Skip to comments.A College Freshman History Text on the Stock Market Crash of 1987.
Posted on 08/22/2006 10:51:02 AM PDT by mcvey
A seeming epidemic of greed and self-absorbed materialism had spread through the country. Wall Street witnessed a rash of arrests and convictions . . . .
And more government officials, including Attorney General Edwin Meese, became entangled in the web of corruption. Commentators talked of a compulsive materialism energizing the . . . professionals dubbed Yuppies. Caught up in the race for money, goods, and status, these baby boomers in the fast lane captured the tone and mood of affluent life in the 1980s.
Then on October 19, 1987, the bill collector suddenly arrived at the nations doorstep.
The Dow Jones industrial average plummeted . . . an astounding 22.6 percent.
What caused such a goring of the bull market?
But most [analysts] agreed that the . . . problem was the nations spiraling indebtedness and chronically high trade deficits. Americans were consuming more than they were producing, importing the difference, and paying for with borrowed money . . . Foreign investors had lost confidence in Reaganomics and were no longer willing to finance Americas spending binge.
For the first time, [Reagan] indicated that he was willing to include increased taxes in such a package. Yet the eventual compromise plan was so modest that it did little to restore investor confidence. As one Republican senator lamented: There is a total lack of courage among those of us in the Congress to do what we all know has to be done.
George Brown Tindall and David Shi, American A Narrative History (New York: W. W. Norton & Company, 2004) Brief Sixth Ed., pp. 1188-1189.
The graph should be plotted with a logarithmic scale on the y axis.
And note the prescription of that surefire fixall- the tax increase.
They are "educating" our kids into stupidity!..........
I lived through this as an investor. That evening the "experts" were all calling for the DOW to drop from about 1750 (it was about 2300 before it tanked)to 1000 or less. Instead the futures turned sometime during the morning of the day after and the market began it's climb back. No one really knows the cause of this one day record decline. here is an interesting link for you to examine.
Great link and thanks!
AHA!! You noticed that? As soon as I saw that on the news I shorted equities in a BIIIG way. I cleaned up!!!
I was just going to recommend your book - it is one of the most unbiased texts I've ever read.
If you ask most people over fifty who are intellectually honest, they will tell you that compared to the four years of the traitorous, incompetent Peanut Farmer in the late 1970's, we haven't had anything in a quarter of a century that even felt like a recession.
In spite of the left's attempts to mess it up and the media's attempts to talk it down whenever a Republican is in office, we are still reaping the benefits of Reagan's economic policies.
If you know any suitably conservative economics professors, I'd suggest an addition to your curriculum on the evolution of economic theories and their impact on history over the past 500 years.
Most history courses ignore the economic theories that historical powers used as the basis of their decisions, or they cover them in discrete units without any coverage of the evolutions, transitions, and conflicts between competing economic theories and their contemporary and counterpart political theories.
You might even be able to write a supplemental text book on the subject.
BooYaa, you're right. I forgot about those stupid things.
Dangerous as hell and lot of folks got burned really badly.
I never had to make margin calls to customer, because I avoided those sales like the plague. But some guys in the office who were playing with them, just went home. It was a triple Wild Turkey day, that was for sure.
But... IBM went from about 165 a share down to 119, I called everyone I knew and sold a ton of the stuff. Ford dropped to about 65 a share or something stupid like that. I called everyone who was loosing money on everything else and pushed the hell out of blue chips. In my mind, it was a fire sale.
Those customers who agreed and took advantage completely wiped out any loss they suffered that day.
It recovered more than 100 points the next day, and was back over 1000 2 years later.
Ping list for the discussion of the politics and social (and sometimes nostalgic) aspects that directly effects Generation Reagan / Generation-X (Those born from 1965-1981) including all the spending previous generations (i.e. The Baby Boomers) are doing that Gen-X and Y will end up paying for.
Freep mail me to be added or dropped. See my home page for details and previous articles.
Thanks for the "you are there."
I can use this stuff in class.
I'd assign some supplimental reading on the market "crash" of 2000 and ask them to compare and contrast. See if anyone can catch the difference in the description of the "culprits" between the 80's and the 90's. If they don't get it, tell them. Then watch their semi-indoctrinated minds spin out of control.
As they are freshmen, and as of yet don't know everything (that's a sophomore) you'd be doing them a great favor.
Hmmm, any suggestions on the 2000 crash--which is not, in this textbook, a crash.
It took until January 1989 before it hit the value of the day before the crash and August 1989 to hit the precrash peak.
Here's the page I used. http://bigcharts.marketwatch.com/intchart/frames/frames.asp?symb=djia&time=20&freq=2
Select Custom under time frame and you can select the exact dates to look at.
All I can remember is that the world was coming down from the Chernobyl disaster that occurred in April 1986. That even scared the world poopless and results are being determined even now.
