Wall Street Assignment.docx - Wall Street Collapse of 1929...

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Wall Street Collapse of 1929- Case Study QuestionsQ1. What were the basic reasons behind the mea collapse?A1.The 1929 stock market crash was a result of an unsustainable boom in share prices in thepreceding years. The boom in share prices was caused by the irrational exuberance of investors,buying shares on the margin, and over-confidence in the sustainability of economic growth.Some economists argue the boom was also facilitated by ‘loose money’ with US interest rateskept low in the mid-1920s.These are some of the most significant economic factors behind thestock market crash of 1929.Credit boomIn the 1920s, there was a rapid growth in bank credit and loans in the US. Encouraged by thestrength of the economy, people felt the stock market was a one-way bet. Some consumersborrowed to buy shares. Firms took out more loans for expansion. Because people becamehighly indebted, it meant they became more susceptible to a change in confidence. When thatchange of confidence came in 1929, those who had borrowed were particularly exposed andjoined the rush to sell shares and try and redeem their debts.Buying on the marginRelated to buying on credit was the practice of buying shares on the margin. This meant youonly had to pay 10 or 20% of the value of the shares; it meant you were borrowing 80-90% ofthe value of the shares. This enabled more money to be put into shares, increasing their value. Itis said there were many ‘margin millionaire’ investors. They had made huge profits by buyingon the margin and watching share prices rise. But, it left investors very exposed when pricesfell. These margin millionaires got wiped out when the stock market fall came. It also affectedthose banks and investors who had lent money to those buying on the margin.
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