There Is No FDIC For The Stock Market; 1930 Can Most Definitely Happen Again

Posted by politicalpartypooper on June 10, 2010

One of the discussions I had with a few people recently revolved around the idea that what happened in 1930 could never happen today because of the FDIC insurance on depositor accounts.  Fine, I’ll grant that.  But there is one place where there is no insurance; the stock market.  If panic selling ensues, even though there are breaks placed on the system to limit interday drops, there are no safety nets for those who desperately want to get out of the market as quickly as they can.  Picture the market in this instance as your bank account, only instead of cash, you own shares of stock, and those shares have a fluctuating value.  Today, they may be worth $100, while tomorrow, they could be worth $10.

As more and more people decide to get out of the market altogether, the demands that their shares be liquidated into cash increases substantially.  At some point, because there won’t be enough buyers to purchase the shares for sale, stock prices will drop precipitously, but the safeguards will halt many interday trades.  People who believed they had cashed  out will wake up the next morning only to find that they still hold their original positions, and that those positions are worth far less today than yesterday.  That could cause yet another panic sell, as instead of calming down and thinking rationally, investors will continue to try and get “their money” out of the market.

The danger in all of this is that there are no safeguards in such an event.  Most people invest their savings in stocks, bonds, and mutual funds, whereas in 1929 and 1930, most people invested their savings in their local bank.  The mass withdrawal of cash from savings accounts caused banks to collapse, and in their wake, the Federal Government created the FDIC to protect investor deposits.  There is no FDIC for the stock market.  If a panic ensues, millions will lose vast amounts of their savings; in some cases they will lose everything.

So, this idea that we are somehow protected from another 1930-like collapse is ridiculous.  Yes, your cash in your bank is protected, but I ask you, as a proportion of your entire savings, how much do you really have in a savings account verses your retirement account?     Ω


2 Responses to “There Is No FDIC For The Stock Market; 1930 Can Most Definitely Happen Again”

  1. I can't believe you said that said

    {The danger in all of this is that there are no safeguards in such an event.}

    It is because of this risk factor that people such as myself and many, many others have made money over the years in the stock market. Please enlighten me in regards to where I can put my money and double it in a relatively short period of time. The fact that I can lose it all in that same time frame is part of the equation that drives the profit margin to new heights or lows. To complain about the rules at this late date without offering a compromise is no better then what Cesca preaches to his Lemmings everyday.


    • politicalpartypooper said

      No complaining here. I’m not asking that there be an “FDIC” for the stock market. You take your chances. This post was in answer to the people who believe that 1930 can’t happen again. They believe so because the FDIC protects cash savings accounts in its member banks. I merely enlightened them to the facts; there is no FDIC in the stock market, which is where most of the savings of Americans resides.

      My point was that 1930 most definitely CAN happen again, and your money can be wiped out before you even have a chance to get out of the market. Those “safeguards” that are in the market to stop interday trading should anything go badly wrong will protect big investors long before they’ll protect you.

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