"Knowledge will forever govern ignorance"

--James Madison--

"The real division is not between conservatives and revolutionaries, but between authoritarians and libertarians"

--George Orwell--

Orderly Markets

It has been posited here that, during the period from 1929-2008, there were no major stock market crashes, and that the entire financial system behaved in an orderly fashion for decades. 

All thanks to securities laws enacted in the 1930's and 1940's, almost all of which are still on the books and still intact.  Why would anyone want to screw with them?  They're written pretty loosely.  They even direct the securities business to regulate itself, and severely limit government intervention.

Still, they must have kept things pretty quiet and orderly, right?

"No Black Tuesdays for over 50 years"


A little history.  This is the Dow Jones Industrial Average, from 1890 to 2010:

That many years in that small a space masks the severity of downturns, especially as you go forward.  But if you look at the graph closely, there are a bunch of "teeth marks".

March 10, 1937.  The "Whitney Scandal" breaks.  Former President of the NYSE Richard Whitney's brokerage firm is suspended.  They are unable to settle somewhere in the neighborhood of $10 M in transactions.

A slide starts that lasts just over a year, and takes until December 1945 to recover.  The Dow and other broad market indices all fall 45-50% between March 1937 and March 1938.  This is still the second worst US stock market downturn since 1929.

1939-1942.  Even as we stayed out of the European War, American companies doing business in Europe experienced numerous problems with supply, delivery, and communications.  Speculation caused by faster, but still slow moving news made keeping markets orderly impossible.  Finally, in September 1939, what had been looking like a recovery from 1938 broke.

Another problem was the fact that the New York Stock Exchange wasn't following trading limits rules that were established after the 1937 crash.  Even as the markets slid precipitously in September 1939, the NYSE would not halt trading, even though volume, order, and loss limits had all been exceeded.

Oh well. Rules are made to be broken, especially when it's just a Federally mandated gentleman's agreement.  Maybe that's why the NYSE bought its own regulatory agency.

The post-war boom did hum along with few hiccups until 1973. 

I've never figured out why, but Watergate was accompanied by lots of stock speculation, rapidly increasing volume, and a sharp and severe decline in the stock market that took until 1982 to recover from.  This is sometimes referred to as "the lost decade".

Once again, the exchanges failed to maintain orderly markets, and the selling frenzy fed itself.  Markets that should have been temporarily closed kept taking sell orders, and the Dow lost over 45% in about a year.

October 19, 1987.  This day is universally known as "Black Monday".  OK, so it wasn't a Tuesday.

This was the most spectacular worldwide trading frenzy in history.  Nobody can say for sure exactly what caused this to happen on this particular day.  There are rumors that a major brokerage was testing new trading software that day.

The crash started in Asia, and moved west with the time zones.  The markets here opened to sheer panic.  The Dow Jones Industrial Average fell 23% by the time trading was belatedly suspended.

It was real ugly:

Just as the markets were recovering in 1989, a huge banking crisis hit.  This isn't including the S & L meltdown of the same era.  in 1989, 534 banks closed their doors, the most ever in one year.  Losses added up to almost $3 trillion.  The 2008-2009 bank failures had combined losses of $2.3 trillion.

In fact, the 1980's were the biggest decade in US history for bank failures.  2036 banks shuttered.  946 in the 90's.  In the first decade of this century, just over 400 banks failed.

Why all of the bank and S&L failures in the 80's?  It seems to be mainly a combination of a real estate boom gone poof, and banks in competition to pay increasingly unrealistic interest rates on CD's, to keep up with the now-suicidal S&L's.  Good times.  Neil Bush.

Then, of course, there was 1999-2003.  Short lived ecstasy, long lived agony as the internet, telecom and energy bubbles all burst.

There were multiple layers of scandal, of course.  Enron, Tyco, Worldcom, Qwest, Nokia, Yahoo...so many others...

Of course, how can we forget 2008?

An interesting thing to note is that during these past two market downturns, trading rules on exchanges worldwide were much more strictly enforced.  Doesn't seem to have helped much.  It's hard to stop a trend when everybody starts panic selling to keep up with the other panic sellers...


It has been asked of me to come up with a theory as to why all of this happened.  I'm not big on theories.  Especially those that involve major players acting in concert to produce results that might not even be to their advantage.

I do know that the markets have been about as volatile with current securities laws as they were before there were any securities laws at all.  I know that markets are always less volatile when other economic conditions are good, and that bad developments in other business sectors can cause markets to fall or rise quickly.

I know for sure that shit happens.  I know for sure that nobody knows exactly why.  I know for sure that, in the future, the stock markets will rise.  They will fall.  They will have days that they swing precipitously one way or another.  They will even have flat periods.

I also know another thing for sure.  Since March 8, 1817, not a day has gone by that someone on Wall Street wasn't in trouble for something.