Loans warning on economy

Some years ago I was down at my favourite library, a private subscription library which has, among other resources, copies of New York newspapers going back to the 1770s.

Well, for what I needed, I had no cause to go back so far. I was doing a little digging into the year 1928. I can't remember now what I was after. Very likely, something to do with the theatre, who was playing in what on Broadway – doesn't matter. I'd put in a slip for the Sunday editions of the New York Times for the spring of 1928 and they were delivered to me, fortunately for my back muscles, on microfilm.

I fed them into the machine and turned the handle like an old-time movie projectionist and I sent the pages whirling by, stopping only from time to time to notice the date at the top of the page. Entirely by chance, I stopped once at a full-page advertisement for a Fifth Avenue apartment house (block of flats) which was then a building and which was to open in the following September – 1928, this was.

I think I should have given it only a cursory glance, with its promise of the ultimate in New York apartment luxury, its breathless listing of such features as butler's room, maid's room, two master bedrooms, each with own bath, small bathroom in the back, parquet floors, 35 foot gallery etc. etc. All these doodads would not have impressed old ungullible me if I had not been hypnotised by the address. It was my own address, the very building in which I then lived and still do and have lived since 1950. Coo, sir! I was living in the ultimate of apartment luxury?

Well, since then, the definition of the ultimate has expanded greatly and we think of it now as an old-fashioned New York apartment building, though I must say the walls are thick and solid, making each apartment a silent fortress, impervious to the sounds, the music, say, of the neighbours, which is not true of the later 'ultimates' further south. And there's a kitchen and a serving pantry which they don't build any more. And we have the original stove – a towering, white enamel job, much marvelled at 50 years ago, which we would not exchange for any modern miracle, since it has eight gas burners, two ovens and a plate-warming section.

Well, the second hypnotic item was the listing of the rental prices. All of us, of whatever generation, bemoan the rising cost of everything and old folks bore the young with tales of how in 1932 the absolutely top price for a four-course dinner at the best New York restaurant was one dollar 25 cents. It's now about $35 a person. So, I had to look twice at the proposed scale of rents. Lowest of course for the ground floor apartments – there are five on each floor – and highest for the top one, the fifteenth. The lowest rent available for occupancy October 1 was over a thousand dollars.

This put me into momentary shock till I said to myself, of course, this was 1928. I then noticed that the price of theatre seats was about what it is today. Of course! It was the high noon of the great prosperity. The wise Herbert Hoover was in the White House. First a world-famous mining engineer, then the genuine saviour of millions of starving refugees in Europe after the First World War, then a brilliant secretary of commerce and, finally, about a month after those lucky people would take up occupancy of the ultimate, President of the United States.

With, I have to say, rather indecent haste, I filed another slip and requested the Sunday papers for October and November 1929. Some of you will have already guessed what mischief I was up to. I checked apartment rental prices, theatre ticket prices again. Same story right through October. On the news pages, there was a knotty debate going on in the business and financial worlds, much like what we have today.

Some of the famous bankers wanted the Federal Reserve Board to slow the boom by raising the discount rate and, incidentally put the brake on speculation. Others thought this would induce deflation. Others straddled the debate by warning that a higher interest rate might drastically slow down investment. In the late summer, home building was down and business inventories were up.

You could have reproduced those business arguments any time during the past three years. Technical stuff that did not bother the stock market which, in September, reached its highest average of all time.

On Wednesday October 23, there was a big break in the stock market. One afternoon of noisy alarm, near panic, a remarkable and rare spectacle for observers in the visitors' gallery – one of whom, by the way, was an out-of-office British politician, name of Winston Churchill. The break was wholly unexpected and serious enough to prompt four of New York's biggest bankers to meet and each offer to throw in $40 million to plug the leaking dyke. Next day, all was well. The president himself announced, 'The fundamental business of this country is on a sound and prosperous basis'.

