Is It 1929 All Over Again?

It was 79 years ago today that the 1929 Wall Street Crash marked the beginning of America's slide into the Great Depression. As we find ourselves in the middle of an economic crisis -- during which the Great Depression has been referenced by just about everyone -- I decided to mark the anniversary by talking with economist and author Robert Kuttner about how we got from the Crash of 1929 to Meltdown 2008, and how we can avoid a repeat of what followed the 1929 crash.

Terrance Heath: In his column about the 79th anniversary of the 1929 Wall Street Crash, Professor Maury Klein asked, "Is it 1929 all over again?" Is it?

Robert Kuttner: Yes, this is 1929 all over again. For the same reasons. The crash of 1929 was caused by too much speculation, with too much borrowed money, with too many conflicts of interest and too little transparency. And in the 1930's the New Deal mostly repaired that by much tighter regulation of banks, much stricter supervision of conflict of interest, much greater controls on leverage and much grater disclosure for investors.

But it fixed the problem for the known universe of financial institutions, and after the '70s all kinds of new exotic financial instruments were invented. And because deregulation came back into fashion, and the right wing really took over the conversation as well as government regulators did not keep up with the new instruments that Wall Street invented. And so all the same kinds of uses crept back in, and it took about 20 years until the house of cards was so high and so rickety that you then had the same kind of crash.

TH: When did the rolling back of those New Deal measures start?

RK: Well, it's interesting; it happened in fits and starts. Some of it was deliberate and some of it was simply people taking advantage of other things that had happened. For instance, in the period between 1971 and 1973 the Nixon administration dismantled dismantled one of the main pillars of Bretton Woods from 1944, which had created a regime of fixed exchange rates and along the way prevented a great deal of international speculation in currencies

So, after the 1970s little by little you had a whole category of speculation that had been prohibited by the ground rules obtained in the '50s and '60s, namely a lot of currently speculation. You had the so-called eurodollar market of dollars that existed in Europe that are not really regulated by anybody.

Then in the '70s also you had Wall Street taking something that had been the monopoly of Fannie Mae back when Fannie Mae was a public institution and part of the government, namely the securitization of mortgage, and privatizing it, and having lower standards than Fannie Mae did.

Again this was OK from the first decade or so but then when securitized mortgages rendezvoused with subprime and subprime rendezvoused with contracts written against the risk of bonds going bad, the whole house of cards just goes higher and higher and because in the '80s and the '90s Democrats fingerprints were on this, too. Regulators were not really interested in keeping up with these new risk products that Wall Street invented.

So, then in 1999, the capstone of this is the repeal of the Glass-Steagall Act. One other aspect of this was Greenspan's failure to enforce the Home Ownership Equity Protection Act of 1994, which, had Greenspan enforced it, subprime never would have happened, because that legislation required anybody who made mortgage loans to use sound underwriting standards. And you had Democrats and Republicans preventing the Commodity Futures Trading Commission from regulating many categories of derivatives.

So it was in the air, the idea that whatever Wall Street invents is by definition efficient, by definition virtuous, by definition self-regulating, and little by little a whole parallel banking system gets created that is beyond the scope of what the regulators can monitor.