How did the stock market “crash”?

yellowhummin217: How did the stock market “crash”?
I’m desperately trying to understand the stock market and the Great Depression, so my question is this: What, exactly, is a stock market “crash,” and how did/does it happen? Explain this to me like you would with a mentally retarded first-grader.

Answers and Views:

Answer by kitz
The illuminati elitists used the Fed.Reserve to do it.Won’t find that in any history books,though.

Answer by Need Help
More money was going out of the country than going in. In result the prices of everything went up, while pay was still low for Americans. This created the Great Depression.

Answer by E B
A stock crash is just when the stock market falls in value very quickly due to heavy selling. The market loses value then. Durring the Great Depression, there were indeed some practices in the market that were learned to be bad such as heavy borrowing on margin in investing, so when stocks begin to go down, people have to sell them to pay off their loans, which in tern causes the stocks to go down more, andd so on and so on. Also we did not have banks insured by the government so once this started. bpeople started a bank run, taking out all fo their depsots and a lot of banks failed and people lost their savings.

However, other then in these instances, despite what they tell you in your high school history books, which are written by non economist leftist college proffessors, it was not laregly the free market that caused the depression, but rather government interevention.

The governments around the world took what would have been a recession and turned it into the great depression.

As mentioned before, there were market practices that contributed ot the stock crash, however, the stock crash and beginnning of the depression was triggered because of government intervention in europe with regards to the treaty of versialle that caused hyper inflation in germany and crushed the european economy. All through the twenties, the US was really the only industral power booming. Kaynes warned about this in his book “The Economic Consequences of the Peace.”

But beyond this, after the stock crash and then the beginnning of a recession, it was government that made it the great depression.

First: Hoover… the first to make big mistakes. First he signed the Smoot Hartey Act which put up huge trade tarriffs with other countries. This shut down trade and caused unemployment and higher prices together. Then, just as the country was falling into a recession, he over doubled the income tax rate with the highest marginal rate going from about 30% to 60%. This reduced the supply of labor and investment shutting down economic growth.

Second… FDR: Though he was genuine in his efforts, despite common believe, the new deal did not get us out of the depression. He did not listen to Kaynes. Though he created all these new jobs like park rangers and bridge builders, he raised taxes to fund them and in turn destroyed private jobs. He increased government consumption, but reduced private consumption. That part was a one to one tradeoff and is neutral. This is called the demand side effect.

But there was also a supply side effect. At high tax rates, to collect an additional dollar of governement revenue, you disincetivse labor and investment, (whos going to work overtime if 60% goes to the government?, or whos going to risk investing in stocks if the gov takes 60% of the gains?) it ends up costing more in private sector dollars. To collect an additional dollar for the government, it might cost the private sector 1.5 dollars. This is called the “deadweight loss” or “excess burden.” Higher the marginal tax rate, more extreme the effect. So for every park ranger he was creating, he was destoying more that one private sector job.

Keyns argued that FDR should take government debt to stimulate demand without reducing private consumption demand, (The demand effect) but he didnt listen. (In addition, Keyns didnt understand the supply side effect ,hurting the labor and investment supply. That was learned about in the 70’s stagflation era by people like friedman and laffer)

It wasnt until WWII that the gov started building up the military and took debt. This is when we finally got out of the depression and wages grew and unemployment lessened.

Had it not been for government interevention, the great depression would have been a recession, started by the stock crash tha was triggered by European events, but would have been over in a year or two. It was government interfearence and a lack of understanding of economic theory that led it to be the great depression.

Answer by OPM
The crash and the Depression had a common cause, shocks transmitted through gold because of the gold standard. A crash is a simultaneous attempt of a very large number of people to sell something. Even on its busiest day, the market only exchanges 1.5% of the shares outstanding. The market is very illiquid. That is a very busy day. If you wanted to sell 2% of the shares you would have trouble finding buyers, that is 33% more stock than on the ordinary busiest day. It is unlikely extra money would show up, so prices must decline. The ’29 crash was worsened by margin calls. At that time you only had to have 10% down payment on margin loans, rather than the 50% down payment currently required (except for pattern day traders). As stocks declined, brokers were forced to “call” loans on stocks. They literally called their customers and said bring cash. Since most people are illiquid, or had already put everything they owned in the market, the brokers seized their accounts and sold them at any price. The Fed New York organized a bailout, but the system overall fought them over it. The failure to bail out Wall Street, in part, triggered a 3% contraction of the money supply.

While 3% doesn’t sound like much, investment in the United States at that time, and I think actually today, is only 4% of the money supply. That is a 75% reduction in investment in plants, equipment and inventory. The nation ate its investments almost overnight, converting them into cash and not repairing machinary, building capacity, buying inventory or raw materials. A 3% shift in the supply of money resulted in a 24% unemployment rate within 12 months.

The crash of ’87 was different. It was more like a statistical run. Prices skyrocketed quickly. Everyone who was going to get in, got in, which meant there was no one else to sell to. Brokers walked into the market with hand fulls of sell orders, but none of them were holding buy orders. This set off a panic because a “market order” is an order for a broker to stand at the auction and continue to bid until they are the low bidder if selling or the high bidder if buying. So you had an entire market of brokers bidding as low as they can to find buyers and none would appear because everyone interested in owning stocks already was in the market.

It is rather like having a house that fifty elephants want into. They won’t fit all at the same time, so they crash the building by all rushing in at once.

Panics happen just like fear happens anywhere. If you cannot predict the future, then you can be afraid. People are loss averse and will flee in the face of potential losses. If everyone flees at the same time, you have a crash.

If you had invested in 1929, it would not be until 1962 that you would break even with the 90 bill rate, essentially a savings account. In the 1987 crash it only took a few months.