The Past Repackaged

I found an article by Keynesian economist John Kenneth Galbraith in The Atlantic Monthly.

The opening paragraphs grab you in:

"It was a grave problem, however, that in the event of failing earnings and values, leverage would work fully as powerfully in reverse. All income and value, and in practice more, would be absorbed by the outer debt and preferred shares; for the originating company there would remain literally—very literally—nothing. But of this in 1929 no one, or not many, thought; a rising market combined with the managerial and investment genius of the men who built these structures made any such concern seem irrelevant in the extreme.

Here the parallel: after fifty-seven years investment trusts, called closed-end funds, are now coming back into fashion, although still, I would judge, in a rather modest way as compared with 1929. The more exciting parallel is in the rediscovery of leverage. Leverage is again working its wonders. Not in utility pyramids: these in their full 1929 manifestation are forbidden by law. And the great investment houses, to be sure, still raise capital for new and expanding enterprises. But that is not where the present interest and excitement lie. These lie in the wave of corporate takeovers, mergers, and acquisitions and the leveraged buy-outs. And in the bank loans and bond issues, not excluding the junk bonds, that are arranged to finance these operations."

It was written in 1987. If you recall, in October of that year the market plunged 508 points - or a 22% drop. Parallels, like today, to 1929 were inevitable.

In 2000, the tech bubble burst. Back then, tech companies were believing their own drivel about how they were changing the business landscape. It was all stupid and insipid. I was barely into my first year and found the rhetoric a little rich. Companies with no cash flow were trading, in extreme cases, over 100 times PE multiples. It was completely crazy. We were apparently buying into the future; into a dream.

BUT, this time it's different in 2009. This time we're surely going to collapse.

Forgive me if I yawn.