Thinking Banks are Bigger than the Market

It was 1907, the stock market was down 50% from the year before, bankruptcies were prevalent, there was no such thing as the Federal Reserve Board and panic was in the air.

The two most prominent figures on Wall Street met to discuss what should be done. Jesse Livermore was summoned by J.P. Morgan to listen to a proposition. He, Morgan, would, using the banks reserves, support and bolster the markets if he, Livermore, would stop taking short positions. The foremost banking Titan convinced the foremost investment Bear that it was in both their patriot duty to take this respective action.

Livermore agreed. He covered his shorts. And promised to be a good boy. He, of course, went long and made a killing. So much for patriotism.

J.P., on the other hand, convinced the rest of his bank colleagues to pony up enough money to save the day. When asked what money, the banks should use, he simply said “the people’s money, the deposits, after all why do you think they call them the reserves?”

Thus, the banking system, the stock market and the country at large was saved. A dangerous precedent was set and an unrealistic expectation was established.

Don’t fight the Feds (founded in 1913) or a central bank in general, is the rallying cry for all Bulls at the end of their run.

So it was in 1929 when a collapsing market and the powers to be, once again, turned to J.P. Morgan to save the day. For a few brief days, in that fateful October, the echoes of the past reverberated through the canyons of Wall Street and investors breathed a sigh of relief. Reality set in, however, on October 29, 1929 with all the money the banks could muster they could not stop the onslaught. The markets were bigger than any bank.

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So it is today the world sleeps soundly knowing the Fed has its back. At any negative fluctuation the federal bankers will whip into action and theoretically save the day.

Until they can’t.

Again and again the Feds ability to ride to the rescue takes more and more money and creates more unintended consequences. The shelf life of the rescue package has gotten shorter and shorter until such time as it will have no effect at all.

The Titan and the Bear may be gone but the attitude that the banks are bigger than the market prevails to this day.

Unfortunately when they are proven wrong it will be the 99 who will pay for the sins and the bruised egos of the one.