Causes of Wall Street Crash 1929

1 Overproduction in agriculture thanks to technological progress and farmers struggled to find alternative employment as demand couldn't keep up and profitability low

2 Fragmented weak banking system meant runs always likely

3 Buying on margin

3.1 This left investors very exposed when prices fell

3.2 Margin requirements only around 45%

4 Information assymetries

5 Poor regulation!

5.1 Laissez Fair approach from Republican government

5.2 Procyclical behaviour

5.3 Regulation on issuance of loans to major companies is argued to have encouraged excess equity investment by banks

6 Interest rates too low

6.1 Fueled credit bubble

6.1.1 Fisher (Debt deflation) (1933

6.1.2 Austrian School/Von misses

6.1.3 Asset price inflation

6.1.3.1 Reduces stock of sound investment opportunites

6.1.4 Lionel Robbins (1934)

6.2 Why were they too low?

6.2.1 Reliveing pressure on Sterling and other weak European currencies (Clarke 1967)

6.3 Disputed by Galbraith (1954) Fed did act by buying $400 million worth of government securities

7 Troubles in Europe

7.1 Complicated web of war repartions and loans between Germany, France, Britain and US

8 Irrational exuberance

8.1 Common stocks became "scarce" excess demand

8.2 No Stock issued in companies making saltwater fresh like during South Sea Bubble(Galbraith, 1954)

8.3 Market boom rooted in existing industries on the whole

8.3.1 Bubbles usually related to tech inovations

8.4 Investment decisions based on continuous growth of economy

8.5 Investments became increasingly risky and imprudent

8.6 Stock price growth growth massively exceed dividend growth in 1928 White (1990)

9 Mismatch between production and consumption which led to falls in share prices

10 Dissapointing results posted on Black Thursday (Oct 24)

10.1 Investors cash in profits

11 Reluctance of government to step in to deflate bubble

11.1 Consequences of action seemed almost as bad as those from inaction

11.1.1 Gov wary of being labeled cause of the crisis

12 Noise trading with lots of investors with little expertise in market place (Rappaport and White, 2009)

13 Investment banking operations started within commericial banks through wholely owned securtiites affiliates. Cross selling of investment products to retail customers who would not usually invest

14 Ex post irrational, ex ante rational (De Long, Sheifer )

14.1 Revisionists like Bierman - no evidence of unusually high PE ratio

Causes of Wall Street Crash 1929

Mind Map on Causes of Wall Street Crash 1929, created by liam7052 on 05/11/2014.

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