What would happen?

Question

After the depression there were regulations put in place to try to prevent another depression from happenning. Many of these were removed during the Reagan/Mulroney?Thatcher years. Now with an even more globalized market what would happen if we had another Black Monday. Or could it even happen again?

Answer 1

The conditions that preceeded the Great Depression and the market meltdown in Oct 1929 were many and varied. It did not happen in a vacuum, all because of a bad day on Wall Street.

Those conditions do not exist today, very simply. Those conditions are in the history records, if you wish to dig them out and compare.

There were many problem areas that made the decline worse. You could trade stocks on 5% margin in 1929, and it was rampant; everybody was doing it. This is not possible today. The closest thing is stock futures, and not many people are using it. The leverage of 2:1 in a margin account is considered risky, and not many people do that either.

The Fed did nothing to pump liquidity into the market after or during the market crash. They were not set up to interfere. Now we have an oversight committee, and the Fed pumps liquidity daily, at even a sniff of fear, and micromanages the economy.

Now we have trading curbs to prevent a huge market decline in one day. Now we have the "Up tick" rule before selling short. All kinds of things have been implemented, that are still in force, that would step in front of, and preclude a meltdown.

One of the biggest problems after the meltdown began, was not short selling so much as margin selling. Because of the huge leverage, people were getting margin calls, and had to sell, which drove the price down more, which made more margin calls, etc. In Oct 1987, a big problem was the hedge funds selling futures as "insurance" against a further decline, hedging their portfolio's. Large funds now realize they can't all sell their entire fund at once, without killing each other and the entire market.

The Day Traders today cause huge volatility and market swings and whipsaws, making it seem a little insane, but they can only move the market so far before the pros and the funds and the banks and institutions all take over and bring the market back in line. Even the larger companies with a large float now have an emergency fund for buying back their stock when necessary, just for such an instance of a meltdown. Banks have standing credit lines open for floor traders and market makers and specialists in case trouble erupts.

No, I think it unlikely a meltdown could occur, even if the market conditions were ripe for it. It would not be quick, but rather a orderly decline, with many stops in between short bursts.

Answer 2

Regulation and deregulation are polar opposites of a cycle. When things like Tyco, Worldcom, and Enron happen, the government stepsd up regulation, and creates new agencies. Also, a few years afterwards, people were beginning to work to get the banking and finance industry deregulated. So, , bad things happen, the first thing people do is enact law and agencies to enforce those laws. Since they make steep regulations, when the red flag isn't raised they start to deregulate. Then, someone will overstep again, and then the government will overregulate again. This is the cycle since depressions could be documented.

I don't forsee a Black Monday and what not, becuase generally one little slip in money and banking industries sends off red flags (everything is monitored relatively closely, and regulation has been stepped up EVEN for hedge funds, long term capital mangagement, etc., recently because of potential risks involved). This steps up regulation and will let up when the threat is not so imminent.

To conclude, the market has pretty much checks and balances on most things. Not to say Black Monday's are impossible, just improbable.

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