The 1920s bubble was uniquely driven by the new concept of retail leverage. Financial institutions transported the nascent idea of buying cars on credit to the stock market, allowing individuals to buy stocks with as little as 10% down, creating unprecedented and fragile speculation.
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The rallying cry to give retail investors access to elite opportunities is not new; this same narrative fueled mass participation in the leveraged 1920s stock market bubble. Today, similar rhetoric surrounds cryptocurrency and private equity in 401(k)s, serving as a potential historical warning sign.
Ray Dalio argues bubbles burst due to a mechanical liquidity crisis, not just a realization of flawed fundamentals. When asset holders are forced to sell their "wealth" (e.g., stocks) for "money" (cash) simultaneously—for taxes or other needs—the lack of sufficient buyers triggers the collapse.
In 1929, the stock exchange ticker fell hours behind real-time trading. This information vacuum created immense uncertainty, forcing investors to physically crowd Wall Street for updates. This chaos, driven by a lack of data, contrasts sharply with today's high-speed, social-media-fueled market reactions.
According to Andrew Ross Sorkin, while bad actors and speculation are always present, the single element that transforms a market downturn into a systemic financial crisis is excessive leverage. Without it, the system can absorb shocks; with it, a domino effect is inevitable, making guardrails against leverage paramount.
Contrary to popular belief, the 1929 crash wasn't an instantaneous event. It took a full year for public confidence to erode and for the new reality to set in. This illustrates that markets can absorb financial shocks, but they cannot withstand a sustained, spiraling loss of confidence.
Widespread credit is the common accelerant in major financial crashes, from 1929's margin loans to 2008's subprime mortgages. This same leverage that fuels rapid growth is also the "match that lights the fire" for catastrophic downturns, with today's AI ecosystem showing similar signs.
Instead of raising interest rates, the Fed in 1929 relied on "moral suasion"—sending letters asking banks to stop lending to speculators. This vague, unenforceable policy was largely ignored by bankers who questioned the definition of a 'speculator,' proving ineffective at cooling the market.
Unlike the 2008 crisis, which was concentrated in housing and banking, today's risk is an 'everything bubble.' A decade of cheap money has simultaneously inflated stocks, real estate, crypto, and even collectibles, meaning a collapse would be far broader and more contagious.
The trauma of the 1929 crash created a lasting aversion to stock market investing. Andrew Ross Sorkin notes his grandfather witnessed the crash as a boy and never bought a stock in his life. This shows how crises can shatter a nation's financial psyche for generations, impacting wealth creation.
Current financing deals in AI, sometimes viewed as risky, are analogous to the General Motors Acceptance Corporation (GMAC) funding car dealers in the 1920s. This isn't a sign of fake demand like the dot-com bubble, but rather a necessary mechanism to fund infrastructure for red-hot, genuine customer demand.
