Twenty-one years ago this month, Wall Street plummeted, losing 508 points in one day. We beat that record Monday, when the market lost 777 points. The difference is that in 1987, the market was trading between 2,000 and 3,000 points, whereas Monday – or before Monday – the market was hovering around 11,000 points.
I was a young newspaper reporter at the time and I interviewed an economist for insight. We compared 1987 with 1929 and he assured me that almost 60 years after the great crash, we had learned enough to keep a one-day crisis from turning into a global economic disaster. We may have forgotten that in the 20 years since. Here’s a look at the crashes of 1929, 1987 and 2008.
In 1929, much of the blame for the crash was directed at “margin buying.” Margin buying allowed investors to initially pay only a portion of the cost of a share of stock and pay for the rest later. The idea was that one could pay $5 for a $20 share of stock and when the price of the stock rose to $30, the investor could sell it, pay the remaining $15 and keep a $10 profit. Ease of purchase drove up the prices of stock far past their actual value. When the market began to fall, those margin debts were called, and investors didn’t have the cash to cover their losses. “Market psychology,” which determines much of what happens in a stock market, turned to panic and a liquidity crisis developed that sent the market into a tailspin. “Margin buying” was subsequently outlawed.
In 1987, many economists blamed “program trading” for the crash. Computers were still relatively new on the scene and were programmed to buy or sell huge blocks of stock when their prices hit pre-determined numbers. It’s thought that program trading initially drove up share prices (overvaluing the shares as they did in 1929), then when profitable heights were reached, the computers started to sell and the drop in share prices kicked off a mechanical panic soon followed by human panic. People didn’t have the actual cash to cover their transactions and viola, another liquidity crisis. Because much of the problem was based on a technical problem, it was easier for the collective mind of the market to convince itself that the problem could be fixed.
This crisis is more like 1929 than 1987. Instead of people buying stocks on margin, they bought property. People financed (or refinanced) houses based on the notion that they would be able to flip the property in three years for twice what they paid, pay off their debt and clear a profit. Then (here’s the real stupidity) those mortgages were bundled together and sold as investment instruments, like stocks. It worked – for a while. A fire fueled by greed, however, cannot help but burn out of control and that’s what this one did. The market psychology panicked again. This time it was not so much panic as an admission that the whole scheme was fraudulent and bound to fail sooner or later.
Question is: what do we do about it now? Politicians from both parties tell us we need to bail out the high-flying financiers who got us into this mess, because if we don’t, the whole economy will crash.
I don’t buy that and I don’t think citizens should have to buy that with a trillion-dollar bailout that we’ll be paying off for a century. We’re told that we need to take care of the rich and if we do the benefits will “trickle down” to the rest of us. I’ve been hearing this “trickle down” crap for 28 years and I’ve yet to see any evidence that it works.
What we have, at essence, is a mortgage crisis. If the government has to intervene, let it intervene at the mortgage level. If we have to spend hundreds of billions of dollars, let’s buy up the mortgages, work with homeowners to allow them to stay in their homes and pay off their mortgages at a reasonable rate of interest.
Doing this will first, keep American workers in their homes. Throwing thousands of families into the street will make our economic crisis worse by an order of magnitude. Second, by keeping people in their homes, it will keep those houses off the market and provide a floor to stop the free-fall of housing prices. Third, having the federal government take over the mortgages will guarantee that the money we spend will come back to the federal treasury and the program will pay for itself, instead of passing this debt along to the next three generations.
Three Days on Wall Street
Twenty-one years ago this month, Wall Street plummeted, losing 508 points in one day. We beat that record Monday, when the market lost 777 points. The difference is that in 1987, the market was trading between 2,000 and 3,000 points, whereas Monday – or before Monday – the market was hovering around 11,000 points.
I was a young newspaper reporter at the time and I interviewed an economist for insight. We compared 1987 with 1929 and he assured me that almost 60 years after the great crash, we had learned enough to keep a one-day crisis from turning into a global economic disaster. We may have forgotten that in the 20 years since. Here’s a look at the crashes of 1929, 1987 and 2008.
In 1929, much of the blame for the crash was directed at “margin buying.” Margin buying allowed investors to initially pay only a portion of the cost of a share of stock and pay for the rest later. The idea was that one could pay $5 for a $20 share of stock and when the price of the stock rose to $30, the investor could sell it, pay the remaining $15 and keep a $10 profit. Ease of purchase drove up the prices of stock far past their actual value. When the market began to fall, those margin debts were called, and investors didn’t have the cash to cover their losses. “Market psychology,” which determines much of what happens in a stock market, turned to panic and a liquidity crisis developed that sent the market into a tailspin. “Margin buying” was subsequently outlawed.
In 1987, many economists blamed “program trading” for the crash. Computers were still relatively new on the scene and were programmed to buy or sell huge blocks of stock when their prices hit pre-determined numbers. It’s thought that program trading initially drove up share prices (overvaluing the shares as they did in 1929), then when profitable heights were reached, the computers started to sell and the drop in share prices kicked off a mechanical panic soon followed by human panic. People didn’t have the actual cash to cover their transactions and viola, another liquidity crisis. Because much of the problem was based on a technical problem, it was easier for the collective mind of the market to convince itself that the problem could be fixed.
This crisis is more like 1929 than 1987. Instead of people buying stocks on margin, they bought property. People financed (or refinanced) houses based on the notion that they would be able to flip the property in three years for twice what they paid, pay off their debt and clear a profit. Then (here’s the real stupidity) those mortgages were bundled together and sold as investment instruments, like stocks. It worked – for a while. A fire fueled by greed, however, cannot help but burn out of control and that’s what this one did. The market psychology panicked again. This time it was not so much panic as an admission that the whole scheme was fraudulent and bound to fail sooner or later.
Question is: what do we do about it now? Politicians from both parties tell us we need to bail out the high-flying financiers who got us into this mess, because if we don’t, the whole economy will crash.
I don’t buy that and I don’t think citizens should have to buy that with a trillion-dollar bailout that we’ll be paying off for a century. We’re told that we need to take care of the rich and if we do the benefits will “trickle down” to the rest of us. I’ve been hearing this “trickle down” crap for 28 years and I’ve yet to see any evidence that it works.
What we have, at essence, is a mortgage crisis. If the government has to intervene, let it intervene at the mortgage level. If we have to spend hundreds of billions of dollars, let’s buy up the mortgages, work with homeowners to allow them to stay in their homes and pay off their mortgages at a reasonable rate of interest.
Doing this will first, keep American workers in their homes. Throwing thousands of families into the street will make our economic crisis worse by an order of magnitude. Second, by keeping people in their homes, it will keep those houses off the market and provide a floor to stop the free-fall of housing prices. Third, having the federal government take over the mortgages will guarantee that the money we spend will come back to the federal treasury and the program will pay for itself, instead of passing this debt along to the next three generations.
© Mark Floegel, 2008