Amazing Video on What Caused The Stock Market Crash Of 1987.

Senate Session 2010-03-26 (11:38:58-12:56:02)

Hope you enjoyed that video. Here is some Interesting Reading.

In a recent article, we wrote about striking similarities between the stock market crash of 1929 and the economic collapse of 2008. The main similarity is the root cause of both these painful events − excessive leverage. We also made the point, that these events were way to painful not to learn from, and it is important to try to prevent similar events from happening in the future.

Before the stock market crash of 1929 investors were allowed to put 10% down to buy stocks. During the run up in the market there wasn’t an issue, until it reached the highs, and then started to come down. When the leverage started to unwind panic ensued (causing the crash in stocks) and this caused people to also fear their money wasn’t safe in banks. To make matters worse, when many went to their banks to withdraw their money, the run on the banks added to the painful situation.

Fast forward 80 years or so, and we had another period of excessive leverage, this time focused on real estate. With individuals, banks and other financial institutions getting over leveraged, they caused housing prices to get way overvalued. During the run up there wasn’t a problem, until there was a slowdown in the upward rally in prices. When everything started to unwind − the crash in the market was brutal.

After 1929, the government put in rules and regulations (that restricted leverage) so that investors could no longer put down a small fraction of the costs to buy stocks. This protected investors from major stock market crashes because it took the hot air of a grossly over leveraged run up − out of play. Even though there was a pretty serious correction in 1987, it was brief and the long-term bull market in stocks continued.

During the economic collapse of 2008, it looked like economists and government officials seemed to get that the root cause of the problem, was excessive leverage in the real estate market. They seemed motivated to do something about preventing consumers and financial institutions from getting so remarkably over leveraged.

But their convictions to make changes may be waning, now that the economy, stock markets and real estate markets are starting to get better. It would be a tragedy, that all the pain caused by the recent events are not going to be learned from, and don’t result in changes to try to prevent excessive leverage in real estate. Especially, when it gets so widespread, it can take down the American economy as well as the global economy. If changes to the rules and regulations aren’t made, it will make it likely, these devastating events will happen again.

This brings up the question of whether or not, changes to rules and regulations, can prevent these painful events from happening again. The short answer is no, but it is absolutely possible, to make crushing economic calamity caused by excessive leverage more difficult.

Evidence that it can be done is in the years since the stock market crash of 1929. Since then there have been serious corrections, but the stock market went up more often than it went down. Fortunately, the big stock market corrections in 1987 and in 2008 were over pretty quickly, with rapid recoveries that are a testament to the strength of corporate America.

In 1929, the cause of the market crash was excessive leverage, and that also caused the economic collapse in 2008. This time around, the excessive leverage was from consumers borrowing way too much money for over priced houses, and financial institutions in the middle spurring them on promoting this foolish course of action.

Banks and financial institutions had complicated names for what they were passing off as investments. With names like asset backed commercial paper, known by its acronym of ABCP, and other similar products. These so called “Investments” were merely creative ways for financial institutions, to put a few pennies down on their dollars worth of gambles.

The bottom line is with consumers over borrowing, on overvalued real estate, and banks also getting way too leveraged, created the environment for leverage to run rampant. Putting mortgages up (for some kind of investment vehicle with a complicated name) doesn’t hide the fact, that both the consumer and the financial institutions were excessively leveraged.

Putting in rules and regulations that prevent consumers and financial institutions from getting over leveraged on real estate − can be done and should be. It was done with stocks after the 1929 stock market crash, investors can still get over excited during bull markets or depressed during bear markets, but it took several decades for another severe stock market crash to happen again.

This time around the unwinding of the overheated real estate market took the stock market with it, bringing stock markets and economies throughout the world along for the gut-wrenching ride. This isn’t some kind of fanciful economic theory; it is reality that excessive leverage is extremely dangerous.

When children are small, good parents don’t let them run around with sharp objects because they can hurt themselves. In the economy and markets for stocks and real estate (excessive leverage is the knife) allowing individuals and institutions to run around with these weapons − is hazardous to everyone’s economic health.

Allan Barry Laboucan is a writer, researcher, public speaker, consultant, educator, and the founder of the Allan Barry Reports http://www.allanbarryreports.com which focus on commodities and resource stocks. He started his career almost 20 years ago. As a consultant to publicly traded companies, he worked with them to more effectively communicate their stories to a diverse audience of investors. This led to branching out into writing his reports since 2005. The focus of the reports has always been on fundamental research to find undervalued companies and refining technical information into a common sense report. Mr. Laboucan has national television exposure on BNN-Business News Network and has been a guest speaker at some of the largest investor conferences in the world. Visit http://www.allanbarryreports.com to find coverage of commodities, resource stocks, economics and more.

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