While Wall Street is preparing to open the market today against Black Monday, in terms of courtesy, President Donald Trump, Cryptopolitan I wanted to return everyone to October 19, 1987, so that we could update our minds exactly what happened on that fateful day.
Therefore, Black Monday hit the world during regular trading hours, and was the largest decrease for one day in the Wall Street history. Dow Jones (DJIA) decreased by 508 points, or 22.6 %, in one trading session. The damage did not stop in the United States.
Within hours, it became a global accident, as it reached every main financial market. Total losses around the world amounted to $ 1.71 trillion. But unlike this time, the accident came without warning, and people were afraid that the second great depression would be on the way. The traders threw shares as quickly as possible, resulting in fear, computers and broken confidence in government financial plans. Some markets were called Black Tuesday due to the differences in the area of time, but the pain was global.
The markets began to fall severely before the accident landed
The first signs of problems appeared five days before the Black Monday. On October 14, 1987, the House of Representatives for Roads and means submitted a bill that would reduce the tax advantages of integration operations that funded companies and acquisitions.
On the same day, the US Department of Commerce published a commercial report showing a higher deficit, making investors more tense. The news pushed the US dollar down while interest rates rose. Merchants began to retract stocks.
On Wednesday, DJIA decreased by 3.81 %, or 95.46 points, to 2,412.70. The next day, it decreased again by 2.39 %, or 57.61 points. By Friday, October 16, DJIA decreased by 4.6 %, or 108.35 points. This made it less than 12 % of the high record on August 25.
These drops struck the United States first, but it didn’t take a long time to follow other markets. International indicators that were flying for five years in a row – which it represented on average 296 % – was now drowned. The United States was not alone in panic.
From August 1982 to August 1987, the curtain rose from 776 to 2722, which led to a powerful bull market for five years. But by October, this range was collapsing. Behind the scenes, many things were adding fuel to the fire. The interest rates were high. The deficit was growing. The stocks were considered exaggerated. The US dollar was declining. Investors were concerned that the whole thing would be broken.
In February 1987, the best economies took up UPORER Accord in an attempt to stabilize currencies and reform the dollar decline. But no one believes that he will work. Confidence disappeared. When faith collapsed in the Louvre Museum agreement, the markets lost any calm they left.
Computers made panic worse
One of the biggest drivers behind the accident was a system known as Portfolio Insurance. This computer -based strategy used market data to create automatic sales of futures contracts if prices drop. The idea was to reduce risk. But when the prices began to decline, computers continued to sell – this sale forced more sale. It was a self -made reaction ring.
During the weekend before the collapse, the stock market was closed technically, but the troubles continued to build. Insurance models have maintained the preservation of applications. Large investment funds allow investors to recover shares during the weekend at the closing price on Friday, forcing the money to prepare for the large Monday sales. But they did not have money. So they had to empty the stocks early on Monday.
Some merchants saw coming and tried to move forward by selling before the wave reached. By the time the New York Stock Exchange (NYSE) opened on Monday, October 19, the sales orders were already stacked. The system cannot keep up with. The imbalance between purchase and sale orders was huge. The New York Stock Exchange allowed to connect the appointed market makers, which are also called specialists, to delay trading if they cannot match the requests. This is what happened.
When the bell rang, 95 S&P 500 shares were not opened on time. He did not do 11 of 30 DJIA stocks. But the futures market opened on the specified date – and instantly hit. DJIA decreased from 2,246.74 in open to 1738.74 in near.
System failures are added to chaos
The last 90 minutes of trading on that day was pure chaos. The stocks were falling quickly. The merchants were drowned. 195 out of 2,257 stocks listed on the New York Stock Exchange, stop or stop. Computers failed. The phone lines are jam. Superdot system for processing collapsed. The orders did not go for more than an hour. Fedwire, the system used to transfer large money, also closes temporarily.
Nobody can know who is worthy of who, or where the money was. People were not only afraid of losing money – they were afraid that the entire financial system might stop working.
The day after the accident, panic spread outside the shares. Frederick Mishkin, an economist, said the biggest threat is the risk of a complete collapse of financial companies. The Brady Committee, which was held to investigate the accident. “Maybe the black Monday was scary, but the liquidity problem on Tuesday was horrific,” said Robert Glipper, part of this team.
Tuesday brought the nightmare of the margin call
On Tuesday, October 20, the nightmare increased. Margin calls – requests for investors to add money to cover the losing centers – 10 times the normal amount and three times over any previous records. Some brokerage companies have discovered that their customers have no enough money.
They were separated, which means that they did not separate the client money from the company’s cash. Companies forced the gaps using their own money. Eleven companies with margin calls were exposed to one customer who was weak in net capital.
Margin’s calls had to be paid via the open market on Tuesday. The clearing needed money, and asked banks to extend credit. But the banks were a maximum. They were already concerned about the risks, and now they were asked to expose the broken market. Some banks hit their credit limits. Others just refused. The risk of the opposite party has become real. No one knows who can pay what they owe, and no one wants to know the difficult way.
The entire financial structure was volatile. This is when the federal reserve is entered.
The Federal Reserve started injecting cash to stop the complete collapse
On Tuesday morning, Alan Greenspan, the head of the Federal Reserve at the time, made a single statement of reality: “The Federal Reserve affirmed, in line with his responsibilities as a central bank in the country, today his willingness to work as a source of liquidity to support the economic and financial system.” This was not some line. It was a warning snapshot, shortly short, so it is not possible to read.
It had an immediate effect. DJIA jumped nearly 200 points, but this did not last. By the back, the decline resumed. So not only the Federal Reserve – they acted.
On that day, they achieved $ 17 billion in the banking system through open market operations. This was more than 25 % of the total bank reserves and about 7 % of the entire US monetary base. The average federal funds decreased by 0.5 % immediately. The federal reserve continued to pump money for weeks. They even started trading an hour before the usual. The banks were told tonight
Raw to expect it. Everything was public, clear and fast. They wanted to lend banks, and it was not hidden about it.
The goal of the Federal Reserve did not make the stocks return. It was to prevent the regime from collapsing. Use tactic: pressure and criticism. They pushed the banks – known as the moral division – to make them continue to lend to securities. At the same time, they gave these banks access to more money so that they feel safe to do so.
“The main procedure of the Federal Reserve was to motivate banks (by persuasion and supply liquidity) to provide loans, with customary conditions, despite the chaotic conditions and the possibility of a severe negative choice for borrowers.” Translation: lending money at that moment is meaningless. The Federal Reserve had to force it anyway.
This strategy succeeded. Entity is doubled by large banks in Chicago and New York. Even with the collapse of everything around them, the federal reserve batch prevented the financial system from fractures completely.
Will they do the same time? who knows?
