A History of Crashes and the Next One Coming

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From the end of WW2 through the end of the 1970s Wall Street and the stock market was a sleepy place.  Wall Street firms were partner owned and risks were low. The only exposure Americans got was when the nightly network broadcaster would read off what happened on the exchanges in a ten second blurb towards the end of the newscast.  Investment firms tended to be ethnic oriented and many were filled with tough minded guys from Queens or Brooklyn with perhaps a state university college degree. Wall Street was no place for the Ivy League crowd.


This began to radically change in the 1980s.  Firms went public so it was no longer partner money at risk.  Wall Street firms began to hire Ivy League grads under the assumption they From the end of WW2 through the 1970s Wall Street and the stock market was a very sleepy place.  Firms knew more about business.  Risk exploded.  Greed was good.  Finance was sexy.  This led to "irrational exuberance" and an eventual huge stock market crash in October 1987.  Although the biggest one day crash in the market's history, Wall Street very quickly self healed itself.  The crash did not spread to the general economy, which was doing well at the time.  However, the lessons were not learned and soon the financial sector was back at big risk taking.  Only now with technology and globalization firms were now becoming interconnected.


Prior to the 1980s, hedge funds were small in numbers and unknown.  By the 1990s that was changing quickly and hedge funds like investment banks were taking on more leverage and more risk.  In 1998, the world's largest hedge fund, Long Term Capital Management, led by a couple of quants imploded as the Russian and Thailand currencies were failing.  By then all investment banks were interconnected and the failure of Long Term Capital Management would take down them all.  So all of the investment banks, for the exception of Bears Sterns, ponied up hundreds of millions to bailout an errant hedge fund.  In a twist of fate, ten years later when Bear Sterns was going belly up all of Wall Street turned their backs.


1998 was right before the Internet explosion so most Americans knew little of this incident and how close it had come to crashing the economy.  And while like before in 1987 the overall economy suffered not a bit, lessons were again not learned.  Wall Street went right back to business as usual, only this time because of deregulation the large commercial banks joined their orgy of financial and risk excesses.


By the 00s with interest rates lowered down to 1% and the government pressuring banks to make mortgage loans to low income consumers for in return the ability to carry out endless acquisitions subprime mortgages generation began to soar.  Another factor was securitization, which enabled the banks to make horrible loans and pass them off to a bunch of clueless chumps in return for huge underwriting fees and the like.  The chumps took the outlandish risk of losses.  The three credit rating agencies willing to "whore" themselves for a buck simply rated all of the mortgages (packaged together called securities) the same as US government T bills.  By 2006, the chumps were getting wise to the game.  Wall Street firms were stuck with billions of bad loans that no one would buy.  Some firms even continued making the loans thinking the market would come right back.  Wall Street to supposedly protect themselves against losses bought derivatives and even sold such.  By 2008 the entire system imploded.


Starting off 2008 the economy appeared full steam ahead.  Corporate earnings, including Wall Street were at record highs. Unemployment was relatively low.  Oil prices were soaring due to strong demand (and speculation).  The masters claimed the financial system to be fully operational with few issues.  Of course by the end of the year it was a vastly different picture.


The Bush and subsequently Obama administration along with the Federal Reserve quickly went to work to bailout the fraudulent characters through direct bail outs, purchases of the garbage securities for what the banks valued them at, dirt cheap loans and loan guarantees.  Investment banks were allowed to convert to commercial banks providing them with an array of bailout benefits.  Wall Street within six months showed little to no sign that anything had ever happen.


Corporate America benefited from near next to free money in which they bought their competition, repurchased their stock and paid the C level enough money to choke a horse.  Corporations also went on a firing spree paring down costs.  Who paid for all this?  I'm sure you can guess who.  Again, no lessons were learned and the culprits suffered at the most some temporary stress (made smooth by tens of millions in the bank).


Fast forward to 2017, the DOW has soared above 21,000 and real estate prices particularly in desirable cities have increased to new heights.  Wall Street and Corporate America are awaiting their tax cut, deregulation and other Trump goodies.  However, it doesn't appear to be happening.  For once Washington DC won't be able to agree on how to make life better  for their sugar daddies.


