No. of Recommendations: 3
No, the Great Recession was not caused by stock market buybacks. And yes, I would probably disregard Bauman's "theory" if I ever gave it an ounce of attention to begin with.

The crash followed a speculative boom during the 1920's in steel production, building construction, retail, automobiles, even railways. In other words, the whole economy. The more share prices rose, the more investors believed they could never fall. Brokers were lending money to investors to turn around and plug back into the market (margin).

And what happens to bubbles when someone comes along with a sharp object?

In this case, it was agriculture. Strong harvests of wheat led to a global oversupply, driving prices down. Congress approved a $100m relief package for America's farmers but the bubble was quickly losing air. Automobile sales, the housing market and steel production were all experiencing slowdowns, and after a 10% market drop at the end of September, the selling panic selling snowballed. Margins were called and there wasn't enough cash to cover the losses. Short of cash, financial institutions closed to prevent runs on the banks.

So margin buying, overpriced stocks and a lack of legal protections separating banking and investing, and certainly sensational headlines all contributed to the market collapse. But not share buybacks.

At least, that's how I learned it.

Fuskie
Who notes prior to 1981, all share buybacks were on the open market; it wasn't until after that repurchases were made through fixed price tender offers or a dutch auction...


-----
Ticker Guide for The Walt Disney Company (DIS), SodaStream (SODA), Live Nation (LYV), CME Group (CME), Mongo DB (MDB)
Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)
Fool Code of Conduct: http://tinyurl.com/FoolCode
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.