The stock market goes up and all the sages give you reasons why. The stock market declines, and suddenly all the pundits begin asking: “Is this the big one?” “Are we walking over a precipice?” “Will it be like 1929?” NetGain will go out on a limb. The answer to these questions and all the ones like them is “no”. Comparing 1929 to 2007 is like to comparing Earth to Mars. They’re both planets, but after that the similarity ends.

1929 Stocks

Stocks were bought by individuals. Many people purchased their stock on margin with 10% down. That meant the stock buyer owed the brokerage firm 90% of the value of the purchase. If there was a decline of more than 10% in value, the stock buyer lost all his money, and the brokerage had an outstanding loan that was larger than the market value of the stock.

Under these conditions, a change in the earnings potential of American business triggered a stock market decline. Because the drop in market values left most accounts with no equity and less value than the loan, margin calls went unanswered. Brokerage firms sold out accounts to meet margin calls or reduce the debt owed. That further depressed the stock market.

The money the brokerage firms loaned to the stock buyers (90% of the purchase cost) was borrowed from banks. Because the market decline accelerated and was long lasting, individual stock buyers went bankrupt and brokerage firms couldn’t pay the banks back the money they borrowed. As a result banks lost a considerable amount of money.

People became concerned about their savings and started to withdraw their funds from the banks. The banks were worried that they would run out of money so they closed their doors (declared a holiday) to the depositors.

1929 Real Estate

Borrowing money to purchase real estate or land was entirely different in 1929 when compared to 2007. Homeowners, commercial real estate owners, and farmers borrowed money with mortgages that were interest only and generally due (usually renegotiated and extended) in five years. The concept of amortization and long-term mortgages didn’t exist.

As expected, when the mortgages came due for the real estate owners and farmers, the banks weren’t very friendly. The result was that foreclosures were added to the potpourri of financial problems. The final consequences were an extended market decline, high unemployment, and many personal tragedies. The only security most Americans had for retirement was whatever savings they had at their local savings bank.

2007 Economy

Today’s economy is entirely different from the one that existed in 1929. As already stated, Earth and Mars are both planets, but that’s where the comparison ends. The same is true when comparing 1929 to 2007. 1929 involved people and 2007 involves people. After that the comparison ends.

• The largest percentage of investors in today’s stock market are no longer individuals. They are institutions that are long-term investors. The vast majority of these are prohibited from buying stocks on margin. Margin accounts play a very small role in today’s stock market.
• Aside from social security, there are IRAs, Keoghs, 401Ks, and a host of other plans whereby people and companies are committed to set aside money for retirement. This money is regularly committed to the stock market, either directly or through conduits such as mutual funds or money managers.
• The savers for retirement are the 20 to 64 year-olds. Breaking the population out by age, the 2005 estimate indicates there are five times more in the saver category (60%) than there are in the 65+ yearold category (12%). That means there are five times more people putting money in than taking it out.
• Today’s borrowers have the option of long-term, amortized real estate mortgages.
• Brokerage accounts are insured.
• Savings accounts are insured.

Pages: 1 2