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A rebound in asset prices can mask deeper economic damage, making policies aimed at the real economy more urgent than stock market support.
Kim Sung-jae
The author is a business administration professor at Furman University and the author of “The Story of Tariffs” (2025).
Governments tend to focus first on stock prices when markets wobble. Meanwhile, the real economy quietly deteriorates, leaving policy either a step behind or pointed in the wrong direction.
In November 1929, U.S. President Herbert Hoover urgently convened business, labor and government leaders for a White House economic conference. It came just after the New York stock market collapsed, with an index that had reached record highs just that autumn plunging 50 percent.
Banks were closing and households were losing jobs. A sense of crisis swept the country. Responding to Hoover’s appeal for cooperation, business leaders pledged to stabilize wages and employment and expand infrastructure investment. Labor unions agreed to refrain from strikes. The public welcomed the accord. The Federal Reserve also cut its benchmark rate from 6 percent to 2 percent by the first half of the following year.
With the government, business, labor and the Fed moving quickly, financial markets rebounded on hopes that the worst was over. By the following spring, stocks had recovered more than 50 percent from their lows. Yet bank failures and corporate bankruptcies continued to mount.
Hoover’s early response appeared comprehensive precisely because so many institutions participated at once. Employers promised restraint, workers offered cooperation and monetary policy was eased. The rebound in equities seemed to validate the strategy. But the apparent stabilization in financial markets concealed a widening gap between market sentiment and economic fundamentals. Falling employment weakened consumption, weaker consumption damaged company finances and accumulating inventories deepened the contraction. Once that cycle took hold, measures aimed at restoring confidence in markets were no substitute for policies capable of arresting the decline in production, employment and credit.
Unemployment, previously near the full-employment level of 3 percent, tripled. As household purchasing power collapsed, corporate earnings plunged and inventories piled up. The government drew up emergency budgets and increased investment, but its measures could not keep pace with the deterioration of the real economy.
Making matters worse, the Fed, bound by its policy principles, hesitated to inject sufficient liquidity even as the banking system crumbled. Above all, politicians clung to an outdated campaign promise to protect farmers from imports and intensified protectionism.
In 1930, Congress passed the Smoot-Hawley Tariff Act, raising tariff rates to 45 percent. In its aftermath, two-thirds of world trade disappeared. U.S. exports also plunged, helping spread the Great Depression around the world. As the real economy collapsed, stocks resumed their downward spiral.
By 1932, the Dow Jones Industrial Average had fallen 89 percent from its peak. Only after Franklin D. Roosevelt, who won that year’s presidential election, launched the New Deal and began broad reforms of the economy and financial system did the real economy and stock market begin to recover.
Recent government responses to stock markets recall the Hoover administration. As AI-related shares have surged, governments in major economies increasingly view investment in AI infrastructure as a national competition and are moving to support it. Yet conditions in the real economy are worsening amid geopolitical instability and inflationary pressure from soaring oil prices.
The same problem applies to responses to surging real estate prices. When policymakers react sensitively to asset price movements and concentrate on short-term measures to put out immediate fires, they can easily miss the right timing for policy.
The lesson of 1929 is that policymakers should not mistake a rebound in asset prices for an economic recovery. Markets can recover temporarily even as banks fail, companies struggle and household purchasing power erodes. Policies designed primarily to stabilize prices can therefore obscure deeper weaknesses rather than resolve them.
Restoring balance between supply and demand in asset markets and strengthening industrial competitiveness require a longer horizon. Governments should focus less on supporting stock prices and more on protecting the foundations of the real economy. That distinction remains crucial for governments confronting today’s asset booms.
