allowed the Congress to pass more and more restrictive laws, giving more and more power to the federal government. It would be prudent to prepare for any emergency, but keep cool. Just as in the Depression years, Americans have a way of rallying together to help each other when we are in need. Then remember the motto stamped on all our coins: In God We Trust.