Even some of the factors that are supposed to be quite different from the late 1920s and are meant to protect the financial system from another collapse are not really that different:

* The Securities and Exchange Commission, created in reaction to the 1929 stock market crash and the Depression that followed, carefully regulates stock markets and prevents excessive margin debt. But, speculative risks now can just as easily be taken with options, futures contracts, and junk bonds as they were with highly leveraged stocks in the 1920s.Already, Guarantee Financial Corporation, a California savings and loans, showed how to lose $50 million through trading options in Treasury securities on a total net worth of $150 million. And, the bankruptcy of LTV is calling attention to the high risk of junk bonds.

Furthermore, index mutual funds engaged in arbitrage trading can completely circumvent the rules designed to prevent a cumulative stock market collapse through selling stocks short. Finally, a great deal of speculation - and financial problems - has shifted to the government bond market, which until recently was unregulated.

* The built-in fiscal stabilizers are now expected to cushion any weakness in the private sector. If the economy starts to slip, corporate and individual tax payments automatically become smaller while government spending on social security, unemployment benefits, etc., rises. The resulting increase in the federal deficit offsets the weakness in the private sector, the theory goes.

But, the Gramm-Rudman law actually reverses this process and makes fiscal policy destabilizing. The law requires government spending cuts or revenue increases equal to the amount by which the budget deficit exceeds the specified target level. But the weaker the economy, the higher the estimated deficit from which the Gramm-Rudman cuts must be made, the bigger the cuts in spending or the increases in taxes needed to reach the law's deficit targets, the more the economy is depressed, and so it goes in a potential downward spiral.

Of course, Congress is not going to sit idly by while the implementation of that law drives the economy into a serious recession. In fact, a provision in Gramm-Rudman calls for its suspension after two consecutive quarters when the annualized real GNP growth rate slows to below 1 percent. Yet, because of reporting delays and statistical revisions, the first round of budget cuts could be put into effect before Washington would even realize how weak the economy really was.

In contrast, fiscal policy had little effect on the economy in the 1920s, when federal government spending accounted for only 2 percent to 3 percent of GNP, far less than the 25 percent share it claims today. Consequently, the destabilizing effect of the Gramm-Rudman fiscal policy of today may actually be much more of a depressant to the economy than the neutral-to-negative fiscal policies of the late 1920s and early 1930s.

* The tax reform law, as noted above, is designed to make the tax system much more neutral by tremendously reducing the old law's orientation toward achieving specific social and political goals. This removes, however, the

financial underpinnings of most tax shelters, the bulk of which are based on real estate and other tangible assets.

With the end of inflation and other factors already depressing the prices of farm land, oil, office buildings, and many other tangibles, the tax law changes may transform price weakness into price collapse and prove very destabilizing. The law's long-run goals have much merit, but the timing couldn't be worse in terms of increasing the risks of financial crises.

* Deposit insurance by the FDIC for banks and by the FSLIC for thrift institutions was also introduced in reaction to the Depression, but it is not as risk-free as it may appear. Americans still seem to love risks, and when the government raises the safety net, people climb to a higher perch from which to take that half-mile dive into a wet sponge. People throughout the country are now depositing funds in any financial institution that pays high rates of interest, regardless of its financial health, as long as it has federal insurance coverage.

Recent history shows that the institutions paying the highest rates are the closest to bankruptcy. Furthermore, the insurance funds themselves are in dire straits. The FDIC has $18 billion in resources, less than the total problem loans of the top 35 banks in this country. FSLIC has about $1 billion in net assets to handle a clean-up of troubled S&Ls that the Federal Home Loan Bank Board estimates to be as high as $25 billion.

Of course, these government-sponsored insurance funds would have open- ended draws on the Treasury if worse came to worst. But, the uncertainty that would precede such bailouts could cause severe financial disruptions. Note that Congress adjourned its 1986 session without passing the FSLIC recapitalization bill, and without enough members on the bank board to permit that body to function legally.

The probability of a 1930s-type Depression seems small, but the parallels between the current situation and that of the late 1920s and early 1930s are striking, even down to the 50-odd-year length of the Kondratieff Wave and the fact that the various features of the wave are appearing right on schedule. But even if its likelihood is small, the consequences of a depression are so significant that they cannot be ignored in anyone's business plans or portfolio strategy. An analogy may help to make this point.

Let's suppose we all make a trip to Las Vegas and walk into a casino. The manager comes up to us and tells us that since we're such important businessmen and investors he's going to make us a very special bet. They'll spin the roulette wheel once, he says, and if the ball lands on anything but zero or double zero they'll pay each and every one of us $10 million with no strings attached. They'll even wire it to our Swiss bank accounts or give it to us in cash.

"But," the manager goes on, "if the ball lands on zero or double zero, our guards over there with their Tommy guns will march you all outside the casino, line you up against the wall, and shoot you." We don't know about our readers, but we wouldn't take that bet. The odds of that trip outside the casino are very small, but the consequences are unacceptable!

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