Market Crash

Categories: Stocks, Econ

See: Stock Market Crash. And be sure you think "Stock" in there; it's not like Safeway was on wheels going down a hill and then hit a wall.

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Finance: What was the Market Crash of 19...1 Views

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and finance Allah shmoop What was the market crash of

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1929 aren't people while there was cheap and easy credit

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and that's what the crash was really about Greed and

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a big bad bear market nobody could have imagined happening

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at the time right Nonprofessional retail investors were allowed to

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borrow some 90% of their investment portfolio to go buy

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new stocks beyond the stocks they already owned So quick

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Math If someone invested $1000 of their own hard earned

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savings and the stock tripled like it did in the

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mid twenties for a lot of easy money yeah well

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then that $1000 would have become $3000 in a very

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short period of time Great but in fact margin rules

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were almost non existent in era it was coming to

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allow investors to have 334 even five times they're invested

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equity as borrowed margin or set another way on an

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initial $1000 invested Many investors were stupidly allowed to buy

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$5000 worth of stocks So really volatile right If things

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go the wrong way it hurts But let's take a

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simpler approach If an investor had been allowed to margin

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there account up to 90% of its value like 50%

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is generally the maximum today that you could borrow Then

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that investor on $1000 of their own invested capital could

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have purchased $1900 worth of that stock that tripled So

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doing the math three times 1900 gets you What is

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that $5700 You pay back the $900 of margin that

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you borrowed against yourself and you'll have netted something like

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$4800 in profits albeit a little bit last because you'll

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have paid interest to the brokerage's that allowed you to

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borrow money in this manner That's a margin interests So

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in the margin case while the $1000 ofyour invested capital

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maybe 4.8 times your money rather of any paltry three

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times your money had you not been leveraged and that's

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way more dough to crow about right And in those

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days well that extra $1800 would have bought you like

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a house So everything was great 90 50 1926 27

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28 when the market mostly generally went up and provided

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easy money for the well heeled invest who could play

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the game and everyone was incentivized to keep the party

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rolling Yes that's a flapper girl Brokerages could charge fat

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commissions on transactions and nobody complained Why Well because the

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markets rise more than eight for those commissions Brokerages could

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also charge big interest rates on borrowed margin because the

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markets rise Masked all those costs and everything ended up

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sweet and beautiful is the prince married the princess and

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they went off to their castle in the clouds Oh

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but wait Then reality struck One day a not so

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kindly old woman offered Snow White the apple she bit

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and the market went down down down Such that panic

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selling ensued and more or less Everyone who was on

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the hook to pay back borrowed money in the form

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of margin had their loans called immediately by the kindly

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smiling brokerages as they more or less lost while mohr

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than everything meaning that not only did the investors lose

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all of their investments but the brokerages who had underwritten

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those loans themselves went bankrupt because the stocks went down

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so far that even the margin limit covenants were violated

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That is on the stock purchased $4000 with the $900

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a margin That $1000 worth of stock ended up being

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worth well $500 or maybe a lot less so even

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if the brokerages sold every share of that original $1000

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investment now worth only $500 While the $500 in original

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value remaining didn't even come close to covering the $900

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in margin the brokerages clients took out in loans in

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the first place So yeah it sounds like the crazy

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maddening crowds at work and the crowds back then were

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mad Everyone was buying on margin and if you weren't

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well then sucker you were just yet another sucker hauling

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bricks or ice or railroad ties for a living Life

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was way easier when you could just phone in a

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stop order in you know play golf all day So

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this was bad and 1/2 and it's part of the

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process of investors panicking They lost trust in the financial

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system of America Many investors then wanted to sleep on

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a pile of their hard earned saved $20 bills so

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they ran to the bank on Mass and asked for

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their money back They wanted to withdraw all their money

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from the banks And guess what The banks didn't have

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the money sitting around because they loaned it out for

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mortgages and car loans and horse loans or over the

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head back then So the frame then was a failed

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stock market Lack of trust in the banking system in

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America no credit then offered Teo Well pretty much anyone

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You can imagine what America would be like if we

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didn't have credit cards alive and well and no adult

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supervision to get this country out of the deep financial

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hole that I dug well along came FDR With the

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New Deal he primed the pump and creating federal guarantees

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for banking deposits upto a little certain amount like FBI

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see limits of 100 grand and change today He also

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enforced vastly stricter regulations on banks brokerages and pretty much

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anything financial such that going forward this country ran a

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dramatically Mohr conservative balance sheets and investment people had to

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disclose well pretty much everything The result Well gradually greed

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came to overtake fear again and in mid thirties or

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so the market slowly trundled northward again It's what I

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look like And then everything gave rise Teo Well this

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really beautiful sight Welcome to America

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