I'll bet that graph is in the textbook, since academics focus so much on intellectual integrity. Yeah, right. Actually, liberals have trouble understanding anything that doesn't fit their ideology.
Fairly accurate, though slanted.
Just checked the index--not in there (surprise, surprise.)
Oh, yes, the Great Depression of the '80s-'90s.
I was just starting college and was terrified. <\sarc off
Can't help you there. I'd start here on FR, actually.
But I'll tell you a story.
I was workng at an on-line broker just before the correction, crash, whatever, of 2000. I opened a new account for a fellow who sent in two money orders for $1000 each (min. $2K to open).
So, I called the guy and axed him, "Wassup with this?"
He told me he didn't have a checking account or credit cards, but everyone he knew said the market was the place to make money.
Then there's the lady who mortgaged her house to by a swell stock called EConnect 'cause she (and her neighbors) KNEW it would go through the roof...
and on and on...
And the simple answer is ?????? Not everyone on FP are rocket scientist!
Anytime one has a variable which roughly repeatedly doubles over the roughly the same amount of time, a semi-log plot should almost always be used, as it provides the most meaningful picture of all periods of time on the graph. In a semilog plot the y-axis is logarithmically scaled, while the x-axis is linearly scaled.
The stock market as a whole averages about %10 growth per year. One 'rule' which is used in finance isn't exact but fairly accurate and very practical is the rule of 72: To find out how long it will take your money to double at a given interest rate: 72/interest rate:
time for money to double:
72/10 = 7.2 years to double.
Investors are concerned w/ percentage growth, or time to double.
Linear plots exaggerate the end of the graph while hiding information at the beginning of the graph for populations which roughly double over roughly equal periods of time. For this reason, long term market trends are better plotted as semilog.
Just went on vacation with a family member who graduated college recently. He spent 4 years being spoon fed liberal garbage. He knows nothing else, as he was innoculated against any other positions or truths, and he will not believe that he might have poor information. You may be your students' only hope!
Here's some FACT.
According to Facts on File, an authoritative source of current-events information for professional research and education, the 1987 crash "marked the end of a five-year 'bull' market that had seen the Dow rise from 776 points in August 1982 to a high of 2,722.42 points in August 1987." Unlike what happened in 1929, however, the market rallied immediately after the crash, posting a record one-day gain of 102.27 the very next day and 186.64 points on Thursday October 22. It took only two years for the Dow to recover completely; by September of 1989, the market had regained all of the value it had lost in the '87 crash.2
In other words, if your lefty professor wants to blame Reagan for a 500 point drop, then he must also give Reagan the credit for the 2000 point gain that proceeded the loss.
There are lots of web sites out there that discuss the contributing factors for the crash but the overall tone of your history book completely misrepresents both the facts and the effects.
People have blamed a variety of factors for the crash from computerized trading, overuse of derivatives and a general price over valuation after five years of a strong bull market. But none of those was the tipping point for a crash. Here's what was ... Democrats in control of the House Ways & Means Committee playing demagogic footsie with big labor .
While structural problems within markets may have played a role in the magnitude of the market crash, they could not have caused it. That would require some action outside the market that caused traders to dramatically lower their estimates of stock market values. The main culprit here seems to have been legislation that passed the House Ways & Means Committee on October 15 eliminating the deductibility of interest on debt used for corporate takeovers. Two economists from the Securities and Exchange Commission, Mark Mitchell and Jeffry Netter, published a study in 1989 concluding that the anti-takeover legislation did trigger the crash. They note that as the legislation began to move through Congress, the market reacted almost instantaneously to news of its progress. Between Tuesday, October 13, when the legislation was first introduced, and Friday, October 16, when the market closed for the weekend, stock prices fell more than 10 percent -- the largest 3-day drop in almost 50 years. In addition, those stocks that led the market downward were precisely those most affected by the legislation. [Ultimately, the legislation was stripped of the provisions that concerned the stock market before being enacted into law.]4
You kind of had to be around back then to understand how the Democrats and MSM painted the so-called "Corporate Raiders" as the worst thing to ever happen. In reality, they were the guys who forced corrupt corporate executives to clean-up their acts and show concern for the stock holders.
False. The last 2 consecutive recessive quarters where in 2001.
Logarithmic shows a certain percentage change as an equal length. Thus from 100 to 200 is the same length as 1000 to 2000 and from 10000 to 20000.
On a linear scale the 1929 stock market crash disappears.
The Crash from 1929 to 1932 is huge. The 1987 correction looks similar to others in the past.
Duh... I didn't think the /sarc was necessary, but taken in context my post makes it clear that the claims made by the MSM to that effect are false.
That cresh left everyone catatonic but they were all over it within a few months.
Contrast that with the Bill Clinton crash of 2000 where 401(k)'s got halved in a period of two years. People lost fortunes in a market that all the brokers kept saying would get better but never did. It just kept going down relentlessly for almost three years.
