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Stock market crash

sudden dramatic decline of stock prices acros a significant cross-section of a stock market

A Stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors. They often follow speculation and economic bubbles.

Crowd gathering on Wall Street the day after the 1929 crash.
The banks... took huge gambles... then broke the world system... Then they rushed out to say 'bail us out, bail us out...we're too big to fail... and the public is standing there, amazed, because we just bailed you out how can you be paying yourself billions of dollars of bonuses again? Jeffrey Sachs

Quotes

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  • While most of the attention paid to the October 19 experience in the stock markets has focused on U.S. markets and exchanges, the stock market crash-and the bull market that preceded it-were international in scope. Major exchanges around the world have become increasingly connected. They all experienced substantial increases in stock prices in the years prior to the crash, and similarly experienced sharp drops in value in the period of the crash.
  • As the probability of war suddenly rose, the financial crisis long ago foreseen by Bloch, Angell and others unfolded with terrible swiftness. What happened was a classic case of international financial contagion. The Vienna and Budapest markets, which had been sliding for more than a week, were closed on Monday, July 27, St Petersburg followed two days later, and by Thursday The Economist regarded the Berlin and Paris bourses as shut in all but name. The closure of the continental stock markets caused a twofold crisis in London. First, foreigners who had drawn commercial bills on London found it much harder to make remittances; those British banks which had accepted foreign bills suddenly faced a general default as the bills fell due. At the same time, there were large withdrawals of continental funds on deposit with London banks and sales of foreign-held securities. As Lord Rothschild nervously reported to his French cousins on July 27, 'All the foreign Banks and particularly the German ones took a very large amount of money out of the Stock Exchange to-day and . . . the markets were at one time quite demoralized, a good many weak speculators selling à nil prix.' London became, as The Economist put it, 'a dumping ground for liquidation for the whole Continent of Europe'. On July 29, with the clearing banks declining to accommodate their hard-pressed Stock Exchange clients, trading effectively ceased and the first firms began to fail. The next day the news broke that the well-known stockbrokers Derenburg & Co. had been 'hammered' (declared bankrupt); this, coupled with the Bank of England's decision to raise its discount rate from 3 to 5 per cent, deepened the gloom. On the morning of the 31st came what The Economist called the 'final thunderclap' - the closure of the Stock Exchange, followed by the Bank of England's decision to raise the discount rate again, to 8 per cent. There is no need to detail here the subsequent steps taken by the authorities to avert a complete financial collapse. The crucial point is that by July 31 the crisis had closed down the London stock market, and it stayed closed until January 4, 1915. There could be no better testimony to the size of the financial shock caused by the outbreak of war.
    • Niall Ferguson, The War of the World: Twentieth-Century Conflict and the Descent of the West (2006), p. xliii
  • The Depression was an economic catastrophe unmatched before or since. It was signalled by a collapse in American asset prices. On October 29, 1929 - 'Black Tuesday' - the Dow Jones Industrial index fell by nearly 12 per cent, one of the steepest one-day declines in its history. The market had in fact begun to slide after September 3; by November 13 it had fallen by nearly 50 per cent. This signified a slump in the confidence of investors in the future profitability of US corporations, magnified by panic selling on the part of speculators who had been trading on margin (in effect, with borrowed money). The subsequent rally, which lasted until April 1930, proved illusory. From then until July 1932 the market slid inexorably downwards. At its nadir on July 8, 1932 stock prices had fallen to just 11 per cent of their 1929 maximum. With the exception of 1914, the stock market had never seen such volatility, and nothing remotely like it has happened since.
    • Niall Ferguson, The War of the World: Twentieth-Century Conflict and the Descent of the West (2006), p. 192
  • The crash of 1929 was not really the cause of the Depression. The cause of the Depression was the failure of banks, and people panicking. So what the Fed is trying to do is trying to prevent another massive failure of banks. Now, why Bear Stearns ended up in that situation, that’s the key question. Why was a bank allowed to borrow way over the amount of money that it could actually pay back? This is the key question. And the answer is, lack of regulation.
  • The banks have said, leave us deregulated, we know how to run things, don't put government in to meddle. Then with that freedom of maneuver they took huge gambles, and even made illegal actions, and then broke the world system. As soon as that happened then they rushed out to say 'bail us out, bail us out, if you don't bail us out, we're too big to fail, you have to save us'. As soon as that happened, they said 'oh, don't regulate us, we know what to do'. And they almost went back to their old story, and the public is standing there, amazed, because we just bailed you out how can you be paying yourself billions of dollars of bonuses again? ... There is a lot of greed and there's very little accountability... One wonders in the United States sometime whether the government is regulating the banks, or are the banks determining government policy?... Why have the politicians protected them all along? You know why? Very simple they pay for the politicians.
  • Well, companies themselves have been causing this crisis as much as speculators, because companies like Amazon, like Google, or Apple especially, have been borrowing money to buy their own stock. Corporate activists, stockholder activists, have told these companies, we want you to put us on the board because we want you to borrow at 1 percent to buy your stock yielding 5 percent. You’ll get rich in no time. So these stock buybacks by Apple and by other companies at high prices can push up their stock price in the short term. But when prices crash, their net worth is all of a sudden plunging... this morning in the stock market was a huge wipeout of borrowed money on which people thought the market would go up, and the Federal Reserve would be able to inflate prices. The job of the Federal Reserve is to increase the price of wealth and stocks and real estate relative to labor. The Federal Reserve is sort of waging class war. It wants to increase the assets of the 1 percent relative to the earnings of the 99 percent, and we’re seeing the fact that this, the effect of this class war is so successful it’s plunged the economy into debt, slowed the economy, and led to the crisis we have today.
  • As a foreign correspondent I covered collapsed societies... It is impossible for any doomed population to grasp how fragile the decayed financial, social and political system is on the eve of implosion. All the harbingers of collapse are visible... We suffer the usual pathologies of impending death. I would be happy to be wrong. But I have seen this before. I know the warning signs. All I can say is get ready.
  • The U.S. economy crashes when it becomes too top heavy because the economy depends on consumer spending to keep it going... For a time, the middle class and poor can keep the economy going nonetheless by borrowing. But, as in 1929 and 2008, debt bubbles eventually burst. We're getting dangerously close. By the first quarter of this year, household debt was at an all-time high of $13.2 trillion. Almost 80 percent of Americans are now living paycheck to paycheck.... 40 percent of Americans said they wouldn't be able to pay their bills if faced with a $400 emergency. The underlying problem isn't that Americans have been living beyond their means. It's that their means haven't been keeping up with the growing economy. Most gains have gone to the top... Trump and his Republican enablers are now reversing regulations put in place to stop Wall Street's excessively risky lending. But Trump's real contributions to the next crash are his sabotage of the Affordable Care Act, rollback of overtime pay, burdens on labor organizing, tax reductions for corporations and the wealthy but not for most workers, cuts in programs for the poor, and proposed cuts in Medicare and Medicaid—all of which put more stress on the paychecks of most Americans.
  • A friend recently asked, "Ben, just between you and me, the market is going to crash, right?" My answer was a resounding "yes." The stock market will definitely crash at some point. That's just the nature of the beast... Humans are prone to taking things too far in both directions but that doesn't help predict how far we'll collectively take things during the next melt-up or meltdown. I know for sure there will another market crash at some point. It's something all investors should mentally prepare for. The hard part is knowing when that will be.

See also

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