The Boston Fed has re-released a study about the Panic of 1907 that makes for interesting reading in its own right, but also highlights a lot of the similarities between financial crisis we’re just now recovering from and the one that preceded it by nearly a century.
Fed: Speculating with depositors’ cash proves to be dangerous (again)
The first similarity that should jump out at you is the explosive combination of rank speculation and everyday people’s deposits. The 1907 crisis was kicked off by F. Augustus Heinze’s scheme to literally corner the market on shares of the United Copper Company. His plan was to drive up the price on margin and then name his price when short sellers were forced to cover, but when it fell apart the Butte (Montana) Savings Bank headed by Heinze went under and Heinze’s connections throughout the financial sector caused a bank run that also took down the Knickerbocker Trust Company before J.P. Morgan (the person, not the institution) stepped in and managed a solution over the next several weeks, front-running modern central bankers with his vow to do whatever it takes to keep the financial system healthy.
Morgan was able to organize support from the US Treasury, John D. Rockefeller, and other New York banks and trusts, but the Panic of 1907 and the realization that a healthy financial system needs a lender of last resort for times of crisis were part of the reason the Federal Reserve in 1913.
Broad similarities in reactions to both crises
The Boston Fed paper also makes a point of showing how human interest stories from the newspaper could have practically happened yesterday with a couple of technological updates (swapping out a pilfered gold watch for an iPhone 6, for instance) and modern language. Everything from Rockefeller reassuring the nation that everything would be okay (like Warren Buffett did when he declared that he was long on the US economy), it seems like we really didn’t learn that much in the 100 years between the two events.
But one last similarity should be a little more worrying. Six years after the Panic of 1907, the solution that had been slung together became embodied in the Federal Reserve. Seven years after the more recent crisis and St. Louis Federal Reserve Bank (Fed) President James Bullard doesn’t think we should even bother to number QEs anymore, suggesting that he thinks they are going to be a permanent part of the financial system.
The full study can be found here