The year was 1987. Cocaine was the drug of choice. Ivan Boesky and Michael Milken were the leading names in a widespread insider trading scandal. The Tower Commission held Colonel Oliver North and President Ronald Reagan accountable for the Iran-Contra “arms for hostages” scandal. Mark McGwire and Barry Bonds played their first full seasons in the major leagues.
It was also the year of a precipitous decline in the Dow Jones Industrial Average: On October 19, the same day US warships shelled an Iranian oil platform in the Persian Gulf, the Dow dropped 508 points.
In and of itself, the crash was not unique. What was unique, in the wave of reforms that followed, was that the New York Stock Exchange instituted a braking system to slow the process of panicked stockholders selling en masse. It was hoped that the newly designed, computer controlled system was “crash proof” but of course that was not the case.
In the reform of 1987 inside operators gained access to the inner workings of the market. More than ever, the New York Stock Exchange became Voodoo Central for a market that has long depended on conjuring illusions of prosperity.
Ostensibly, the exchange was empowered to halt trading for up to two hours in a collapsing market. In reality, we observe the workings of the braking system every time we watch the ticker with a decline in progress. The numbers do not flow as one would expect in a free flowing market; rather, they stutter, stumble, stop and often freeze like a digital display losing its pixilation power.
When the market seemingly froze late on the trading day 27 February 2007 and then suddenly burst like a broken dam, a stiff 250 point drop was revealed to stunned traders. What we actually observed was a foot slipping off the brake.
The market is and always has been a house of cards. It was in fact the business model for the Enron-Anderson mega-corporation. Its function is to generate capital and protect the interests of its most powerful members. Like Enron, the market produces no useful product yet it thrives on the belief that its services are essential. Just as deregulation was the key to Enron’s excesses and ultimate collapse, an unregulated stock exchange has produced every imaginable variety of gaming, fraud and manipulation.
When the market crashes, as it inevitably must, the biggest losers are always the small investors. Going back to the Panic of 1893, when JP Morgan consolidated wealth and redesigned the nature of money in America, the power players are always protected. The eventual beneficiaries of every crash are the surviving elite, the only ones standing to pick up the pieces of shattered economies and shattered lives at bargain basement prices.
Always the one with the least to lose loses all. That is the way of the Dow.
Today’s economy has been wonderful for the wealthiest investors and a well-timed crash will only increase their net holdings.
Every market crash shares certain characteristics: overvalued stocks, under-funded debt, irrational optimism, and underlying economic weakness. There is one unique feature in the current crash (whether it is manifest in the coming days or further down the line): It is the first triggered by a foreign market. In 1987, there were concerns that Japan was too heavily invested in American assets but those concerns are dwarfed by the current ownership of American debt by foreign governments -- most notably China.
What is happening now is a perfect storm that will soon blow away the house of cards that is the American financial marketplace. The combination of national debt, individual debt and the looming implosion of the housing market is a deadly convergence.
The American president, already known for the worst foreign policy blunders in history, may soon have to account for the worst economic meltdown since the Great Depression. Like Iraq, Afghanistan and New Orleans, he is ill prepared to deal with the crisis.
He is a free market man. That is the way of the Dow.
As always with these dire predictions, I hope I am dead wrong. I know the people who would suffer most. I am one of them. I am not an economist, only an observer with eyes wide open.
I see the clouds, dark and foreboding on the western horizon, and I know there is a powerful storm heading this way. I see the writing on the wall and I know how to read.
How long will it take our leaders to see what I see, to read as I read, and begin to make fundamental changes?
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