Is a financial collapse coming worse than the Wall St crash?

0:00Bite into a stack sandwich made with Hero Bread, and the only thing you'll think is delicious. You won't think it has up to 19 grams of protein, 11 to 32 grams of fiber, or just 0 to 5 grams net carbs. But it does. Hero Bread. No compromises. Just loaves, buns, tortillas, bagels, and noodles packed with flavor. Right now, get 10 % off at Hero.co with code iHeart. That's H-E-R-O dot C-O, code iHeart. All figures per serving of Hero Bread. See nutrition facts on Hero.co. This is a global production. What actually caused the Wall Street crash? The match that lit the fire then and that has lit the fire ever since is debt.

0:42You could walk in and effectively take out a big loan. If you put$10 down, they'd give you$90 to go bet with. This is not really a story about 1929. To some degree, this is a story about today. John Raskob, who was running General Motors in the 1920s and then builds the Empire State Building and gets involved in politics, he was Elon Musk then. I do worry that we're at this inflection point where the oligarchy has taken over. The global chip route deepens on AI spending fears. Slumps in Samsung and SK Hynix point to cracks in the memory chip boom. Meta's earnings per share of$6.18 coming in well below expectations of$7.22 per share.

1:25You see shares are now down 7%. So the anxiousness is actually palpable. And I will tell you anecdotally in speaking to investors every day, at some point something has to give. This is the biggest crash in tech momentum ever. Is it? Yes. Biggest crash in tech momentum ever? Andy Burnham hasn't yet been prime minister for a whole fortnight. So far, the consensus is that he's done well, that he's done something his predecessors so often seem unable to do. He's commanded the agenda, exuded political authority. But for how long? Because premierships have a habit. You often think you know what they'll be about as they begin.

2:06In Burnham's case, devolution, rewiring the British state, social care, a comprehensive domestic agenda. But history sometimes points and laughs at those who think they can control it. Prime Ministers and governments so often come to be defined by something none of those involved even think about as they take office. Westminster is so often about the micro The who's up, the who's down. How do we get our message out? How do we do this bit of spin or that or the other? But there are so many massive stories just under the surface, moving slowly, then suddenly, which might consume him and his ministers.

2:44One, for my money, is the possibility of an AI bubble. The astounding volume of pure cash, unimaginable cash, one and a half trillion dollars of cash, which has poured in to San Francisco, AI companies, tech stocks, people who think that they are unravelling the secrets of consciousness itself, inventing machines which might control men and matter. But what if it doesn't and they can't? That there may have just been the early glimmers of that this week, because it's been a bruising five days or so for tech stocks around the world, with investors selling many of the biggest AI names after a run of disappointing earnings and growing concern over the enormous costs of AI investment and the Chinese developing chip technology we didn't think they had.

3:33Some investors are whispering darkly that there is just too much money sloshing around for too little return. And if that does prove to be the case, there is just a world where sooner or later there is a crash, the likes of which perhaps we've never seen, or almost never. The politicians of 1929, in the years leading up to the Wall Street crash, didn't see it coming either. But that event came to dictate the politics of their time, the 1930s to come, and through that even helped direct the geopolitical course of the rest of the 20th century. Those events, though, as important as they are, are now largely obscure to us.

4:14Andrew Ross Sorkin is a writer and journalist who wrote about the 2008 crash and has now turned his eye to the events of 1929 in his new book, 1929, Inside the Greatest Crash in Wall Street History and How It Shattered a Nation. He's come into the News Agent studio to talk about that extraordinary event and the parallels, perhaps, with our own time, which are striking. What led to that crash and what can we learn from it if it all happens again? Welcome to The News Agents.

4:49The News Agents. Well, Andrew Ross-Solkin, thank you so much for joining us on The News Agents. Thanks for having me. I was saying to you before, before we started recording, which is something you should never say, but I'm going to say it anyway, that your book, Genuine 1929, probably my favourite book last year. Oh my goodness, thank you. Wow. No, no, not at all. Not at all. And what was so extraordinary about it, given that it is fundamentally a historical book or a book of history, is how contemporary, weirdly contemporary, the world of the 1920s feels to the 2020s. Is that something that you set out to do or did it occur as you were going?

