A Global Crash
OCTOBER 19, 1987, was a strange day on our planet. On that day a storm was unleashed that swept the globe and wreaked havoc in dozens of nations. Yet the storm was windless. It sent no pelting rains, blew no houses over, killed no one. That day a crash reverberated around the world, and for a while a charging bull became a runaway bear.
Windless storms? Bulls turning into bears? As you may know, this storm had nothing to do with the earth’s weather but, rather, with its economy. October 19 was the day of the now famous Crash of 1987, when Wall Street’s stock market took the deepest, fastest plunge in its history, setting off panic around the world. The market stopped charging upward in value (a “bull market”) and temporarily turned to run madly downhill (a “bear market”).
While the crash was without real sound and the bear without real claws, the victims were real. A reporter in Zurich overheard a man cry out, “I’m ruined, totally ruined,” and noted that the people in the financial district reading the newspapers looked as if they were reading their own obituaries. In Hong Kong the panic reached such a fever pitch that the market was shut down for four days. It fared worse than any other market in the crash, losing some 33 percent of its value. One Hong Kong businessman alone lost $124 million. In New York a 63-year-old widow found not only that the crash had wiped out the value of her portfolio of stocks but also that she now owed her broker over $400,000!
Helmut Schmidt, former chancellor of West Germany, said in Die Zeit, a German newspaper: “The fall of stock markets all over the world by more than $1 trillion has made 100 to 200 million households in the West poorer than they had believed themselves to be before the crash.” Yet the crash was not limited to the West. Markets toppled like dominoes in Hong Kong, Tokyo, Singapore, Taiwan, Australia, South Africa, and Latin America, as well as in Europe and North America.
Le Quotidien of Paris bore the bold headline “LE CRASH.” Cambio of Lima, Peru, proclaimed “PANIC IN NEW YORK, TOKYO AND LONDON!” The Australian Financial Review of Sydney asserted that Wall Street had “fallen with a thud equivalent to a dead bull being thrown off the Empire State Building.” But as former chancellor Schmidt pointed out, these falling markets meant more than a jumble of numbers and screaming headlines. The crash meant real losses to many who had to sell their stocks at the lower levels. Life savings, pension funds, nest eggs put up for retirement, plans to buy a house, plans for the care of children—all were vulnerable in the financial storm.
The optimism of the runaway bull market leading up to the crash only made matters worse. The number of direct investors in the U.S. stock market nearly doubled between 1975 and 1985. The number of those who own stock indirectly through pension funds, insurance companies, and banks had increased during the same period by nearly 35 million. The charging bull market drew investors like flies to honey. Many invested too late, paid too much, and couldn’t get out again fast enough.
As the crash rippled outward from Wall Street and around the world, people began to recall another year infamous in economic history: 1929. In that year, a similar stock market crash led to a global depression. The world still cringes at the thought of that era, with its breadlines, soup kitchens, rampant unemployment, and poverty. Would the new crash lead to a similar depression? After all, on the worst day of the 1929 crash (Black Tuesday), the market dropped by 12.8 percent. But on Black Monday of 1987, it plummeted by 22.6 percent. A New York Times headline of October 20, 1987, asked, “Does 1987 Equal 1929?”
The answer, to the great relief of multitudes, turned out to be no. Nearly two years after Black Monday, many experts surveying the lasting damage done by the storm found it to be minimal. The U.S. economy was still expanding. The unemployment rate was low. After all, even after Black Monday the market was only 4 percent lower than it had been a year earlier; it even managed to finish out the year slightly ahead.
Many experts regarded Black Monday as the mere bursting of a bubble, a much needed correction of bloated stock market prices. If the crash has had any enduring legacy, it has been the record flight of many individuals from the market. ‘Never again,’ they vow. They seem to mean it.
Does that mean that Black Monday was unimportant? Far from it! Some experts feel that the crash should be taken as a warning, that it illuminated some deep flaws that run from Wall Street through the world’s economy. But has the world in general heeded the warning? Not according to an economics professor, who told Time magazine: “It’s like a bunch of drunken teenagers driving a car and thinking that just because they made it through the last curve, they’ll be able to make the next one as well.”
Just what went wrong with Wall Street? Could it crash again? And does any of it affect you personally?