By Alan Dessoff
Tulip Bubble
Tulip bulbs were brought from Turkey and introduced in Holland in 1593, quickly becoming a sought-after status symbol for the Dutch upper classes. By 1636, bulbs were traded on Dutch stock exchanges, creating speculation in the markets at all levels of society. At the market’s height, the rarest bulbs traded for as much as six times the average person’s annual salary, and many people traded or sold possessions to get in on the action. The prices did not accurately reflect the value of the bulbs, and they began to drop in 1637, causing panic as people sold at any price, with many suffering great financial losses.
South Sea Bubble
At the global height of the British Empire in the 1700s, the South Sea Company purchased the rights to all trade in the South Seas with a 10 million pound IOU to the British government. In a period of prosperity in the Empire, the company easily attracted investors who ignored deficiencies in South Sea’s management as they continued to buy new issues of its stock. When members of the management team recognized the company’s precarious financial position and the actual reduced value of its stock, they sold their own shares in 1720, and other investors followed, causing a panic sell-out as the company crashed.
Panic of 1907
A failed attempt by two men in October 1907 to corner the market on stock of the United Copper Company quickly triggered a broader and worsening financial crisis. As panic spread, runs on several large banks that had lent money to the cornering scheme caused the banks to close after millions of dollars were withdrawn. The New York Stock Exchange fell by nearly 50 percent from its peak the year before. As panic spread across the country, with continuing runs on banks and trust companies, many state and local banks as well as businesses entered bankruptcy. J. Pierpont Morgan stemmed the panic when he and other New York bankers shored up the banking system with pledges of their own money.
Crash of 1929
After a six-year run when the value of the Dow Jones Industrial Average increased fivefold, prices on the New York Stock Exchange peaked on September 3, 1929. Over the next month, the market fell sharply, losing 17 percent. Over the next week, more than half of the losses were recovered, then fell again. On “Black Thursday,” October 24, 1929, a record 12.9 million shares were traded, and share prices collapsed. They continued to fall at an unprecedented rate for a month, triggering the Great Depression of the next 12 years.
Silver Thursday 1980
Attempting to corner the silver market, Texas brothers Nelson Bunker Hunt and William Herbert Hunt invested heavily in futures contracts through several brokers. The price of silver jumped from $6 per ounce to a record high of $48.70 in 1979, and it was estimated that the Hunt brothers held one third of the entire world supply of silver that was not held by governments. When short-term weaknesses in the price of silver caused it to fall below their minimum margin requirement, and they were unable to meet a margin call for $100 million, a sharp sell-off occurred on Thursday, March 27, 1980.
Crash of 1987
As the U.S. Securities and Exchange Commission conducted a series of investigations into insider trading in early 1987, concerned investors began to leave the stock market. The New York Stock Exchange computer system could not keep up with their sell orders and as panic developed, investors started dumping their stock without knowing what the outcome would be. On Black Monday—October 19, 1987—stock markets crashed around the world, starting in Hong Kong and spreading west to Europe and the United States. The Dow Jones Industrial Average fell by 508 points (22.6 percent).
Japanese Asset Bubble
Real estate and stock prices were greatly inflated in Japan from 1986-1991, the result of government policies after World War II that made much money available for investment. Financial deregulation and monetary easing by the Bank of Japan brought about aggressive speculation, particularly in the Tokyo Stock Exchange and the real estate market. The Nikkei stock index reached an all-time high on December 29, 1989, banks granted increasingly risky loans, and choice real estate in Tokyo’s Ginza district was selling for the equivalent of $93,000 per square foot in U.S. dollars.
Dot Com Bubble
The Internet sector and related fields fueled rapid growth in the stock markets of the U.S. and other western nations, creating a speculative bubble between 1995-2001. The period was marked by the founding and also failure of many new Internet-based companies that became known as dot coms. Companies were financed primarily by venture capital and initial public offerings (IPO’s) of stocks to investors eager to get in on the action. Stock prices soared when the companies went public. The bubble peaked and burst on March 10, 2000, when the NASDAQ reached 5132.52 in intraday trading before closing at 5048.62.
1998 Russian Financial Crisis
On August 13, 1998, investor fears that the Russian government would devalue the ruble, default on domestic debt, or both, caused the country’s stock, bond, and currency markets to collapse. Four days later, the government took the two expected actions and declared a moratorium on payment to foreign creditors. Inflation in Russia reached 84 percent, welfare costs soared, and many banks were closed. Among other repercussions, depreciation of the ruble significantly raised domestic prices for food stuffs, reducing the demand for food and lowering food consumption.
2007 Credit Crisis
A crisis in the U.S. subprime mortgage industry triggered the broader 2007 credit crisis. The subprime mortgage crisis was characterized by an increase in mortgage delinquencies and foreclosures and a resulting decline of securities backing the mortgages. Although initially confined to the residential real estate market, the effects of the subprime situation spread throughout the U.S. economy and into markets worldwide. The impact was felt especially in the financial services industry, where many investment banks were using mortgage-backed securities (MBSs) to spread risk and free additional capital.
2010 Flash Crash
Worries about a debt crisis in Greece caused U.S. stock markets to open down on May 6, 2010, and continue dropping, until quickly recovering most of the losses. At 2:42 p.m., the Dow Jones Industrial Average had dropped more than 300 points for the day, and the equity market began to fall rapidly, dropping more than 600 points in 5 minutes. By 2:47 p.m., the market had lost almost 1,000 points. Twenty minutes later, it had regained most of the 600 point drop. A report issued jointly on September 30, 2010 by the U.S. Securities and Exchange Commission and Commodities Futures Trading Commission portrayed a market “so fragmented and fragile that a single large trade could send stocks into a sudden spiral.”