July 9, 1932 was a day Wall Street would never wish to relive. The Dow Jones Industrial Average closed at 41.63, down 91% from its level exactly three years earlier. Total trading volume that day was a meager 235,000 shares. The nation was in the grip of what U.S. Treasury Secretary Ogden Mills called “the psychology of fear.” Industrial production was down 52% in three years; corporate profits had fallen 49%.
Click to see long-running bear markets
We have been in a “bear market” since Jan 14, 2000, when the dot.com bubble burst. “We’re dealing with fundamental and profound uncertainties,” according to Robert Schiller, Professor of Finance at Yale University. In his book “Irrational Exuberance,” published at the very crest of the Internet bubble in early 2000, he forecast the crash of NASDAQ. The second edition of the book, in 2005, insisted (at a time when few other pundits took such a view) that residential real estate was wildly overvalued.
The entire nation is in the grip of what psychologists call “the disposition effect,” or an inability to confront financial losses. This stupor may very likely be the last stage before many investors finally let go. Stupor prevents rash action, keeping many long-term investors from bailing out near the bottom. Investors who have either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it.
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What history tells us about the market, Wall Street Journal, Oct 11, 2008
How Government Stoked the Mania, Wall Street Journal, Oct 3, 2008
Housing prices would never have risen so high without multiple Washington mistakes. The collapse of Fannie Mae and Freddie Mac started the current stock market decline. Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize low-income housing outside of the budget, at least in the short run. It was a political free lunch. Beware of trying to do good with other people’s money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.
What they said about Fannie Mae and Freddie Mac, Wall Street Journal, Oct 2, 2008
Rep. Barney Frank (D., Mass.): The more people exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios.
Fannie Mayhem: A History, Wall Street Journal, July 14, 2008
A joke in Washington these days goes like this: “What’s the difference between Enron and Fannie Mae? Answer: The guys at Enron have been convicted.”