5:22It was so not intentional. I thought when I began that I was just trying to bring the reader and the public back to this historically fascinating period. I was fascinated by the characters and the people and their motivations and their incentives. and as I was writing, you know, these headlines would happen and I'd go, oh, that's quite similar. Oh, that's quite similar. Oh, that's a parallel. So in this sort of pattern matching scenario, I was sort of sitting there going, this is not really a story about 1929. To some degree, this is a story about today because the truth is the sort of human condition is not that different.

6:03We had FOMO, that phrase didn't exist, I don't think, in 1929, but fear of missing out. That was very much a feeling in 1929. And it seems like it is a feeling today when you think about artificial intelligence and the stock market and all the things that are happening. Because, I mean, there are lots of ways, I think, some of the characters and the kind of political economy of the late 20s are similar today, which we can talk about. But the thing that you're talking about there in particular, which I wasn't aware of or not to the same extent before reading your book anyway, was just how prevalent and pervasive stock market culture had become by the mid to late 1920s.

6:39Everyone was doing it and everyone was afraid of not being involved in it. And it was really the first time, too. I mean, I think the biggest unlock to this whole thing was, you know, most people in America and frankly here in the UK as well around the world, people had not taken on debt before. And that was really the big shift in the early in 1919, 1920. I mean, it was almost immoral to have debt of any sort. And then you had companies like General Motors providing credit to people so they could go buy vehicles. That changed the culture. and then Wall Street sees what's happening, sees the culture's changing and says, okay, we can lend you money and then you can be part of this market.

7:23And they talked about it in this idea of democratizing finance, the same way you hear that phrase today, oftentimes around crypto, around AI, all of these kinds of things. Just Jamie Dimon, the CEO of JP Morgan, just used that phrase last week in the context of individual investors trying to get access to SpaceX and this IPO that's about to happen. And there's a story, isn't there? of things in your book and i think it's well known before that anyway but it's that story of um just to illustrate that of joseph kennedy yes of course who talks about the shoeshine boy tell us about that well whenever the shoeshine i mean in his case he always tells the story that the shoeshine boy started asking him for stock tips and that was the high sign for him that that was a problem i remember thinking many years ago actually being here in the uk being in the back of a taxi cab and the taxi cab driver asking me about Bitcoin and thinking, oh, maybe that's the high sign.

8:17So, yes, I think sort of when you get to these moments, these inflection points where it becomes so part of the culture. I mean, in the 1920s, it was also a time when the idea of the business person as a celebrity, that was the first time that was happening to used to be that, you know, athletes and Hollywood stars were on the cover of magazines. All of a sudden, the CEO of banks were on the cover of these magazines. That was sort of the shift. Today we see Elon Musk on the cover of magazines. But yes, today we're living through almost like a gambling kind of culture. So let's rewind slightly.

8:53Why did you want to write about 1929? Because it's an interesting event, or rather as you describe in the book, it's actually a set of events. It's a series of events. We talk about the Wall Street crash. It's actually a whole series of dominoes. Series of dominoes. And it's kind of an event that people have heard of. They often know about some of the political repercussions of it, particularly in Europe. But the actual kind of nuts and bolts of it have largely for most people been lost to time because it's financial history, right? Which is complicated. Was it that that made you want to write about it?

9:25And, you know, what happened for me was I had written this book, Too Big to Fail, about the 2008 financial crisis. And everywhere I go, people would ask me about how 2008 compared to 1929. And the truth was, I did not know the answer. So I, too, went looking because I sort of had a very base knowledge, basic knowledge of what had happened in 1929. And there were some great books, by the way, written about that period, mostly, though, by economists who talked about economic cycles and theories. Quite dense. And for whatever reason, I couldn't find a book that was genuinely a character driven, that put you in the room, that really showed you what the incentives and the motives of these individuals were and how fascinating they were.

10:08And so I thought, wow, maybe there's some white space here. Maybe that's the opportunity. And as I really dug into the archives and was able to get access to memos and letters and personal diaries and transcripts and all sorts of things, I thought, these characters are extraordinary. And they all had corollaries so similar to people today. You know, every time I would sort of find a new character, I'd go John Raskob, who was running General Motors in the 1920s and then builds the Empire State Building, gets involved in politics. He was Elon Musk then. You know, radio and automobiles were the big thing, but radio, RCA, was the invidia of its time.

