Business Finance
at Caused the Great Depression?Throughout the 1920s, the U.S. economy expanded rapidly, and the nation’s total wealth more than doubled between 1920 and 1929, a period dubbed “the Roaring Twenties.”
The stock market, centered at the New York Stock Exchange on Wall Street in New York City, was the scene of reckless speculation, where everyone from millionaire tycoons to cooks and janitors poured their savings into stocks. As a result, the stock market underwent rapid expansion, reaching its peak in August 1929.By then, production had already declined and unemployment had risen, leaving stock prices much higher than their actual value. Additionally, wages at that time were low, consumer debt was proliferating, the agricultural sector of the economy was struggling due to drought and falling food prices, and banks had an excess of large loans that could not be liquidated.The American economy entered a mild recession during the summer of 1929, as consumer spending slowed and unsold goods began to pile up, which in turn slowed factory production. Nonetheless, stock prices continued to rise, and by the fall of that year had reached stratospheric levels that could not be justified by expected future earnings.On October 24, 1929, as nervous investors began selling overpriced shares en masse, the stock market crash that some had feared happened at last. A record 12.9 million shares were traded that day, known as “Black Thursday.”Five days later, on October 29 or “Black Tuesday,” some 16 million shares were traded after another wave of panic swept Wall Street. Millions of shares ended up worthless, and those investors who had bought stocks “on margin” (with borrowed money) were wiped out completely.As consumer confidence vanished in the wake of the stock market crash, the downturn in spending and investment led factories and other businesses to slow down production and begin firing their workers. For those who were lucky enough to remain employed, wages fell and buying power decreased.Many Americans forced to buy on credit fell into debt, and the number of foreclosures and repossessions climbed steadily. The global adherence to the gold standard, which joined countries around the world in a fixed currency exchange, helped spread economic woes from the United States throughout the world, especially Europe.Among the programs and institutions of the New Deal that aided in recovery from the Great Depression were the Tennessee Valley Authority (TVA), which built dams and hydroelectric projects to control flooding and provide electric power to the impoverished Tennessee Valley region, and the Works Progress Administration (WPA), a permanent jobs program that employed 8.5 million people from 1935 to 1943.ENRON TheEnron scandal, publicized in October 2001, eventually led to thebankruptcyof theEnron Corporation, an American energy company based inHouston, Texas, and thede factodissolution ofArthur Andersen, which was one of thefive largestauditandaccountancypartnerships in the world. In addition to being the largest bankruptcy reorganization in American history at that time, Enron was cited as the biggest audit failure.[1]Enron was formed in 1985 byKenneth Layafter mergingHouston Natural GasandInterNorth. Several years later, whenJeffrey Skillingwas hired, he developed a staff of executives that – by the use of accounting loopholes,special purpose entities, and poor financial reporting – were able to hide billions of dollars in debt from failed deals and projects. Chief Financial OfficerAndrew Fastowand other executives not only misled Enron’s Board of Directors and Audit Committee on high-risk accounting practices, but also pressured Arthur Andersen to ignore the issues.Enron shareholders filed a $40 billion lawsuit after the company’s stock price, which achieved a high ofUS$90.75 per share in mid-2000, plummeted to less than $1 by the end of November 2001.[2]TheU.S. Securities and Exchange Commission(SEC) began an investigation, and rival Houston competitorDynegyoffered to purchase the company at a very low price. The deal failed, and on December 2, 2001, Enron filed for bankruptcy underChapter 11of theUnited States Bankruptcy Code. Enron’s $63.4 billion in assets made it the largest corporate bankruptcy in U.S. history untilWorldCom‘s bankruptcy the next year.[3]Many executives at Enron were indicted for a variety of charges and some were later sentenced to prison. Enron’s auditor,Arthur Andersen, was found guilty in a United States District Court of illegally destroying documents relevant to the SEC investigation which voided its license to audit public companies, effectively closing the business. By the timethe ruling was overturnedat theU.S. Supreme Court, the company had lost the majority of its customers and had ceased operating. Enron employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies.[4]One piece of legislation, theSarbanes–Oxley Act, increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders.[5]The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.[4]CAUSES OF DOWNFALLEnron’s complex financial statements were confusing to shareholders and analysts.[13][14]In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify thebalance sheetto indicate favorable performance.[15]The combination of these issues later resulted in the bankruptcy of the company, and the majority of them were perpetuated by the indirect knowledge or direct actions ofKenneth Lay,Jeffrey Skilling,Andrew Fastow, and other executives such asRebecca Mark. Lay served as the chairman of the company in its last few years, and approved of the actions of Skilling and Fastow although he did not always inquire about the details. Skilling constantly focused on meeting Wall Street expectations, advocated the use ofmark-to-market accounting(accounting based on market value, which was then inflated) and pressured Enron executives to find new ways to hide its debt. Fastow and other executives “created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them.”
CAUSES of Financial Crisis 1. US-China trade war 2.Access to capital markets 3.AI 4. Emerging Markets 5. Corporate and private debt 6. Student loans