History of 1837 repeats itself

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It is not the first time in history that housing sector default on account of aggressive expansion of credit to realty sector has pressed the panic button in world equity markets. In 1837 a real estate boom, fuelled by an aggressive expansion of credit, ended in disaster.

The current subprime mortgage default has wiped out over $5 trillion market capitalisation world over. All major benchmark indices have declined by over 10 per cent from the peak levels sometime in February 2007.

In 1837, by the time President Van Buren took office in March 1837, currency shortages plagued the nation. When some banks admitted their inability to honor drafts, the panic spread to Wall Street. By May 10, with runs a daily occurrence, all New York banks suspended operations.

By early fall of 1837, 90 per cent of eastern factories closed. Despite a temporary reprieve in 1838, the depression worsened over the next several years.

Banks, which had accepted overvalued land as collateral for loans used to buy yet more real estate, took it on the chin. United States Bank shares, which hadn’t traded below 100 for 20 years, collapsed from 122 in 1837 to 4 in November 1841.

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