10:49And so everything felt like there was something that's so relatable. to today um and those characters because the character i mean the for those who haven't read the book yet the difference perhaps with some of the tomes the weighty tomes that you describe is that it is a it's sort of a character-led book and it's a narrative-led book you know it describes the kind of characters what was going through their head and what might have been going through the head what we know we know about them when you say you discovered some of these characters and think about analogs you mentioned rascal who are the sort of characters that have been kind of lost the time now to some extent but we're huge oh i mean the most interesting ones um charles mitchell uh ran a bank called national city which becomes city group he was he was the jamie diamond of his era he was building what was going to be the largest bank in the world he puts the bank on his back in so many ways but then by the way does some extraordinarily um questionable things that lead him to get arrested.

11:48You know, John Raskob, I mentioned to you, Carter Glass was a senator in Virginia. He was a Cassandra. He was, for years, he would rail about Mitchellism, the idea that Charlie Mitchell was going to upend the system. He hated these guys. He hated these guys. He hated Wall Street. He was like the Elizabeth Warren of his time. If you know Senator Warren in the United States, who's been going after Wall Street for years and years and years. I became infatuated with this character. Really, she only gets a cameo in the book, but Evangeline Adams was an astrologer that every banker, including J.P. Morgan himself, would go visit, pay$50 an hour to talk to her about whether they should buy or sell stocks at any given moment.

12:35They were listening literally to this astrologer who had an office in... And we wonder why it all went wrong. In Carnegie Hall. And so there was a character named Thomas Lamont who was running J.P. Morgan at the time. All of these people, Jesse Livermore, who was a short seller, who made a small fortune during the crisis, but was such an emotional wreck of a human, they ultimately committed suicide. And by the way, I mean, here we are in London. Winston Churchill has more than a cameo in this book. I was actually amazed by this. I had no idea of this. He shows up in New York City. He's literally on the floor of the New York Stock Exchange as the crash is happening, literally.

13:17Because he was looking to make money like everybody else. He had come to the United States. Frankly, he was in debt. He was trying to give speeches. He'd been challenging the exchequer by that point. He was still coming over. And he's coming over to try to make some money and then becomes enamored with the stock market. Like everybody, though. And that was really the thing. It had taken over the culture. And he's trading, trading back and forth. He's calling his wife for more money. And of course, he loses a small fortune too. And just in parentheses, actually, now you've made me think of it because I say it was a few months ago since I read it now.

13:47Isn't it true? And again, I had no idea about this history. He gets knocked over. He gets knocked over. He almost gets killed. History could have been so different. He's off to make his fortune and he almost gets killed on the streets of New York. He literally almost gets killed by a driver. He's trying to cross the street at night and gets knocked down, gets brought to the hospital. It's an extraordinary story. but there were so many little stories like that that also I think explained the rest of the world and how we live today. I remember coming across a letter, a note that John Raskob had written in the fall of 1929 where he called for a five-day work week.

14:24So back then we all worked six days a week and he was making the argument and he may be responsible to some degree for this. The fact that that people didn't work on Saturdays and Sundays. And he wasn't doing this because he was a nice guy. He was arguing we needed a five-day work week because more people would buy cars because they'd have places to go over the weekends and buy gardening equipment and different clothing. So it was just so interesting to see the sort of different people and what was really driving them and the greed. I mean, there was a greed behind all of it. Well, I mean, I'm conscious with news agents rather than the history agents at the moment.

14:56Who knows what will happen in the future? But I think it's worth just dwelling on history for a moment before we sort of talk about the contemporary resonances and the politics of today and how it feeds into it. You've already elided on the question, which is, you know, thousand, thousand, thousand schoolchildren across the world have sort of been asked to write about this over the years. What actually caused the Wall Street crash? What actually caused the crash of 29? And not just that, but obviously everything that happened since. So I always think that every major crash actually is a function of one thing.

15:31And that one thing, the match that lit the fire then and that has lit the fire ever since is debt. It's the idea of borrowing. One of the things that we often forget, I didn't even realize about 1929, was by the end of 1929, the stock market was only down 17%. But between October and November, it had dropped 50%. Yes, this amazes me. Now, Now, most people might say to themselves, well, if it just ended the year and 17 % down, if I could have just held on, it would have been fine. Why would that create a problem? And all the big political players at the time, just to interrupt, just to add a bit of context, all the political players at the time, including President Hoover, they all think that's going to happen, right?

