Put 'em against the Wall!

No, enraged mobs aren't spraying the walls of southern Manhattan with graffiti calling to put the Wall Street "crooks" against the wall, not yet. No, that kind of brutal vengeance is reserved for places like certain Mediterranean nations, where tempers run hotter than the weather.

But yes, America's investors are growing angrier by the day as their wealth evaporates. They want to know whos responsible for their stock market losses. Who made their dreams go up in smoke, and mainly, who should be punished to sate that ancient human emotion, the need for revenge.

The public's waning confidence in the stock market, and in free markets. has become a hot topic. The logic behind the public's fear is clear. If you can't believe in corporations and their managements, if their figures aren't reliable, and if you can't trust capital market players either the chance is you'll turn your back on the whole sordid mess and take your money elsewhere.

Well, let's start by saying that the dirt hitting the fan and hitting investors in the face should have been no surprise. Analysts, and my column too, have discussed rotten corporate reporting before. The U.S. press wrote extensively about such problems before they hit the front pages. People taken aback by heavy losses should ask an entirely different question: Why weren't the lessons of history learnt?

There is a simple rule governing dishonesty in the financial market: just like bacteria in food, it's always there. There will always be companies that try to defraud investors. It can't be completely eradicated.

But like the germs in food, as long as reasonable conditions are maintained, things don't get out of control. The body can stamp out the occasional outbreak of runny tummy.

But if the stock market is taken out of the fridge and left to suppurate in the sun, allowing the corruption to proliferate as expotentially as bacteria - and then investors come along and wolf down the stocks - you get massive food poisoning.

The beauty of the furor surrounding Wall Street and the corporations, and the shrieking demands for tighter regulation, is that it's a replay of events 70 years ago. The result of the commotion then was the same tighter regulation, to stop most of the wealth from accumulating in too-few hands, ever again.

July 1932, exactly 70 years ago, was the low point of the American stock market. In fact, one could say the market was in a state of clinical death.

People have heard about the 1929 crash, and Black October, but the truth is that the crash however dramatic it may have been - wasn't what wiped out investors. It was the subsequent bear market of 1931 and 1932.

The numbers bear out this assertion. As the roaring twenties ended, the Dow Jones almost quadrupled from 100 points to 350 within four years, fueled by speculative credit. Broad market shares soared by even more, as happens in serious bull markets.

The crash in the fall of 1929 dragged the Dow down about 40% to 220 points. What caused the trauma was the issue of credit. Although stocks dropped by 40%, on average, many investors were wiped out because of the credit they had taken out. In fact, 1929 ended not far from where it began.

Nor was 1930 such a bad year: The Dow returned to 260 points, and the worst seemed to be behind the market. But then came 1931 and 1932, the worst years of the Depression. By July 1932, the Dow had sunk to 50 points, 85% below its September 1929 high, and 82% below the post-crash low of November 1929.

In practice, it didn't matter if you bought stocks before or after the crash: You were wiped out.

About half the securities issued during the twenties, stocks and bonds, became valueless.

The Dow returned to its 1929 high of 350 points only in 1954. Very few of the gay dogs of the 1920s were still nosing around the Street. Interestingly, anybody who invested at the low point of 1932 saw his money quadruple, which sounds good until you realize that it took 22 years annual returns of 9.2% before costs and inflation. Not great.

So, in the early 30s, the American stock market kicked once and went into coma, resulting in loss of confidence and tighter regulation. The Securities and Exchange Commission was established in 1934 and its first chairman was a heavyweight of the financial establishment, Senator Joseph Kennedy, the father of President John Kennedy.

Wall Street became an object of burning hatred. There were trials of bankers, brokers and corporate chiefs, but they came to practically nothing, for a simple reason: America of the 1920s believed in the free market, almost entirely free of supervision. Regulation was a dirty word, especially as far as the stock market was concerned.

Legislation was therefore sparse. Consequently, people customarily engaged in activity that would be considered criminal today using insider information, manipulating shares and information, and so on and it was legal. Not that there wasn't any law, just that its loopholes were enormous.

Years were to pass before confidence in stocks, as a long-term instrument for savers, returned. It took the maturation of a whole new generation of Americans, the people of the 1950s, who hadn't learned the bitter lessons of the crash and depression.

In many ways the bull market of the 1990s, mainly the tech stocks bubble, is reminiscent of the 1920s. Expectations ran wild, speculators had a blowout, even the argot on the Street was similar. In the 1990s, it was the New Economy that justified the excess; in the 1920s they called it the New Era.

It's too soon to say whether the rest of the story will repeat itself, whether an entire generation must pass on before confidence in stocks is restored. Much depends on macroeconomic factors, and the companies themselves. If the economy deteriorates, which will drag down corporate profits and cause some to collapse altogether, the result will be a coma lasting years and years. During this time share prices will drop further and further, as profits and the price investors are willing to pay erode.

The American authorities haven't been in this scenario since establishing the SEC in 1934: it fears a crisis of confidence that will have investors abandoning shares completely.

But this isn't 1934. There is a difference. Today, we don't have to invent a mechanism to restore confidence: it's there. We just have to make sure it's working properly, and the public seems more and more inclined to do just that. Making sure the criminals reach trial would help restore confidence, too.

So: Barring dramatic macroeconomic decline, if corporate profits don't drop to zero or beyond, as happened in the Great Depression I personally do not believe we'll return to the 1930s. The stock market won't decline into a death-sleep for decades. Share prices certainly may fall, they are likely to do so, since many are still too high.

But it's a vast distance from dropping stock prices to eulogizing the stock market and the free market system that it represents. There's a vast distance from where matters stand to the declaration that the system has gone bankrupt.