Assignment 1
The panic of 1907 was a major market crash had resulted in a 37 percent decline in the value of all listed stocks, affecting nearly every industrial sectors. Panic occurred, there were numerous runs on banks and trust companies. The 1907 panic eventually spread throughout the nation when many state and local banks and business of market liquidity by a number of New York City banks and a loss of confidence among depositors. During the sharpest part of this downturn, a banking panic led to the failure of at least 25 banks and 17 trust companies. Money was increasingly scarce, brokerage firms were forced to close and the City of New York was twice unable to find buyers for its bonds, forcing the municipal government to the brink of bankruptcy. J.P Morgan was 70 years old at the time of the panic. He was in the twilight of his extraordinarily successful career as a financier of the boom era, the American expansion. He was able to pledged large sums of his own money, and convinced other New York banks to join with him to shore up the banking system; he had also engineered the mergers of firms that we all recognized today,such as U.S steel, AT&T, General Electric. By the November, the financial contagion had largely ended. One of the most important outcomes of the Bank Panic of 1907 was the development of the Federal Reserve system approved by Anti-monopolist President Theodore Roosevelt.
The economic condition in 1907 is not stable, shocks in San Francisco just occurred. Trust companies paid huge amount of money into San Francisco and following by bid fail of United Copper Company. Stock Market start falling quickly. Panic occurred, people withdraw their money from banks and trust companies. The primary causes of the runs included a retraction of market liquidity. The economic condition in 2007 was booming, GDP increases every year until Bear Stearns had trouble with their liquidity issues. Eventually saved by JP Morgan. The difference between the year of 1907 and 2007 is united states was using gold standards and now is in dollars. There are only certain amount of gold in the market, but now the federal reserve is printing our money instead.
Shadow banks and trust companies have similar systems, both banks try to loan money to different projects with interest rate and at main time make money more liquid. The difference is shadow banks have higher interest rates than trust companies, because they loan money to riskier projects. And also, there is no any complex financial instrument back in the day to move money from point A to point B. Now, we have securitization, which is a financial practice of pooling various types of contractual debt into smaller pieces base on each individual mortgages inherent risk of default and then sell those smaller piece to investor.
Bear Stearns was a investment bank in New York, Because of heavily involved in securitization and issued large amount of asset-baked securities, cost part of the global financial crisis and finally subsequently sold to JP Morgan. Bear Stearns was not under Federal Reserve at the time, so government doesn't have the responsibility to save its company. National Bank of Commerce financed knickerbocker to extending loans to hold off depositor runs. But not long National Bank of commerce refusal to continue acting as a clearing agent for Knickerbocker was interpreted as a vote of no confidence that seriously alarmed Knickerbocker depositors. However,