Robert F. Bruner is the dean of the University of Virginia's Darden Graduate School of Business Administration. Last year, he and Sean D. Carr, the Director of Corporate Innovation Programs at the Darden Schools' Batten Institute, published "The Panic of 1907: Lessons Learned From the Market's Perfect Storm," detailing a historic financial crisis eerily similar to the one now gripping Wall Street.
What was the Panic of 1907, and what caused it?
The Panic of 1907 was a six-week stretch of runs on banks in New York City and other American cities in October and early November of 1907. It was triggered by a failed speculation that caused the bankruptcy of two brokerage firms. But the shock that set in motion the events to create the Panic was the earthquake in San Francisco in 1906. The devastation of that city drew gold out of the world's major money centers. This created a liquidity crunch that created a recession starting in June of 1907.
In 2008 , is the housing market the culprit this time?
Today's panic was triggered by the surprising discovery of higher defaults on subprime mortgages than anybody expected. This discovery occurred in late 2006 and early 2007. A panic always follows a real economic shock; panics are not random occurrences of market emotions. They are responses to unambiguous, surprising, costly events that spook investors.
But the first cause of a panic is the boom that precedes the panic. Every panic has been preceded by a very buoyant period of growth in the economy. This was true in 1907 and it was true in advance of 2007.
What are the differences between the panic of 1907 and the crisis of 2008?
Three factors stand out: higher complexity, faster speed and greater scale.
The complexity of markets today is magnitudes higher than a century ago. We have subprime loans that even the experts aren't sure how to value. We have trading positions, very complicated combinations of securities held by major institutions, on which the exposure is not clear. And we have the institutions themselves that are so complicated that it's hard to tell who among them is solvent and who is failing.
Then there is greater speed: we enjoy Internet banking and wire transfers that allow funds to move instantaneously across institutions across borders. And news now travels at the speed of light. Markets react immediately and this accelerates the pace of the panic.
The third element is scale. We've just past the TARP, the Troubled Asset Relief Program, funded at $ 700 billion. There may be another $500 billion in credit default swaps that will need to be covered. And there are billions more in other exposures. We could be looking at a cost in trillions. In current dollars, these amounts may well dwarf any other financial crisis in history. In terms of sheer human misery,the Crash of 1929 and the Great Depression still overshadow other financial crises, even today's. But we aren't done with the current crisis; surely it already stands out as one of the largest crises in all of financial history.
Describe J.P. Morgan and how he fit into Wall Street's culture in 1907.
J.P. Morgan was 70 years old at the time of the Panic. He was in the twilight of his extraordinarily successful career as a financier of the boom era, the Gilded Age of American expansion from 1865 to roughly 1900. He had engineered the mergers of firms that we would recognize today as still dominant—U.S. Steel, American Telephone and Telegraph, General Electric and the like. He was widely respected. In fact, the popular press personified him as the very image of the American capitalist. The little fellow on the Monopoly box with the striped pants and the balding head looks vaguely like J.P. Morgan.
He was a remarkable person. He had deep and extensive relations throughout the financial and business communities, and this is one of the keys to the leadership he exercised in the panic. He was a man of action; he galvanized people.