Andrew Ross Sorkin on Market Bubbles, Banking Rules, and the Real Lessons of 1929

What It Covers

Tyler Cowen interviews Andrew Ross Sorkin about his book examining the 1929 stock market crash. They debate whether pre-crash prices represented rational speculation on America's future prosperity, discuss Federal Reserve independence, banking regulation evolution, and draw parallels between 1929 financial dynamics and modern challenges including private credit markets and cryptocurrency regulation.

Key Questions Answered

• •Pre-crash valuations debate: Stock prices before 1929 crash may have been rational bets on America's century of growth, with thirty-year returns from 1929-1959 delivering approximately 6% real returns despite the Depression. The crash severity resulted from policy mistakes and unlucky events like World War Two rather than fundamental overvaluation, suggesting speculators were more correct than contemporary critics like Irving Fisher.
• •Leverage amplification mechanics: Individual investors in 1929 used 10-to-1 margin loans from proliferating brokerage houses, meaning a 50% stock decline triggered forced liquidations of not just equities but homes and other assets. This leverage dynamic, not just price levels, created the cascading crisis—a pattern repeated in 2008 with subprime mortgages where underwater homeowners couldn't meet payment obligations.
• •Federal Reserve political constraints: Fed board members' diaries from the 1920s reveal they feared Congressional backlash after raising rates in 1920-1921, viewing themselves as an experimental institution. They recognized speculation was excessive but believed tamping it down required rate increases so dramatic they would guarantee recession, lacking courage to act preemptively—a political calculation that persists in modern central banking.
• •Banking system fragmentation risk: United States banned interstate branch banking while Canada allowed it, resulting in zero Canadian bank failures during the Great Depression versus 9,000 American bank failures by 1933. Deposit insurance and faster abandonment of the gold standard would have prevented money supply collapse more effectively than interest rate manipulation, addressing liquidity rather than solvency concerns.
• •Shadow banking expansion threat: Private credit markets now constitute 80% of lending versus 20% from formal banks, a proportion that grows as capital requirements and regulations push activity outside traditional banking. This shadow system connects to insurance companies and has unclear leverage and liquidity lines back to banks, creating potential systemic risk without clear regulatory framework or understanding of contagion mechanisms.