Did anyone warn about the potential for stock market crashes in 1929, and if so why were their warnings ignored?

score:12

Accepted answer

Roger Babson is often credited with predicting the 1929 crash. See, for example, http://www.newswise.com/articles/the-man-who-predicted-the-crash-of-29

Having worked in the markets through several more recent crashes, I suspect that there may have been a number of people lamenting high asset prices in 1929, but Babson happened to say so in the press just before Black Thursday, and/or had the most vocal campaign for credit afterwards, and has become associated with the prediction. A similar phenomenon certainly seemed to apply with Elaine Garzarelli in 1987 and again with Nassim Nicholas Taleb and Noriel Roubini in the most recent crash.

Upvote:1

Babson did call for a crash right before the 1929 crash, but he also called for a crash a year earlier. The Federal Reserve was very concerned about stock speculation and called for a restriction in call money lending by banks which was fueling the stock market bubble. However, Smiling Charlie, the President of First National Bank (Citi Bank) said he would make all the money needed for security loans available, overriding the Fed's concerns. He was also a Director of the New York Fed at the time

Also, I believe the financial writer for the NEw York Times wrote several articles throughout the summer about an overheated stockmarket, which every choose to ignore.

Upvote:3

Lawrence Sloan, in his 1931 book, "Every Man and His Common Stocks," posed three rhetorical questions about the economic conditions in the United States and the rest of the world: Was the country in a severy and possibly prolonged economic downturn? Almost certainly yes. Were there clear signs ahead of time? A qualified yes. The last questoin was "Could if it have been foreseen? Here, Sloan made a mixed case. In his opinion, the indications of trouble were present, but only to someone who was predisposed to look for them. But there were enough other confusing and positive signs that someone with an optimistic, or even neutral view of the world would have been led astray."

The above passage comes from my own, 2004 book, "A Modern Approach to Graham and Dodd Investing," which predicted a "1929" crash (more than 50% drop in the Dow, like the one that occurred in 2008-09). No one believed me at the time, that "it" could happen again. Some people don't want to believe it even after the fact.

http://www.ebooksx.org/A-Modern-Approach-to-Graham-and-Dodd-Investing_44908.html

Upvote:9

One should take with a grain of salt any "predictions" by "experts" about the stock market. An inherent characteristic of the stock market is that it is highly unpredictable in the short run. This follows by common sense: If one could predict the fluctuations in the stock market consistently, one could become the richest person in the world simply by shorting stocks at opportune moments, rather than spending all his time warning the public. For a more detailed argument, see A Random Walk Down Wall Street, which reflects current academic consensus.

So, retrospective analyses about how "warnings were not heeded" are usually moral tales designed to lay blame on greedy investors, foolhardy families, or even human nature itself. In reality, well-documented histories about stock market crashes generally show that there are always as many "believers" in the stock market as skeptics before the crash. In particular, both John Maynard Keynes and Irving Fisher - leading economists of their generation - believed wrongly that the prices before the crashes of 1929 were reasonably priced. (The Great Myths of 1929, Harold Bierman, 1991)

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