16:12It's not like there haven't been dips before. There have been some crashes, but it will recover. And everyone sort of thinks that. But the difference this time was that everybody was so indebted. they had taken out for every dollar they'd put down, they'd been loaned nine or ten dollars back. So when the market fell 50%, they never had an opportunity to keep going because the bank called them and took their house. And so you had all these people who effectively lost their homes during this 50 % downdraft. And even though it came back, people didn't, they weren't able to hold on. And not only was the stock market down by 50%, it was multiplied for them because they had taken on all this debt.

16:56And most people didn't realize, because this was the first time they had ever been in the stock market, just what the true risks were. I mean, most of these people were walking on the corner of the street to brokerages. It was almost like walking into a coffee house back then. At the Plaza Hotel, instead of the Oak Bar, which is this famous bar, it had turned into an EF Hutton, which was one of the great brokerage houses of the time in the United States. By the way, EF Hutton owned Mar-a-Lago back in 1929. Interesting enough. But just it really sort of centers... It doesn't repeat itself, but it rhymes.

17:28It does. It does. So the point is to say that, and this is against some of the more contemporary residents, perhaps. But, you know, in the 1920s, to sort of take a step back, the 1920s in that period, although there had been dips and there had been some downturns, particularly in the decade before, This was an age of huge optimism. Huge. Relentless optimism. Again, the Empire State Building kind of, although it wasn't finished until during the crash, it was commissioned before, and it kind of embodies that age. Everything can be conquered. Tremendous bullishness about the future, particularly in the United States, but elsewhere as well.

18:00Tremendous optimism. Everyone can get in on it. Everything's going to be different this time. That was the overwhelming feeling of the age. And doesn't that seem to rhyme now? And it never is that different, is it? There are things that are different, but there are certain fundamentals. And the economic cycle as it was then eventually manifested itself. That's what you're saying. Absolutely. Not only did it manifest itself in that crash, then there was a series of policy choices. And the book is about getting inside the White House, for example, with President Hoover, where you see him make mistake after mistake, including, by the way, implementing tariffs in 1930.

18:37Very similar to what just happened about 12 months ago. So there are all those kind of parallels, and that leads to unemployment of 25 % in 1932. And just explain something that comes up again and again, a concept that's largely been forgotten, but seems to be a big contributing factor to what happened, which is this idea of borrowing on margin. Just explain what that was, because that was a huge part of it, wasn't it? That was everything. I mean, the idea that you could walk in to a brokerage and effectively take out a big loan. Every time you bought stock, you would only put a dollar down. Or if you put$10 down, they'd give you$90 to go bet with.

19:19So everything was magnified. And by the way, when everything was going up, that was fabulous, obviously. But when everything was going down, it was magnified just as much. So ordinary people were literally walking into brokerages, wanting to get a slice of the action. Again, one can think of particular industries that this is similar of today, but wanting to get a slice of the action, going in, putting down tiny deposits, saving out huge loans. Huge loans. On the basis that the market would just continue to inflate. As long as the stock market went up, it worked. And if you'd asked, you think, policymakers in the late 20s, like Hoover, but people in the Hoover administration, do you think that they would have understood what was going on?

20:00And if you'd asked them about what was going on, how much concern do you think they'd have? Or do you think that they genuinely also bought into this idea that effectively capitalism had been perfected? No, I think if you read the diaries of a lot of these individuals, whether they're on the Federal Reserve Board or in the White House, including President Hoover, there was anxiety about this. There was a definitive sense among policymakers, including Senator Carter Glass, that this could become a problem. I just don't know if they knew, A, what to do about it, and B, I think oftentimes when markets get to these kind of frothy moments, people put blinders on.

20:40They want it to keep going up. the incentive is for everything to go up. And is there a moment? So we get to 1929. What is the moment of ignition of the crash? It might not have been the whole thing, but what is the thing that causes it? Just a classic thing that we've seen time and again, which is just confidence is lost and then there's a run or what is the moment? Well, interestingly, one of the things that contributed to this in October of 1929 was a technological problem. You had so many people trying to trade on the stock exchange change that once there was a break, and that was really a philosophical sort of psychological break where people thought that the market was overheated and people started to sell.

