time to party like it's 1929
I didn't feel comfortable talking about this at work, due to the non-disclosure clause in my contract, but hell, this is very public news by now. Guess what day it is today?
Yes, that's right! It's BLACK MONDAY!
Five hundred points. The Dow dropped five hundred points. In one day. You aren't supposed to ever see numbers like that on the stock market. Scroll down--look at all that red. Basic materials? Down. Capital goods? Down. Energy, financial, healthcare, services, technology, transportation--Google Finance is barely scaled to even measure those numbers. Every good, service, commodity--gone to shit. Around lunchtime, they announced that the markets had surpassed the levels of the 1987 crash (for which there is a bronzed statue outside the stock exchange in the memory of all the traders who committed suicide that day) in terms of losses. By the end of the trading day, the only worse day for Wall Street in the entire history of American finance was the start of the Great Depression.
My friends, there is no hiding it. We are in the middle of a bona fide stock market crash.
And you know what's really weird? No one's freaking out just yet. AP, Reuters, AFP all sent photogs down to the stock exchange to snap pictures of emoting dramatically in despair, and if the Yahoo! News archives are any indication all they got were a bunch of calm Indian techs and a Middle Eastern guy with a migraine. Everyone's worried--everyone's holding their breath--but no one's jumping out of windows just yet. This, I suppose, is because everyone knows what happened--and everyone saw it coming.
Now I'm not an economist myself--I've never taken more than Econ 101--so let's go at this from a layman's perspective. Here's my potentially flawed understanding, from a dozen news channels and a bunch of informal conversations with knowledgeable but uninvolved people. Suppose you owe somebody money. You've got to borrow from someone else to pay off that debt, right? And if that someone else doesn't have enough money to lend to you, that person has to borrow from someone else. And that person has to borrow from someone else, and that person from someone else, and so on. At the highest level, for a consumer, someone is going to borrow from a bank. And what if the bank doesn't have enough money? Then they borrow from a bigger bank, and a bigger bank, and sooner or later it goes to the five biggest broker/banks--all of which borrow directly from the Federal Reserve. Which the Federal Reserve doesn't do often, because that means inflation. Keeping a fixed amount of money in the system prevents the economy from exploding.
My understanding is that when the subprime crisis first hit several months ago, the chain of debt ballooned so immensely that it brought down one of those five biggest broker/banks, Bear Stearns. That shook up the market a little but, but the Federal Reserve cut their lending rate for interest and the other banks picked up the slack, so everything was fine. But the problem didn't go away. Two days ago, Lehman Brothers--one of those other super banks, which survived both the Great Depression and the '87 crash--ran dry, and filed bankruptcy. Not long after, Merrill Lynch, another one of the Big Five, looked like it was about ready to do so too--and was, until it was immediately and unexpectedly bought out by the Bank of America in a very sketchy deal. The Big Five had become the Big Three. This was not good news.
Because, if your friend can't pay you, and your bank can't pay your friend, and the megabank can't pay the bank, and the money has to come straight out of the Federal Reserve--suddenly, everyone's broke. If you lent money, you can't collect. If you owe money, you can't pay. And that, on a market-wide scale, is a very bad thing. Fewer mega-banks means less competition between them, and less money in the economy overall. But that's not what caused the stock market crash. Oh no.
The problem is that, well, what happens when a company files bankruptcy? It liquidates its assets to pay off its debt. Everything must go. And what assets does a brokerage/holding company/bank like Lehman Brothers have?
That's right. Stocks.
Millions and millions of shares in everything from natural gas to vacuum cleaners are flooding the market right now. So much money and so much debt was accumulated in Lehman Brothers holdings that forcing it to sell at current market price drove down the price of literally everything. Brokers don't seem very optimistic that these stocks will shoot back up anytime soon, so they're exacerbating the problem by selling everything they've got. In theory this will be a temporary effect, as the invisible hand of the marketplace corrects this enormous surge of supply with an equalizing surge of demand. (That's what Bush and his laissez-faire financial advisors are counting on right now--they've officially announced that their response to the crisis is to sit back and do nothing, and let the free market work its magic.) But actual demand doesn't move the market quite as much as perceived demand, and it's pretty obvious right now that shareholders believe everything has gone to shit. Or, rather, they want all the other shareholders to believe that nothing has gone to shit, so they can cut their losses and sell off their stock at a decent price before everything has gone to shit.
The reason why the system worked this way, explained a friend of mine, long before the curent crisis hit, is because the Big Five are inherently stable. If one of those banks goes down, we are all fucked anyway.
Well. We've lost three. That's rather comforting now, isn't it.
In the long run we should be okay--but in the long run we are all dead. (Remember who originally said that? Remember why he said it?) Remember when Jim Cramer of Mad Money shouted "THIS IS ARMAGEDDON!!" at a market shaken by the subprime crisis? Cramer was right. He was just a few months early.
On the news, I've been mostly hearing about two forecasts for what happens next. In the one scenario, the market should bounce back in a few days, as stock prices stabilize, and business will continue as normal on a drastically different Wall Street. Many businesses will close, and the price of commodities will go down (including oil, which already has), making life a little easier for poorer Americans, at least for a little while. Unemployment will soar to even greater levels than we are at now, but at least 401k and other retirement savings will slowly recover as the government works to make sure insurance companies stay solvent (the biggest one, American International Group, is already on its last legs). Eventually America will return to business as usual. But it may take a while.
The other, hopefully unlikely scenario? Inflation skyrockets, the remaining Big Three fold under the stress, insurance companies go belly up, and well...let's just say that pretty soon the only safe investments would be Spam and ammunition.
