Echoes from the past. One of the books I enjoyed reading most this year was 1929 by Andrew Ross Sorkin, a New York Times commentator and broadcaster. It is the story of the extraordinary stock market crash of October that year, which foreshadowed – though was not entirely responsible for – the Great Depression.
In the run up the crash – as they do today with the AI revolution – investors were telling each other that “this time is different”; that there was a combination of circumstances, then based on rising consumerism and big profits in industry and telecommunications, which meant stocks were seen as a one-way bet. There are also other parallels – notably a cast of larger-than-life characters in business and finance, pressure on the US central bank, the Fed, to cut interest rates and on government to cut regulation.
The public was caught up in the frenzy and clever bankers had developed schemes that allowed the public to buy “on margin” – putting up only a portion of the price, often as little as 10 per cent, and borrowing the rest. This all worked just fine when share prices were going up. But when they started to fall it set off a tragic downward spiral leading to financial ruin for many and eventually a string of bank failures, many caused by runs as savers desperately looked for their money back. Only a few, very far-sighted investors saw it coming and made a fortune by betting on a collapse.
The strength of Sorkin’s book is the telling of it through the big, colourful characters of the time – senior bankers, industrialists, presidents and politicians. Economists can look at the data and draw a picture of what went wrong and the subsequent trail of events leading to the Great Depression, including the imposition of disastrous import taxes – the Smoot-Hawley tariffs – by the US in 1930, to try to protect farmers and manufacturers. But Sorkin’s book looks at what was driving the characters involved – the mixture of greed, misjudgments and vengeance that shaped events – and this is its central contribution to the history of the time.
While history never repeats itself exactly, the book reminds us that the “this time is different” dictum has often caused a lot of trouble. Think of the dot.com crash of late 1999 – when technology valuations had run well ahead of reality – or the financial crash of 2008, when few spotted the hidden bombs in the financial markets based on highly leveraged bets on property. In Ireland, meanwhile, as in Wall Street in 1929, the public had been pulled into leveraged investments, not on stocks but on property, either as a home or an investment.
And so the Irish banks had to be bailed out as loans went sour and the finances of many households took years to recover – if they did at all. Crashes, inevitably, pass after a time, but the damage left in their wake and their impact on politics and how society is organised are long lasting. And, again, this is based on personalities and power. A key piece of legislation passed after the 1929 crash to try to lessen the risk in banking, the Glass-Stegall Act – which separated investment and commercial banking – was seen as a prudent response, but also reflected the outcome of lobbying by one part of US banking to try to do over another.
A century later, the extraordinary gains in financial markets, led by the AI giants and hopes that the technology can lead to transformative productivity gains, do not necessarily mean a market collapse is on the way. There is a bubble of hope, for sure; market valuations are high and uncertainty remains about who will ultimately cash in and when.
The question is whether the bubble will gradually deflate or adjust at some stage – bringing valuations in line with whatever reality is emerging about the economic impact of AI – or whether we will see a nastier “correction”, as brokers call it to reassure their investors, or something worse. This is important because gentler market swings can be dealt with, but more dramatic ones can cause trouble – and can spread to wider economic and financial turbulence.
And while what we think of as the financial sector – centred around the banks – is regulated heavily after the 2008 crash, there are other places in the system where risk may be hiding. Central banks and international agencies point, in particular, to parts of the financial system outside the narrow world of banking: think highly-borrowed investment funds with speculative investments, or the new world of financial intermediation based around digital currencies – crypto and what are called, possibly misleadingly, stablecoin. The slashing of regulation in the US adds another layer of risk here. And more and more AI investment itself is also based on borrowings, rather than equity.
[ Is there an AI bubble? Howard Marks weighs inOpens in new window ]
The lessons of 1929 and 2008 are that highly leveraged investments along with complex ideas that are hard to understand often intensify any danger. And also that, as everyone – brokers, bankers, investors and politicians – is “talking their own book” and looking after their own interests, we need to make our own judgments and try to spot the naked emperors.
After 2008, remember, banks kept telling us they had plenty of financial leeway to absorb what was going on – in reality they were “gambling for redemption” by keeping going and hoping things would turn around, just as after the crash of 1929 US banks were desperately arranging share-buying schemes to try to calm the market.
The period in which Sorkin’s book was set also teaches another lesson. Common-sense economics is generally correct – and one is that economies generally gain from trade. The imposition of tariffs in 1930 and their impact on trade and growth was a key factor in causing the subsequent US depression. This year, we may have avoided the worst in terms of Trump’s tariffs. But in the longer term, if protectionism does take hold, it brings heavy costs. And Trump’s laughable claim that they would not increase prices has been proved wrong in spades.
Fortunately, Ireland got through 2025 with remarkably little economic damage from the fallout so far. Perhaps our luck will hold, but the last few years suggests that an unstable world is going to keep confronting policymakers with new and awkward developments to navigate.