21:21But back then, one of the big problems was that the stock market, in the same way you can look at your phone now and see the stocks trading by the millisecond, you were often two, three, four, five hours out of date, if you will, wherever you were. In fact, I don't know if you ever saw those famous black and white photos of like thousands of people standing on the street around the stock exchange in 1929. If you ever think to yourself, what were they doing there? They had all gone there physically to find out what had happened to their money. Because if they were up even on Fifth Avenue in the 40s, New York, they were literally timed out.

22:02They didn't know. And so there was sort of an indiscriminate like selling. And rumors would go across the country about what was happening to different stocks and things like that. And so you could take days for that information to flow out and then people would just automatically sell everything because they didn't know what was happening. And of course, you have that initial downturn, that initial slump, which eventually becomes a depression. Yes. And as you've already alluded to, part of this is about political choices. It's not just about the fundamentals. It's the tariffs. It's deciding effectively the Federal Reserve felt that they weren't going to do anything.

22:39Politically, there was really no appetite. And the sort of natural emotional reaction in a downturn is to, you know, sort of close ranks. It's not to go spend money, for example. And the truth is what we've learned is that during a crash, the thing you have to do as politically unpalatable as this is to actually spend money. And to be fair, of course, this is operating in the period before Keynesianism, as we came to know. Yes, this is before Keynes and this is the gold standard still exists. And there's all sorts of complications. So President Hoover, we should talk about him. President Hoover, who has obviously become notorious and associated indelibly with the crash and is considered now one of the worst presidents in US history because of the way he responded to it.

23:22But of course, he and those in his cabinet, who, of course, contained many people who themselves had worked on Wall Street and had made great fortunes, people like Mellon and so on. They would all, so this is a world that they knew, but they didn't have the conceptual framework that we would perhaps have today in the Keynesian world. So that's, you know, maybe to their credit. But it is true to say that their choices did make things worse. So what did they do? What did Hoover do? Why do you think, do you think, A, what did he do? And B, do you think it's fair that he has the reputation that he does?

23:51So I have a little bit more empathy for Hoover than most. Not saying much. When I say that, because I feel like he actually did recognize some of the problems early. I think, you know, he was only in office for six months before this happened. So I have a little bit of sympathy in that regard. Afterwards, I think he made the mistake of thinking it was a psychological problem. I mean, he literally used to tell people, just put a smile on your face. Like he thought that he could jawbone his way towards making the public feel better about things, that somehow the market was disconnected from the economy.

24:24He also had in Mellon, his treasury secretary, somebody who said, let them eat cake. I mean, it really was somebody who was advising, I think, him terribly. Then he implements the tariffs, which was a terrible idea. It's the famous Smoot-Hawley tariffs. Smoot-Hawley tariffs. He also really thought that, you know, if a bank was going to go out of business, that that should be on them. I mean, this is a very sort of back then, that was the classic view, which was... Something we call moral hazard today. And the moral hazard today. But back then, his view was, you know, if the bank goes out of business, the bank goes out of business.

24:59But what was happening was you had runs on banks all over the country. And by the time he sort of really got religion about what should happen, frankly, he had lost the presidency. Roosevelt was coming in. In fact, he begged Roosevelt to help him try to put in a program to try to save the banking system. And Roosevelt said, talk to the hand. I'm not coming in until March 1933. I don't want to get this on me, this stink of whatever you've done. Leave me alone. But that period of time, that three or four months, had they actually jumped in front of things then, they could have actually prevented things from getting as bad as it really did.

25:38And you think Roosevelt deserves the credit that he gets in terms of the New Deal? I think he doesn't deserve the credit that he gets. You don't? No. Not with the New Deal and with the different sorts of economic policies that he brings in? You know, a lot of people give him a lot of credit. But if you go and look at the market and the economy, things did get better. But by 1937, it broke again. It was the war eventually which wrested America out of the slump. Exactly. So I don't know. I think it's a much more mixed story on Roosevelt. But here's a sort of question that I sort of puzzle about a bit, which brings in sort of more contemporary politics, which is that the Great Depression was appalling, 25 % unemployment, unbelievable hardship.