Someone want to disagree, I'd be glad to be proven wrong. Econ majors? Anyone? Damage control?
Yes, that's right! It's BLACK MONDAY!
Five hundred points. The Dow dropped five hundred points. In one day. You aren't supposed to ever see numbers like that on the stock market. Scroll down--look at all that red. Basic materials? Down. Capital goods? Down. Energy, financial, healthcare, services, technology, transportation--Google Finance is barely scaled to even measure those numbers. Every good, service, commodity--gone to shit. Around lunchtime, they announced that the markets had surpassed the levels of the 1987 crash (for which there is a bronzed statue outside the stock exchange in the memory of all the traders who committed suicide that day) in terms of losses. By the end of the trading day, the only worse day for Wall Street in the entire history of American finance was the start of the Great Depression.
My friends, there is no hiding it. We are in the middle of a bona fide stock market crash.
And you know what's really weird? No one's freaking out just yet. AP, Reuters, AFP all sent photogs down to the stock exchange to snap pictures of emoting dramatically in despair, and if the Yahoo! News archives are any indication all they got were a bunch of calm Indian techs and a Middle Eastern guy with a migraine. Everyone's worried--everyone's holding their breath--but no one's jumping out of windows just yet. This, I suppose, is because everyone knows what happened--and everyone saw it coming.
Now I'm not an economist myself--I've never taken more than Econ 101--so let's go at this from a layman's perspective. Here's my potentially flawed understanding, from a dozen news channels and a bunch of informal conversations with knowledgeable but uninvolved people. Suppose you owe somebody money. You've got to borrow from someone else to pay off that debt, right? And if that someone else doesn't have enough money to lend to you, that person has to borrow from someone else. And that person has to borrow from someone else, and that person from someone else, and so on. At the highest level, for a consumer, someone is going to borrow from a bank. And what if the bank doesn't have enough money? Then they borrow from a bigger bank, and a bigger bank, and sooner or later it goes to the five biggest broker/banks--all of which borrow directly from the Federal Reserve. Which the Federal Reserve doesn't do often, because that means inflation. Keeping a fixed amount of money in the system prevents the economy from exploding.
My understanding is that when the subprime crisis first hit several months ago, the chain of debt ballooned so immensely that it brought down one of those five biggest broker/banks, Bear Stearns. That shook up the market a little but, but the Federal Reserve cut their lending rate for interest and the other banks picked up the slack, so everything was fine. But the problem didn't go away. Two days ago, Lehman Brothers--one of those other super banks, which survived both the Great Depression and the '87 crash--ran dry, and filed bankruptcy. Not long after, Merrill Lynch, another one of the Big Five, looked like it was about ready to do so too--and was, until it was immediately and unexpectedly bought out by the Bank of America in a very sketchy deal. The Big Five had become the Big Three. This was not good news.
Because, if your friend can't pay you, and your bank can't pay your friend, and the megabank can't pay the bank, and the money has to come straight out of the Federal Reserve--suddenly, everyone's broke. If you lent money, you can't collect. If you owe money, you can't pay. And that, on a market-wide scale, is a very bad thing. Fewer mega-banks means less competition between them, and less money in the economy overall. But that's not what caused the stock market crash. Oh no.
The problem is that, well, what happens when a company files bankruptcy? It liquidates its assets to pay off its debt. Everything must go. And what assets does a brokerage/holding company/bank like Lehman Brothers have?
That's right. Stocks.
Millions and millions of shares in everything from natural gas to vacuum cleaners are flooding the market right now. So much money and so much debt was accumulated in Lehman Brothers holdings that forcing it to sell at current market price drove down the price of literally everything. Brokers don't seem very optimistic that these stocks will shoot back up anytime soon, so they're exacerbating the problem by selling everything they've got. In theory this will be a temporary effect, as the invisible hand of the marketplace corrects this enormous surge of supply with an equalizing surge of demand. (That's what Bush and his laissez-faire financial advisors are counting on right now--they've officially announced that their response to the crisis is to sit back and do nothing, and let the free market work its magic.) But actual demand doesn't move the market quite as much as perceived demand, and it's pretty obvious right now that shareholders believe everything has gone to shit. Or, rather, they want all the other shareholders to believe that nothing has gone to shit, so they can cut their losses and sell off their stock at a decent price before everything has gone to shit.
The reason why the system worked this way, explained a friend of mine, long before the curent crisis hit, is because the Big Five are inherently stable. If one of those banks goes down, we are all fucked anyway.
Well. We've lost three. That's rather comforting now, isn't it.
In the long run we should be okay--but in the long run we are all dead. (Remember who originally said that? Remember why he said it?) Remember when Jim Cramer of Mad Money shouted "THIS IS ARMAGEDDON!!" at a market shaken by the subprime crisis? Cramer was right. He was just a few months early.
On the news, I've been mostly hearing about two forecasts for what happens next. In the one scenario, the market should bounce back in a few days, as stock prices stabilize, and business will continue as normal on a drastically different Wall Street. Many businesses will close, and the price of commodities will go down (including oil, which already has), making life a little easier for poorer Americans, at least for a little while. Unemployment will soar to even greater levels than we are at now, but at least 401k and other retirement savings will slowly recover as the government works to make sure insurance companies stay solvent (the biggest one, American International Group, is already on its last legs). Eventually America will return to business as usual. But it may take a while.
The other, hopefully unlikely scenario? Inflation skyrockets, the remaining Big Three fold under the stress, insurance companies go belly up, and well...let's just say that pretty soon the only safe investments would be Spam and ammunition.
Someone want to disagree, I'd be glad to be proven wrong. Econ majors? Anyone? Damage control?