So the stock market crashes, as does real estate, asset prices, and all of the side betting that has continued to go on.  Suddenly trillions not billions will be needed in cash.  Where will it come from this time? Will the Federal Reserve be allowed to digitize a couple hundred trillion?  If not, will the IMF provide fake money in the form of "Special Drawling Rights", or world currency?  Suppose the IMF doesn't move fast enough to stop what will surely be a New York second economic meltdown.  Will it be the Great Depression 2.0? 


Get ready, its coming soon.  And as usual Washington and New York will be the last to know.



Ric Wells Added Mar 21, 2017 - 11:22am
George maybe this country and the world needs to crash before it can fly again. Sadly the innocent will be the ones affected the most.
Jeff Jackson Added Mar 21, 2017 - 12:00pm
My favorite of the rigged game was the ability to take out insurance on other firms' investments. This is like taking out a policy on my neighbor's house. "Say Bill, I've taken out an insurance policy on your house, sure hope it doesn't burn down anytime soon." They are regulated by their pals, because, no one is as smart as they are, so they have to regulate themselves.
When GM went broke, the president of the U.S. called them and told them in order to get bailed out, the president of GM had to step down. When they called the presidents of the financial firms that melted down, almost everyone got to keep their job, and got bailed out as well. The evidence of this rigged game just keeps coming and coming and no one seems willing to stand up and let these cretins pay for their shenanigans. We, the people, pay every time and no one, not any politician or regulator, does anything. Where are all the conspiracy theorists on this? Forget Area 51, pay attention to the financial people. If it happens again, we'll get screwed again, for sure. Sad this republic has come to this. 
Patrick Writes Added Mar 21, 2017 - 8:00pm
...and the Democrat solution to every economic downturn is more government benefits for all. Except the government operates at huge deficits every year and one of the biggest items on the national budget now is interest on the debt. At the current rate, how long until interest on the debt is number one? 
What I think is happening is there isn't enough money to go around anymore. Not enough for the government to support everything it traditionally has. Not enough in the economy to support all the jobs it once did. 
And the minute the treasury prints a 20 trillion dollars to pay off the debt (which is possible) is the same point the world loses faith in the U.S. dollar a single person or entity never buys another treasury bill. Am I wrong? 
And isn't this the fate of another round of 'QEs on steroids' if another massive crash happens (ironically triggered by the original QE's from the last crash)? 
We're out of financial tricks if the economy implodes again, which is George's point. And he's completely right. 
Maybe, just maybe, Trump can move things back toward a traditional economy of producing goods and services and selling them to people. But unlikely. It appears Trump doesn't even know the definition of basic words like 'wire tapping' or 'trade war'. 
Billy Roper Added Mar 21, 2017 - 8:02pm
George, this is an excellent article. May I have your permission to resuse it, giving you full credit, of course?
George N Romey Added Mar 22, 2017 - 5:20am
Yes Billy you can. And yes Patrick the Fed is out of gimmicks and magic tricks. Only a total restart will save the economy in the long run, which includes a restructuring of the debt as well as consumer debt.  Its time the bankers share in the pain for the mess they help create.
Mircea Negres Added Mar 22, 2017 - 6:37am
George, this makes me think "it's called Wall Street, right? So chances are there is at least one wall? Well, put some coke-addicted brokers and bankers against it, then let loose with a SAW". Then again, maybe I'm getting cranky in my old age. Or as is more likely, I get uptight when lessons as expensive as the ones you enumerated are not learned. Of course, in such a case, I got a term for those people- retreaded retards. Good post. Hope the banking wankers wake up to the truth sooner rather than later.
George N Romey Added Mar 22, 2017 - 9:56am
The bankers have bought the system.  Only with a huge crash will they desist.  Unfortunately lots of innocent people will perish too.  Its like for every scumbag we rid ourselves of there will be thousands of victims.
Dino Manalis Added Mar 22, 2017 - 5:32pm
Corrections are normal, crashes should be avoided with good policies.  Simple lending regulations ought to be followed always, it's not discriminatory, it's a matter of common sense to avoid another financial crisis.  Banks have to lend and be able to take risks with their money, but not at taxpayers' and depositers' expense.
