GOLD is the money of the KINGS, SILVER is the money of the GENTLEMEN, BARTER is the money of the PEASANTS, but DEBT is the money of the SLAVES!!!

Thursday, August 21, 2014

The Psychological Effects of a Stock Market Crash: Impact on the Economy and Policy (1987)






The crash of an early European stock markets, when the speculative bubble around the South Sea Company collapse in London in 1720.

The economy had been growing fluidly for most of the Roaring Twenties. It was a technological golden age as innovations such as radio, automobiles, aviation, telephone and the power grid were deployed and adopted. Companies that had pioneered these advances, like Radio Corporation of America (RCA) and General Motors saw their stocks soar. Financial corporations also did well as Wall Street bankers floated mutual fund companies (then known as investment trusts) like the Goldman Sachs Trading Corporation. Investors were infatuated with the returns available in the stock market especially with the use of leverage through margin debt.

On August 24, 1921, the Dow Jones Industrial Average stood at a value of 63.9. By September 3, 1929, it had risen more than sixfold, touching 381.2. It would not regain this level for another 25 years. By the summer of 1929, it was clear that the economy was contracting and the stock market went through a series of unsettling price declines. These declines fed investor anxiety and events soon came to a head on October 24, 28, and 29 (known respectively as Black Thursday, Black Monday, and Black Tuesday).

On Black Monday, the Dow Jones Industrial Average fell 38 points to 260, a drop of 12.8%. The deluge of selling overwhelmed the ticker tape system that normally gave investors the current prices of their shares. Telephone lines and telegraphs were clogged and were unable to cope. This information vacuum only led to more fear and panic. The technology of the New Era, much celebrated by investors previously, now served to deepen their suffering.

The following day, Black Tuesday was a day of chaos. Forced to liquidate their stocks because of margin calls, overextended investors flooded the exchange with sell orders. The Dow fell 30 points to close at 230 on that day. The glamour stocks of the age saw their values plummet. Across the two days, the Dow Jones Industrial Average fell 23%.

By the end of the weekend of November 11, the index stood at 228, a cumulative drop of 40 percent from the September high. The markets rallied in succeeding months but it would be a false recovery that led unsuspecting investors into further losses. The Dow Jones Industrial Average would lose 89% of its value before finally bottoming out in July 1932. The crash was followed by the Great Depression, the worst economic crisis of modern times that plagued the stock market and Wall Street throughout the nineteen thirties.

On September 16, 2008, failures of massive financial institutions in the United States, due primarily to exposure of securities of packaged subprime loans and credit default swaps issued to insure these loans and their issuers, rapidly devolved into a global crisis resulting in a number of bank failures in Europe and sharp reductions in the value of equities (stock) and commodities worldwide. The failure of banks in Iceland resulted in a devaluation of the Icelandic króna and threatened the government with bankruptcy. Iceland was able to secure an emergency loan from the International Monetary Fund in November.[14] In the United States, 15 banks failed in 2008, while several others were rescued through government intervention or acquisitions by other banks.[15] On October 11, 2008, the head of the International Monetary Fund (IMF) warned that the world financial system was teetering on the "brink of systemic meltdown."[16]

The economic crisis caused countries to temporarily close their markets.

On October 8, the Indonesian stock market halted trading, after a 10% drop in one day.

The Times of London reported that the meltdown was being called the Crash of 2008 and older traders were comparing it with Black Monday in 1987. The fall that week of 21 percent was not as large a drop as the 28.3 percent fall 21 years earlier, but some traders were saying it was worse. "At least then it was a short, sharp, shock on one day. This has been relentless all week."[17] Business Week also referred to the crisis as a "stock market crash" or the "Panic of 2008."[18]

Beginning October 6 and lasting all week the Dow Jones Industrial Average closed lower for all five sessions. Volume levels were also record breaking. The Dow Jones industrial average fell over 1,874 points, or 18%, in its worst weekly decline ever on both a point and percentage basis. The S&P 500 fell more than 20%.[19] The week also set 3 top ten NYSE Group Volume Records with October 8 at #5, October 9 at #10, and October 10 at #1.

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