But as the banks had wanted to shield themselves against the brokers, the brokers were now naturally concerned to shield themselves from their profligate clients. The next week there was another immense week of selling. General Motors lost $2 billion in one day.

Well, not to stretch out the story of the terror, there was one day of renewed reassurances from the top bankers and economists and on Thursday 29 October, a date that will live in infamy, the roof fell in. The New York Stock Exchange had lost, in all, over 40 per cent of its value. The Depression was flashing signals on the horizon and very soon the long storm would overwhelm this country and the whole of Europe.

The thousand-dollar ground floor rent in my building dropped to $150. Theatre tickets would be available no longer at $28 but at two dollars and 50 cents.

Well, this memory of a day of what turned into rather morbid research came back to me when, on Wednesday 8 January, just over two weeks ago, the stock market shivered. The industrial average dropped 39 points. Next evening, the network news correspondents brought in several sorts of expert – investment bankers, security analysts, former economic advisers of former presidents – was this an omen? Was it a first tolling of the 1929 bell?

I think they all agreed it was disturbing, but no, it wasn't. The professor of economics at the famous Massachusetts Institute of Technology said that for the past 20 years, he has always answered that jittery question with a firm 'No. What happened then could not happen now'.

Since 1929, many bulwarks have been built against the economy's collapsing in just that way. Today you have to meet high margin requirements. The federal government regulates investing. There is a Securities and Exchange Commission. The government insures national and state banks through the Federal Deposit Insurance Corporation whose stock is subscribed to by the United States Treasury. In 1929, there was no government insurance of bank deposits.

So it's pretty certain that the American economy could not collapse in just the 1929 way, but one of the problems of historical analogies is that most often the situation looks the same, the characters involved argue the same way, but there's usually a new element which is either unseen or belittled. Hence, generals tend to prepare to fight the last war over again.

The distinguished economics professor from MIT says now, 'Today, I no longer say 1929 cannot happen again', from quite different causes. First, he notices that the government has been slow or reluctant to recognise a great amount of fraud that has played the main role in banking collapses, most recently in Maryland and Ohio. Four of the biggest banks in the country have been fined comparatively small amounts for not reporting cash deposits of over $10,000, which is the law, which implies money-laundering on a vast, many billion dollar scale.

The latest, the biggest bank in the west, has just been fined a mere $4 million for 17,000 illegal cash transactions. It has just reported a $337 million dollar loss and $1.6 billion default on loans – Latin American loans, agricultural loans, shipping company loans. Where inflation once bailed them out, it isn't there to bail them out again. The people, the millions who are beginning to take the rap are the shareholders, disastrously so in Maryland and Ohio. In California there are four million anxious customers of this famous bank and all this does not enliven that confidence which is the bloodstream of the stock market.

Loans – they are the new element that frightens more experts than the MIT professor. Financial markets are choking themselves with junk bonds, bundled mortgages, with no more understanding of what they're buying and selling than if they were playing a hand of poker.

Meanwhile, he says, everyone – consumer, businesses, government – continues to go into debt at record rates. 'The (I'm quoting now) loan portfolios of American banks include more than $500 billion in farm and Third World debts on which it is doubtful that even the interest will ever be paid. The wave of big mergers, of big and little corporations, leads to firms that can barely meet their interest obligations in boom periods and that could not meet them in a recession. In the 1980s,' Professor Thurow concludes, 'international debt and not the stock market is apt to be the hammer that shatters a fragile financial system.'

Today, as another economist points out, there is no international lender of last resort. If there was a run on the dollar, would conservative governments be willing to lend hundreds of billions – Japan and West Germany – to the United States, the United States to its banks?

This analysis is, in the end, an appeal to the governments of the free world to do something now. A warning that if the governments do not act soon and in concert to protect the integrity of the system, it could happen again.

This transcript was typed from a recording of the original BBC broadcast (© BBC) and not copied from an original script. Because of the risk of mishearing, the BBC cannot vouch for its complete accuracy.

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