by Grant Springs

Created on: October 10, 2008

Most individuals seem bewildered by the current state of Wall Street. How did get to this point and why on earth does it matter? Most people are clueless about the inner workings of just about everything financial. Now that we all have a vested interest in many failed companies its time to sit on some reality tacks and sober up from our ten year real estate binge.

The current crisis has some eerie similarities to the late 1920's in America. The roaring twenties were characterized by emerging technologies like the telephone, railroads, automobiles and commercial radio. There was unbridled enthusiasm everywhere as the sky was the limit. Normal citizens began to jump on the band wagon by buying stocks in high growth companies in an attempt to capitalize on the boom and make some easy profits. Word of mouth and easy money led many to over extend their borrowing to buy stocks. There were no regulations at the time limiting the amount individuals could borrow against their holdings also known as margin. This is where the trouble began.

The belief in easy profits began to seep into everyone's life. Soon everyone began to buy into the fallacy of unlimited profit as the NYSE went from around 60 in 1921 to 380 by 1929 a six fold rise in less than eight years. There were many rags to riches stories during this time frame. Imagine taking $50 and leveraging it with margin into being able to buy $500 worth of securities. Then imagine the stocks you bought went from $5 a share to $50. You just turned a profit of 1,000 % on your money. Greed became contagious; everyone was talking about someone they knew who made a killing in the market. Many were driving fancy cars, throwing parties and living the high life. This era is characterized as the roaring twenties by historians for good reason.

Bubbles are a fantastic and wonderful thing if you can separate yourself from them. The last people you should ask about a bubble are the vested individuals that are propagating it by continuing to blow more air into its emerging girth. Asset bubbles or the unbridled belief in unlimited asset appreciation can propagate grievous harm to capitalist economies.

As the stock bubble burst in 1929, it also led to many individual debts that could not be repaid to banks which had been extending easy sub-par credit. Within three years after the crash many banks began to fail and it caused a run on deposits. Many banks saddled with bad debt from risky investment and poor lending practices were unable

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