Dow's dizzying rise: rewriting the script that calls for a crash

Wall Street has gone deliciously mad. We are all getting delightfully affluent. Whether we touch bonds or stocks, our capital gains accrue every month. How can this help but remind you of the bull market of the 1920s? The 1922-to-1928 chart of the Dow Jones index looks just like its 1980-86 counterpart.

Nor is this euphoria solely an American happening. Most of the bourses around the globe are also breaking their records. London, Paris, Sydney, Hong Kong: You name it, the happy story is the same; and, in addition, the foreign stocks we Americans bought last year got an extra boost from the appreciation of the Japanese yen and the German mark.

There are, of course, some differences between now and the 1920s. For all the talk in the history books about shoeshine boys and schoolteachers buying General Motors stock by putting up 10 percent margin money or less, and about pools that blatantly manipulated prices of certain stocks in those pre-Securities and Exchange Commission days, most of the public was then too poor to possess appreciable investment securities. Mutual funds and pension systems, today's prime form of investing, were still in their infancy 60 years ago.

When I liken Wall Street today to Wall Street of the '20s, that's calculated to send chills down your spine. We all know how the earlier boom ended in the Great October Crash. The index that soared during the '20s from 63.90 to the dizzy peak of 381.17 had sunk by the 1932 depth of the Great Depression to 41.22 -- a loss of more than 80 percent.

Nine thousand banks failed. Millions of people on Main Street, Tobacco Road, and city alleys lost everything. When Herbert Hoover was voted out of the White House, Franklin Roosevelt took over an economy with 25 percent of the workers unemployed. That same month a German electorate, equally hard hit by the world slump, voted into office the fascist agitator Adolf Hitler, setting into motion a train of events that culminated in the tragedy of World War II.

A hammerblow to the molten steel irreversibly tempers the horse's shoe. Is the economic process like that? Is it true, by some Second Law of Newton, that what goes up must come down?

Or should we take notice of Karl Marx's ironic paraphrase of Hegel, that history repeats itself -- the first time as tragedy, the second time as farce?

I am a great admirer of economic science. All my days I have studied the winsome ways of the economic system.

A naive belief in the exactitude of economics and the rigid determinism of economic developments cannot survive close study of the record.

A better analogy, I suggest, is the making of the classic film ``Casablanca.'' The canny movie magnates, eager to leave no exploitable stone unturned, made two quite different endings for the plot. Aside from the ending most of us remember, where Bogey and Ingrid renounce love in favor of patriotic resistance and martial duty, the script has a sentimental conclusion for those who insist on people's living happily ever after.

Analogies aside, my analysis of the 1925-39 period suggests it would have been quite possible for the recession of 1930 to remain less malignant. If America's Herbert Hoover and Britain's Stanley Baldwin knew then about macroeconomics what even our dullest leaders know today, the slump could have been contained and the date of recovery moved strongly forward.

It was barely forgivable for ignorant leaders to make a mess of things in an age of laissez faire capitalism. In today's mixed economy there can be no alibis.

The crisis on the farms and the bankruptcies in the oil patch cannot help being painful. But there is no need for these to snowball into a world depression. The Federal Reserve, the Bank of England, the Bank of Japan, and the Bundesbank have a power and a duty to stem financial crises and panics.

What is prudent action by the plain person in Milwaukee, Nagoya, D"usseldorf, Malm"o, Barcelona, or Coventry? Skepticism that we are in a new era of price stability and perpetual prosperity is certainly in order.

Experience suggests, however, that you should lack confidence in your ability to get out of the market just before a crash. That famous prediction by Roger Babson of the Wall Street crash was first made in 1925 -- not in September of 1929. How helpful was that?

Experience suggests that those who humbly stay 50 percent in equity shares, 50 percent in other diversified assets, sleep better at night and also come out better in the longest runs than their cousins who vaingloriously try to be ``timers'' and vary their percentage of equity assets in hope of catching the turns.

Dr. Samuelson, institute professor emeritus of economics at the Massachusetts Institute of Technology, won the Nobel Prize in Economics in 1970.

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