Black Monday

Background

Black Monday refers to October 19, 1987, a significant day in financial history when global stock markets faced an unprecedented collapse. The crash began in Hong Kong and spread quickly through Europe and then on to the United States, where the *Dow Jones Industrial Average plummeted by about 23%.

Historical Context

The events leading up to Black Monday were marked by a speculative bubble fueled by a robust bull market during the mid-1980s. High valuation levels, speculative buying, and trading strategies such as portfolio insurance contributed to market instability. On that fateful day, the rapid sell-offs triggered panic, culminating in the precipitous decline in stock prices.

Definitions and Concepts

Black Monday: The nickname given to October 19, 1987, due to the catastrophic falls in stock markets around the world.
Dow Jones Industrial Average (DJIA): One of the primary indices representing the performance of 30 significant U.S. stocks, which fell by 23%.
Speculative Bubble: Economic cycle characterized by a rapid escalation of asset prices followed by a contraction.
Portfolio Insurance: A hedging technique designed to protect investment portfolios from falling prices but criticized for exacerbating the crash.

Major Analytical Frameworks

Classical Economics

Classical economists might argue that the crash was a market correction in response to inflated asset prices, eventually leading back to equilibrium without major government intervention.

Neoclassical Economics

Neoclassical perspectives would examine the role of market participants’ rational behaviors (or irrational exuberance) and the efficient market hypothesis where prices reflect available information, even in scenarios of extreme volatility.

Keynesian Economic

Keynesian analysis might predict the risk of spiraling downward demand, necessitating government intervention through fiscal policies to prevent a prolonged economic downturn.

Marxian Economics

Marxian economists could view Black Monday as an inherent instability and a crisis of capitalism, related to speculative excesses and contradictions within the capitalistic system.

Institutional Economics

This viewpoint might consider the roles of financial institutions, regulatory frameworks, and financial innovations (e.g., portfolio insurance) in creating systemic risk.

Behavioral Economics

Behavioral economists would study psychological factors, herding behavior, and market sentiment that contributed to panicked selling and market collapse.

Post-Keynesian Economics

Post-Keynesians may focus on financial market hysteresis, the lasting effects of initial shocks, and the need for active policy to stabilize financial systems.

Austrian Economics

Austrian economists might interpret Black Monday as a result of monetary manipulation and credit expansion leading to malinvestment and subsequent market corrections.

Development Economics

For emerging markets, Black Monday marked a lesson in financial interconnectedness and the susceptibility to shocks generated in major financial centers.

Monetarism

Monetarist analysis might stress the role of monetary factors and the need for controlled money supply to prevent such extreme financial events.

Comparative Analysis

Unlike the Great Depression of the 1930s, the aftermath of Black Monday did not lead to a global depression. Effective responses by central banks and regulators are often credited with preventing a more significant economic collapse. Comparing government interventions during Black Monday with those during other financial crises offers insights into efficient crisis management strategies.

Case Studies

United States: Federal Reserve’s intervention to stabilize the financial markets.
United Kingdom: The Bank of England’s measures to mitigate impacts on the London Stock Exchange.
Hong Kong: Initial epicenter’s responses influencing later crashes in other markets geographically.

Suggested Books for Further Studies

“Manias, Panics, and Crashes: A History of Financial Crises” by Charles P. Kindleberger.
“The Great Crash 1929” by John Kenneth Galbraith. (Though on an earlier crash, principles apply)
“When Genius Failed: The Rise and Fall of Long-Term Capital Management” by Roger Lowenstein. (Related to financial market mechanisms)

Stock Market Crash: A rapid and often unanticipated drop in stock prices.
Dow Jones Industrial Average (DJIA): An index representing 30 large, publicly-owned companies in the United States.
Speculative Bubble: A rise in asset prices significantly unfounded on actual value driven by exuberant market behavior.
Systemic Risk: The risk of collapse of an entire financial system or entire market.