I don't have the exact numbers but they go something like this:
If you had put 1 million dollars in the technology index at the beginning of 1999, you would have 2.3 million by the end of the year.
In 2000 you would have lost 83%. Of the remaining balance, the year 2001 would have eaten up 79% leaving you with a hundred thousand or so of your original investment. 1987 was NOTHING like that.
How does it compare to, say, Clarence Carson's books ? I used those in college (a while ago!) and thought they were good.
I haven't seen yours and will have to take a look - I'm a sucker for a good history book.
Why? Who knows, maybe the invention of on-line trading played games in peoples' heads. It was the day of the seemingly invincible stock guru, selling buritos one day, making stock picks for the masses the next.
Anyway, the 2000-2004 decline was worse because the market didn't bounce back. It just kept going down. Certain sectors, such as telecom stocks, haven't recovered to this day. Tech stocks in general remain out of fashion. The 2000 event was much closer to the classic 1929 "Crash" because of this seemingly endless decline, but there wasn't a related economic Depression, so it didn't affect nearly as many people.
I had very personal professional relationships with both the 1987 and 2000 market shocks. I can tell you that the 1987 one wiped out a fair number of people quickly, while the 2000 one wiped out more people slowly. In both cases, it was just a matter of stocks getting bid too high too quickly.
It is unfit for education purposes. It is, however, great for liberal DemonCrap propaganda purposes.
Point(s) well made. Thanks.
I got it and that makes perfect sense. A logical reaction to a governmental act empowered by a technology that had not been completely debugged.
You're right, they sure isn't!!
Wouldn't they then have to admit that it was Clinton's Crash and wouldn't they also have to admit that this occurred not long after Robert Rubin gleefully announced that he and the other Clintonistas had "overcome the business cycle."
I remember back in 1999 (maybe early 2000) when magazines like Time and Newsweek were doing cover stories about how wonderful the stock market was and how everyone was making money, etc. Contrast that to now all they want to talk about is a housing bubble.
Housing bubbles have happened before. The last time there was anythign like a technology bubble was in 1929.
There were a lot of people saying things like this. So much so that Michael Dukakis tried to make it part of his "platform." History tells us how that worked out for him.
It would been politically correct to say "aint" instead of "isn't". :)
The difference with housing bubbles that nobody really wants to address is the geographic factor.
When the dot.com bust came, everyone who was in that market was affected more or less the same (obviously the degrees were different, but the techs lost money across the board) as we were all buying from the same market. However, with real estate, a bubble in one part of the country won't necessarily have any effect on other areas of the country, because we are buying from different markets.
Additionally, a person who bought a house say five years ago, may never actually be affected by a housing decline. If they can afford the house and don't plan on selling, it's not really important, they still have the house and in another decade it will still have gone way up. Basically, with real estate, if you can afford to hold onto it, at the end of the day it's still worth something and it is tangible.
However, if you invested all of your money in some dot.com back in 1998 and that company didn't have an actual product, didn't have a business plan that EVER showed a profit, in fact didn't have anything but a website, chances are that by the spring of 2001, that company didn't even exist anymore. Your stock was worth ZERO and it would never be worth anything again. This is what happened in 1999-2000 and this is also what happened in 1929.
I'm embarrassed to say I've never read Clarence Carson. An American history writer?
Several folks in my dept. use that text, and they seem to be surviving.
I use Henretta's "America's History" 5e. Neither are perfect, but it's only the text. You can easily say "the text is great except for this section, ....." when you get there or to a part that you find troublesome.
There will never be a perfect textbook, that's why we have history professors!
"I was a broker for Blinder Robinson when that occurred.
The main culprit was computer trading. The market took a quick dip for whatever reason, but the institutional traders had just set up their software to protect their portfolios. Software trading was still relatively new and the institutions took a chop and slash attitude toward protecting their portfolios."
Thanks for post. It is easy to see how this could happen if sell algorithm was the similar for many institutions.
if( market falls below x day simple moving average )
if( market falls below y day exponential moving average )
The Federal Reserve, none other!, had to open the discount window to let these players borrow (through banks of course) enough capital to settle their trades and/or meet margin calls, or the CME almost surely would not have been able to open its doors the next day.
At one point during Black Monday, SP options were being quoted with a forty point bid/ask spread. One market maker was so harassed by various parties that he screamed at one of his would-be persecutors, ''Hey, I'm making the best market I can, you (bleep). If you think you can do better, here's my damned deck (of orders).'' The individual did not take him up on his offer.
A unique incident (so far) in financial history.
This housing bubble is more serious than you estimate. The effects of L.A. real estate declining will be felt from Wisconsin to Georgia etc.
It was the big mutual funds doing computer-generated automated selling. The computer programs were rewritten after this little fiasco so that this wouldn't happen again. There was no depression or even recession because of this blip.
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