Mortgage Solutions’ sister title IFAonline takes a retrospective look at three major crises and how the experts got it all so badly wrong…
The 1929 Wall Street Crash
The roaring ’20s came to an abrupt end with the onset of the Wall Street Crash in 1929, which triggered a 12-year long depression.
On Black Thursday, October 24, 1929, share prices on the New York Stock Exchange collapsed and continued an unprecedented tumble for a month.
The crash was caused by a number of factors, including the over-exuberance of some investors who saw easy money in stocks that were available very cheaply.
“It came with a speed and ferocity that left men dazed,” reported the New York Times. “The bottom simply fell out of the market”.
But what did the experts of the day have to say in the run-up to the crash?
“We in America today are nearer to the final triumph over poverty than ever before in the history of any land.” New Republican president Herbert Hoover speaking in 1928.
“We will not have any more crashes in our time.” John Maynard Keynes, 1927.
“Stock prices have reached what looks like a permanently high plateau.” US economist Irving Fisher
“I know of nothing fundamentally wrong with the stock market or with the underlying business and credit structure.” Chairman of the National City Bank of New York Charles Mitchell days before the crash.
“The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis.” Herbert Hoover speaking just after the October crash.
1987 crash
19 October, 1987 – more commonly referred to as Black Monday – world stock markets plummeted.
By the end of the month, markets in Australia and Hong Kong had plunged by more than 40% and the UK market tumbled around 26%.
The cause of the crash has been widely attributed to ‘program trading’ – where computers perform rapid stock executions based on external inputs.
But after the onset of the crisis, nothing appeared to be out of the ordinary according to the experts:
“These consultations confirm our view that the underlying economy remains sound. We are in the longest peacetime expansion in history.” Whitehouse statement, October 1987.
“Stocks fluctuate, next question.” Bear Stearns CEO Alan Greenberg speaking at a 1987 conference
“There is so much psychological togetherness that seems to have worked both on the up side and on the down side. It’s a little like a theater where someone yells ‘Fire!'” Andy Grove, Intel CEO, October 20, 1987.
2008 Crash
The credit crunch of 2008, triggered by the sub-prime mortgage crisis in the US, is regarded as the worst crisis since 1929. It led to the collapse of some of the largest financial institutions, government bailouts of banks and a long-lasting global recession.
But again, no one saw this one coming…
“These [subprime] assets are so riskless that their capital for holding them should be under 2%.” Franklin Raines, Chairman and CEO of Fannie Mae, speaking in 2004.
“At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” Federal Reserve Chairman Ben Bernanke speaking at the Congress joint economic committee in March 2007 before the financial crisis erupted.
“I do believe that the worst is likely to be behind us.”
Treasury Secretary Henry Paulson interviewed by the Wall Street Journal in May 2008.
Alas, perhaps we should all have listened to Mark Twain who, long before the onset of any of the three major crises, made some telling observations in his novel Pudd’nhead Wilson.
“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”
The 1929, 1987 and 2008 stock market crashes all occurred in October.
Will Roberts is senior reporter at IFAonline.co.uk
