Analysis of a Panic of 1907
The world has a witnessed some global financial crisis. The most notable one is the great depression that had severe impacts on the economy of the world. Developing nations were adversely affected by the crisis that hit many free markets. Nevertheless, the 20th century was marked by a panic, which ensued on the Wall Street. The aftermath is that American economy and Europe was not spared either as well as the rest of the world. The main aim of this exposition is to analyze the book The Panic of 1907; lessons learned from the Market’s Perfect Storm by Robert F. Brunner and Sean D.Carr. The essay will start by summarizing the authors’ main points and establishing empathy. Second, it will evaluate on the points put forth by analyzing the supporting, contradicting, as well as missing evidence in the book. Third, it will have a response section, and lastly it will conclude its discussion of the book.
Summary
The panic of 1907 places significant emphasis on the financial crisis that hit the New York stock exchange. The crisis affected the stock exchange, as it fell almost 50% from its peak in the previous year. The dramatic change of more than 50% resulted in a panic, as it was a period that coincided with the recession. In essence, local banks were declared bankrupt. The authors suggest that the primary cause o the runs was a retraction of the market liquidity by a majority of New York banks as well as loss of the confidence of depositors. The origin of the panic can be attributed to the failed attempt in cornering the market on stock of the United Copper Company. Failure of the bid resulted in banks that had lent money to the scheme to suffer runs, which later spread to the affiliated banks. A week later, Knickerbockers’ Trust company was declared bankrupt. The situation resulted in many city trusts withdrawing their reserves from the major banks in New York. Intervention by J.P Morgan salvaged the crisis by pledging his funds, and encouraged others as well to do the same in an attempt to rescue the dire situation. He later chaired a Commission that was instrumental in investigating the crisis, and proposing solutions to avoid such future incidences.
The crisis that hit the world in 1907 is similar to the global crisis that hit the world in 2008. In both scenarios, there were similarities and differences as per the authors’ opinions. Both crises involved credit and liquidity concerns, and the authors suggest that the downfall of the country’s third largest trust resulted in the cash flow liquidity problems. Other trusts withdrew their funds in an attempt to protect their investments. The act of removing personal, as well as investment funds resulted in liquidity problems in 1907 and the same case, can be seen in 2008 as well. Furthermore, both crises started in New York affiliated financial institutions and the American markets, before spreading out to other parts of the world. The contributors are also of the impression that both situations elicited populist’s attacks on Wall Street. It is evident from their findings that, trouble started in 1907 because of insufficient regulations. A closer look at both situations suggest that the circumstances challenged the available mechanisms used in resolving crises until the intervention of J.P Morgan helped to solve both crises despite the existence of a vast period between the two incidences.
The disparity between the two situations can also be seen by a careful analysis of the facts at hand. The crisis in 2008 concerned itself with an investment bank. Such includes all the financial institutions that were without direct access to the Federal Reserve Systems. In 1907, it was widespread withdrawals by the depositors in New York City Trust companies that necessitated the three weeks crisis, which affected the country and the rest of the world. In one situation, it took one man’s ingenuity to help salvage the situation, but the other recent crisis took the intervention of government bodies to be able to streamline the situation before it got out of hand.
Response
Conclusion
A panic of 1907 shows the hazards that can arise from the unlimited financial transactions that can occur within the different institution. The book clearly highlights the similarities of the two crises, and looks at each in a logical manner, which can help avert the future occurrence of such kind. The authors also give credit to the ingenuity of J.P Morgan’s actions in 1907, which helped save the world economy at a time that it was marked with challenges that would have severely crippled the world economy; thereby, hindering economic development on a global scale.
