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The Day the Market Went South
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12082 |
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CURRENT ISSUES
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| Issue
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12 / 1987 |
2,388 Words |
| Author
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John H. Fund
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The morbid jokes began almost immediately. "What do you call a yuppie investment banker?" "Waiter." But for millions of investors, the stock market collapse of 1987 - the word crash, with its connotations of economic depression, was too harsh for many - was anything but a laughing matter.
The market's collapse spawned a boom in financial advice, many of it 180 degrees from the bull market optimism of a few weeks before. Booksellers are cashing in on sales of the book The Great Depression of 1990, by economist Ravi Batra. Financial newspapers are disappearing from newsstand racks, and some brokers, whose phones won't stop ringing, are even asking people on the street for their opinions.
As people recovered from the shock of the market's swift drop, the inevitable search for the cause of the decline began. Was it the growing perception that President Reagan was politically weakened? The twin trade and budget deficits? The result of exchange-rate instability? Pressures for higher taxes on corporate takeovers? The threat of a protectionist trade bill being passed by Congress?
Much has been written about the market's concern with the trade and budget deficits. This explanation is inadequate because both deficits had been around for some time, and the most recent evidence was that both were declining or likely to decline in the near future. President Reagan's political weakness was real enough, but it is unlikely to have been a major factor itself in the market decline. It is more likely that his lack of political clout worsened investor fears that unwanted tax and trade bills could become law.
In looking at the three remaining explanations - exchange-rate turmoil, the prospect of business tax increases, and fears of protectionism - one might see how they each helped contribute to the stock market disaster of October 19.
An analysis of the possible role that program (computer) trading played in the market's fall is in order, and then an examination of the concern that this stock market collapse will touch off a general economic depression on the scale of the one in the 1930s.
On October 15, four days before the market's collapse, Treasury Secretary James Baker tried arm-twisting the West German government into lowering interest rates by threatening a further decline in the dollar, a move that would damage West Germany's export-driven economy. Markets immediately responded bearishly. After Secretary Baker seemed to reaffirm his position on the Sunday morning news show Meet the Press, the market began a free-fall the next day. Many analysts believe that Baker's ill-timed intimidation tactics convinced many investors that the United States would let the dollar drop dramatically, thus increasing the chances for higher inflation.
Alarming parallels
The 22 percent drop in the Dow Jones average on October 19 eclipsed the 12 percent drop on Black Tuesday in October 1929, causing many to raise frightening parallels to the event that most believe touched off the Great Depression. From its high of 381 in September 1929, the Dow Jones industrials fell to a low of 41 by July 1932, roughly anticipating the decline in the general economy.
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