History Rhymes in Slow Motion

The repeated attempts by the Fed to arrest the credit contraction and prevent equity markets from going into a tailspin look to me like a repeat of what happened in October 1929, albeit in extra-slow motion. As an avid student of market history (... "it rhymes"), I highly recommend the careful reading of Galbraith's The Great Crash of 1929.

Within it are described concerted attempts to forestall the inevitable. As the market swooned in late September and early October 1929, "great men" from Morgan and National City Bank were sent to walk the floor of the New York Stock Exchange. They made a grand show of providing money at the broker call-loan post (margin funds) and supporting a variety of blue chips like Steel and Radio with repeated buy orders.

Their actions cheered speculators, who ramped up prices sharply for a few days. But when conditions worsened once again, the "great men" had to give up in order to protect their own institutions.

This time the "action" is taking weeks rather than days to play out, because:

• The "great men" have been replaced by the Fed, which has more resources at its disposal and less inhibitions to using them. It has no shareholders or depositors to protect (except for millions of taxpayers, but that's too amorphous a group) and the man at the helm is stubbornly certain he is following the right course.
• Markets are far more diverse and complex today than the simple stocks, bonds and trusts of 1929. While the overall leverage may in fact be far greater today, there are also more dominoes at play, i.e. more products (e.g. derivatives) and more players (e.g. all sorts of funds). Starting as always with the "bad debt" domino, it takes more time now for the whole series of them to drop before the final "equity" domino is hit a decisive blow.
  
• After 25 years of successful Fed action that averted or contained financial crises, its abilities have become an article of faith with most speculators, investors and - most unfortunately - politicians. This past performance has created widespread complacency; time and again I hear the same adage from "sophisticated" market participants: "They won't let it get out of hand". The Greenspan put has morphed into the Bernanke put, even though conditions are far more dangerous now.

To summarize, events are proceeding more or less along the same path as 1929 but with more fits and starts. The experience is akin to watching a football game entirely in slow motion - it may take a while to get to the end, but the outcome won't likely be any different.