In October I wrote an OpEd article that described many of the parallels I saw at the time between what was happening in October and what happened in the 1920s just prior to the Great Depression.
Today, with the Dow Jones hitting the staggering low of 6,763.29, a value not seen since 1997, I decided that it would be a good time to start expanding on that last article and bring it further up to date with what we have seen happen since.
One of the major contributors to the 1929 stock market crash was the banking sector completely imploding upon itself. This was brought about by many reasons, but one of the biggest was the collapse of land values after the post-war bubble of 1919. We’ve seen it happen again in the housing market in the US, and now we’re starting to see similar effects happening in Germany.
Germany’s real estate companies are fighting for survival, with deadlines looming to refinance short-term debt that’s as much as 18 times their market capitalization while the recession erodes asset values.
Loans defined as short-term by the 10 largest publicly traded property companies total 4.2 billion euros ($5.3 billion), according to their most recent financial reports. Patrizia Immobilien AG, Vivacon AG and IVG Immobilien AG alone owe 3.1 billion euros, part of which expires as early as next month. That’s more than five times the trio’s combined market value, which has shrunk 83 percent in the past year.
“I wouldn’t be surprised if banks pull the plug for some real estate companies in the very near future,” said Matthias Schrade, an analyst at GSC Research in Dusseldorf, Germany.
German Real Estate Companies Owing EU4.2 Billion Face Deadlines - Bloomberg
With banks around the world already falling over, especially in the US, and with Governments responding to Obama’s so called “Buy American” provisions of his stimulus plan by implementing their own protectionist policies (such as increased trade tarrifs, or outright import bans) I am convinced we are seeing a repeat of the everything that happened 90 years ago.
The artificial interference in the economy was a disaster prior to the Depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. According to Rothbard, government intervention delayed the market’s adjustment and made the road to complete recovery more difficult.
Rothbard criticizes Milton Friedman’s assertion that the central bank failed to inflate the supply of money. Rothbard asserts that the Federal Reserve purchased $1.1 billion of government securities from February to July 1932 which raised its total holding to $1.8 billion. Total bank reserves only rose by $212 million, but Rothbard argues that this was because the American populace lost faith in the banking system and began hoarding more cash, a factor very much beyond the control of the Central Bank. The potential for a run on the banks caused local bankers to be more conservative in lending out their reserves, and, Rothbard argues, was the cause of the Federal Reserve’s inability to inflate.
Sound familiar? I’ll try to have my new article finished by the end of this week.