Leroy Added Mar 25, 2017 - 11:37am
You're correct, George.  A crash is coming.  I can say that unequivocally.  When?  I can't say.  Trends tend to continue.  It is like the guy going into the auto shop telling the guy behind the counter that his car won't run.  It is always the battery.  The first time, it was the carburetor (it was an old car).   The next time it was the tires.  The next time it was the engine.  The next time the transmission.  Then one day he walks in and tells the guy behind the counter his car won't run and the guy says, "It's your battery", to which he responds, "You're right".  The guy responds, "Told ya".  Yeah.  You're right.  A crash is coming.
George N Romey Added Mar 25, 2017 - 2:45pm
Leroy like crashes of 1929 and 2008 no one in power will expect it.  Things will be supposedly looking up, the worst behind us.  Its like when the nice doggie loves to be pet until you put your hands near its food bowl.  In fact, the more politicians and business leaders claim we are in a healthy economy the closer the meltdown is.
Also fully anticipate our two political parties going into overdrive to bailout and make whole the bad actors.  The American people will get it in the end in the end.
Jeff Michka Added Mar 25, 2017 - 8:04pm
Interesting article, Geo.  But have to ask, in light of this article and others you've written, are you wanting a crash?  Seems you are.  So others will "get hurt" and it will make you feel better?  A lot of Trumpeters were so delighted by the pending demise of any healthcare because it would have hurt "them," until the same Trumpeters realized it was actually them that would get it in the shorts, too.
Leroy Added Mar 25, 2017 - 10:31pm
"And the minute the treasury prints a 20 trillion dollars to pay off the debt (which is possible) is the same point the world loses faith in the U.S. dollar a single person or entity never buys another treasury bill. Am I wrong?"
In my estimate, Patrick, yes, you are wrong.  What you say is logical, but examining what happened to Japan, I think it will be the same fate for the US, massive deflation.  We have already headed in that direction with near zero interest rates.  The US can't afford for interest rates to increase.  Any increase will strengthen the dollar.  When all the other currencies race to the bottom, it all becomes relative.  You seem to imply massive inflation.  I predict massive deflation.  Although I welcome a higher dollar, deflation can be more crippling than inflation.  The US economy might be going to hell in a hand basket, but it will be the last to go down the drain.
George N Romey Added Mar 26, 2017 - 10:32am
Leroy that is what the military might of the US has been about, enforcing the role of the dollar as the world's currency.  We cannot afford even modest inflation in this country so yes I think eventually the Fed will monetize the debt.
Since our banking system is interconnected to everything else a default somewhere else craters our system. Even the default of a small country like Greece or Portugal which has little impact on the world economic stage would cause massive ruin on Wall Street.  The issue is with all of the counter party crap in the form of derivatives.  Why do you think the ECB is keeps Greece economically alive?
wsucram15 Added Mar 28, 2017 - 3:34am
Not sure if this is how it will come this time although this may be a precursor....
From a book I read recently from a Yale Professor-
Think of it this way, we think of Hitler and Stalin as super Villains, but they were elected into power with consent. Hitler was elected. After that the regime is changed gradually. There are no specific policies and then there is attack of some sort of event such as (the Reichstag –Hitlers parliament) and it is blamed on some sort of enemy. At this point, your rights will be suspended and it is at this time you must mobilize and fight for your own rights.  The Reichstag Fire is an old trick. So these are some ways to survive,

Don’t obey in advance (watch the drift and follow your intuition)
Defend institutions, they wont save you..you need to save them-remember what Kennedy said.
Believe in Truth, without truth we have no trust-without trust we have no law and without law we have no democracy. Getting rid of the truth is the shortcut to killing democracy. Think fascism and then the truth doesn’t matter, what matters is the message, the leader, the myth and totality.
Mobilize and look within your fears to fight if you are told there is an enemy. Tyranny loves slaves…

 Just something I read in my research...in the cyber stuff, something is coming.