A College Freshman History Text on the Stock Market Crash of 1987.

American: A Narrative History | 2004 | George Brown Tindall and David Shi

[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 nation’s doorstep.”

--snip—

“The Dow Jones industrial average plummeted . . . an astounding 22.6 percent.”

--snip—

What caused such a goring of the bull market?

--snip—

But most [analysts] agreed that the . . . problem was the nation’s 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 America’s spending binge.

--snip—

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.

[coconutt2000]

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.

[groanup]

This is obviously a slap on supply side economics, and Reagan. The crash of 87 was a fire drill compared to the crash of the bubble of the late 90's. A year after the 87 crash the market had regained almost all of its loss. The day before the crash long term bond yields had hit 10% and the Treasury Secretary had made the statement that is was okay to have a declining dollar. On that Thursday you couldn't find a bear anywhere. EVERY trader was as long as he possibly could be. What was left to do? No more buying was possible.

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.

[cinives]

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.

[KellyAdmirer]

The 2000 "crash" (I don't like that term for these events, they weren't crashes) was much worse than the 1987 event. Investors were having a big pre-2k party and woke up after the turn of the century and had to face reality again. The transition from 1998-1999 to 2000-2004 in the market was striking. It was mass psychology at work. If you look up events in the years 999-1000, you also will find some strange events - people were more religious in those days, they huddled in churches and the like. In 1999, they bought stocks.

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.

[Lazamataz]

It is 100% accurate, factually. It is also 100% biased -- and I mean ONE HUNDRED PERCENT -- in it's tone and it's editorial interjections.

It is unfit for education purposes. It is, however, great for liberal DemonCrap propaganda purposes.

[DancesWithBolsheviks]

Point(s) well made. Thanks.

[mcvey]

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.

Great!

[Eagles Talon IV]

"And the simple answer is ?????? Not everyone on FP are rocket scientist!"

You're right, they sure isn't!!

[wagglebee]

Hmmm, any suggestions on the 2000 crash--which is not, in this textbook, a crash.

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.

[durasell]

Housing bubbles have happened before. The last time there was anythign like a technology bubble was in 1929.

[ichabod1]

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.”

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.

[FreedomProtector]

The liberal textbook ignores that the graph [best plotted semilog : ) ]took off in the 81-82 (after Reagan policies implemented) after being nearly roughly flat for 15 years.

In 'Modern Times', Paul Johnson, a historian has called the 70's America's Suicide Attempt. Liberal policies implemented in the late 60's had a profound effect on America's economy. Paul Johnson provides numerous statistics in his book to support this.

The early 1980's were a beautiful restoration of freedom in this country.

[Orange1998]

It would been politically correct to say "aint" instead of "isn't". :)

[wagglebee]

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.

[LS]

I'm embarrassed to say I've never read Clarence Carson. An American history writer?

[Will_Zurmacht]

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!

[FreedomProtector]

"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 )
{
sell
}

if( market falls below y day exponential moving average )
{
sell
}

[SAJ]

Quite right. In fact, the SP put writers and the futures/cash arbs were clipped for well over $1 billion on that single day. AND, options and futures trading must be settled up daily, not in 3 or 5 business days like stocks.

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.

[durasell]

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.

[Frumious Bandersnatch]

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.