TROUBLE WITH A BUBBLE

There are many reasons, why Fisher had reason to believe the stock prices were to continue to rise. Firstly, the era of 1920s is known as the second industrial revolution. Many entrepreneurs invented new highly technological products positively affecting not only companys effectiveness but also peoples way of living. To name only a few: automobile, telephone network, radio and motion picture. To enhance the importance of technology even more, science was no longer seen as research field only, but as a business itself. Secondly, for technology being effective, managers realized that they have to improve their skill for organizing the company. This fact was not only realized but implemented effectively. This leads to the third and most important point, why Fisher believed the stock prices were on a continuously high plateau: the society realized that an important factor for successful economy is treating your employees well and reward them (not only with salary increases) for their work. This led to more staff loyalty. The fact of decreasing labor disputes number and strikes, was Fishers main argument for increasing stock prices. To sum up, all in all the mass production, the fresh managers skills and the new way of treating employees, led to higher prosperity. This, to continue, caused people to get richer and to increasing sales of luxury products. All the factors mentioned above were the reason for extreme consumption, which in return forced a dangerously fast economic growth. A crash is always triggered by many factors. Also the one in the late twenties had many issues influencing its surge. One point is that too many stocks were newly issued. However, too few experts existed to evaluate those companies correctly. This fact drove the investors in the situation to speculate. Another reason is that the more people get involved in a surging stock market, the greedier they get, causing a herding effect. Moreover, new trading strategies got more popular. This includes leverage trading and short selling. Other causes worth to mention are the overproduction within the automobile industry and the Smoot-Hawley Tariff Act. It should curb the stock market enthusiasm. However, it mainly blocked the USs export guiding not only the USs economy but the global one into severe problems since every state then wanted to protect its own economy, trying to keep investors from other states out of their country. To continue, when a financial crisis arises, an effective monetary policy is crucial. In this case, suspicious signals were sent. Mitchell, chairman of the National City Bank, just wanted to save the stock market somehow, hence, pumped money into it. However, since he was also director of the Federal Reserve Bank, it gave the public the illusion that everything is okay. On the same time, the FED tightened the credit and curbed the speculative excess. This was done by bringin the interest rates to an overall high. Companies were not able to take on more loans to cover their cost, or, to more importantly, were not able to repay them since banks answered to the high interest rates of the FED with even higher ones that were charged to the companies. Due to this mistake, the FED knew it better during the Subprime Crisis. Instead of reducing the monetary base, it increased it. Quantitative easing is a politic still to continue. Another reason is the Hatry London Stock Panic. When this banking house failed to rationalize the steel industry and instead got interested, investors removed their funds from the market. After Londons investors did that, the one of Berlin and Paris were following, putting with spill over effects huge pressure on the world wide stock market. >> smooth Hawley tariff highest tariff level ever responsible for reducing America export high unemployment rate gdp went down

 Hatry London stock panic pull their fund from market, following berlin, paris, wallstreet investor lost competence to invest in the market Fed tighten credit and curb speculative excess Speculation due to irrational market (no evaluation) -> used too much leverage, and the financial structure is not so healthy Investor loosed their confidence, take off the money from the banks (bedause of government, because lost investments, High interest rate, FED, so restricted capital import, export (Smoot-Hawley Tariff Act many ppl lost job) For and foremost, the crisis was thought to be temporary, because soon after new innovations still were introduced. The technology sector did not suffer as much as it was expected. Indeed, the unemployment of engineers and scientists was very low. Moreover, main companies like RCA and GE stayed profitable. This might be because the crisis devastated many companies. The one remaining had now more market potential and less competition. So for some companies even great growth opportunities were to be observed. Engineers & scientists still grow from potential for innovativeness (economic innovation) The panic low point is still higher then the 1923 high They think that the crisis can be solved due to monetary and fiscal policy fisher maybe thinks that the market is deflation, so solve the problem o deflation, so the government should pump money into the market IBM and R$D survived