By Brendan Brown (auth.)
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Additional resources for Bubbles in Credit and Currency: How Hot Markets Cool Down
The confidence of so many potential speculators in their own appraisal ability would have been shaken by the sudden recent reversals of dominant views. In probabilistic terms, the estimated means and variances (together with other measures) of the subjective probability distributions of returns from the given asset or assets might diverge considerably across the market-place. But the level of confidence in these estimated statistics being anywhere near correct would be so low as to mean little asset-churning (turnover) takes place.
The re-bound of the equity market in early 1930 (to a peak of 297) on optimism that the recession would soon end (and that there had indeed been no negative speculative displacement in the economy) brought the Dow Jones Index to a level some 48% above its November 29, 1929 low and to only 22% below its September 29, 1929 high (381). The optimism proved false. In Summer 1931, the market (Dow Jones Index) was back into the 150s, around half its 1930 peak. In the following year (Summer 1931 to Summer 1932), the equity market collapsed to only 25% of its Summer 1931 level (the DJI reaching a low-point of 41 in July 1932) and then proceeded amidst huge volatility along an upward slope until March 1933 (DJI at 54) on the eve of the bank holiday announced by the incoming Roosevelt Administration.
If by contrast the credit market had not heated up simultaneously with the real estate market in reaction to the given speculative displacements then it would have exerted some restraining influence on price rises, with loan-to-value ratios falling). The presence of some soft irrationality in the credit market may be suspected in a situation where certain asset markets (especially real estate and equities) have indeed entered a warm zone (having previously been in the temperate zone) and yet lenders appear not to reckon with the new risks (particular to loan assets, not real assets including real estate or equity) which arise (see p.