Two Democratic presidents. Two mass unemployment crises. Two federal spending plans to rescue the economy. So how does Biden’s stimulus stack up to Roosevelt’s New Deal? Maybe it’s bigger.
President Joe Biden’s large-scale federal spending has already earned comparisons to the New Deal, but a behavioral economics professor says the plan is setting its own precedent.
“People think of the New Deal as this really, really aggressive response to the Great Depression. But part of the reason the Great Depression lasted so long was that Roosevelt and the country, the political leaders were really concerned about deficits,” Leonard Burman, the Paul Volcker Chair of Behavioral Economics at Syracuse University’s Maxwell School, told Insider.
The New Deal packages yielded some historic measures – like Social Security and modern unemployment insurance (UI) – but didn’t actually bring the Great Depression to an end. Part of the proof of this is that FDR rolled out multiple New Deals, including a so-called Second New Deal, but high unemployment wasn’t really put to bed until wartime mobilization set in.
According to Burman, the New Deal “limited some of the pains by creating jobs for some people that needed them and providing other assistance, but it was way too small.”
Roosevelt’s New Dealers “spent much less than would have been appropriate for the size of the economic downturn at that point,” he said, “and we didn’t really recover until there was a massive infusion of spending in World War Two.”
When you contrast that with Biden’s American Rescue Plan, he said, “we’ve never done this.”
Biden’s big spending looks set to continue. He is due to roll out his next multitrillion-dollar package tomorrow, on infrastructure, which could come in anywhere between $3 trillion and $4 trillion, as The Washington Post reported.
Showing that deficit concerns remain a consideration, the package, which will be split into two parts, will include a large tax hike. However, that may be more to calm the inflation fears that have been roiling the markets since Biden took office, instead of the deficit specifically. The movement in Treasury yields indicates market concerns over future runaway inflation that hasn’t arrived yet and not on indicators of it happening at present.
Burman reiterated that this is something new, and should be useful to economists in the future. “I’m an economist. I like data,” he said. “I mean, this has got to be a new data point, and it will be helpful for us to calibrate future response to future economic downturns.”
The White House did not respond to a request for comment.
For as long as there have been financial markets, there have been market crashes.
The March 2020 market crash – driven by the rapid spread of coronavirus around the world – is just the latest in a long line of panics throughout the hundreds of centuries that have roiled markets, crashed economies, and led to financial ruin for countless people.
Generally driven by investor panic and loss of confidence in the markets, often after a period of excitement and speculation, market panics are features of the financial and economic system around the world.
From the infamous Tulip Panic of the 17th century, to the 2008 financial crisis, Markets Insider decided to round up a handful of the most notable and interesting crashes in market history. Check them out below.
Covid-19 Market Crash, 2020
The novel coronavirus outbreak not only led to a global health crisis, but also the most recent global financial recession beginning on February 20.
Although the biggest impact of the crash was initially felt in China, it quickly spread to the rest of the world as the virus spread, forcing lockdowns and plunging economic activity around the globe.
Markets were initially stunned, and on March 16, the S&P 500 reported its steepest drop since 1987 as many businesses were forced to shut down and travel restrictions were set in place. The market’s reaction was sharp but short-lived, and by June, stocks were back to their pre-crash levels.
As the May futures contract for oil expired, many traders were faced with taking delivery of physical oil, so were forced into panic selling, which in turn pushed the commodity below zero.
In March, oil producers cartel OPEC held discussions to reinforce production cuts amongst allies from 2.1 million barrels per day to 3.6 million bpd and to continue this until the end of 2021.
Russia disagreed and a price war was launched by OPEC’s top trading member Saudi Arabia to fight for a greater market share.
Oil lost almost a third of its value with Brent crude crashing 24% to $33.36 and US oil dropping 34% to $27.34.
China’s Stock Market Crash, 2015
Over three weeks in June 2015, fear of a market seizure and growing financial risks across the country caused chaotic panic selling which erased over $3 trillion in the value of Mainland shares.
Possible triggers of the market crash include a surprise devaluation in the Chinese yuan and a weakened outlook for China’s growth, which then put pressure on emerging economies that relied on China for growth.
The crash’s worst day was on June 12, when the Shanghai stock index lost about a third of its value, while losses were even more pronounced in the smaller Shenzhen Composite.
Known to be the worst crash since the Great Depression, the 2008 financial crisis grew out of deregulation in the financial industry that eventually led to the inflation of an enormous housing bubble.
Like all bubbles, it eventually popped, as housing supply overtook demand and house prices fell, making it difficult for homeowners to meet their mortgage obligations, leading to a wave of defaults
The crisis worsened when investment bank Lehman Brothers — which was highly exposed to the sub-prime market — collapsed. Numerous other lenders were bailed out by governments around the world, and markets crashed, before the global economy spiralled into recession.
With its origins in Thailand, a severe financial crisis struck many Asian countries in late 1997.
Foreign investors were worried that Thailand’s debt was rising too rapidly when Bangkok unpegged its currency from the US dollar, and general confidence evaporated.
Indonesia, South Korea, Hong Kong, Laos, Malaysia, and the Philippines were the most affected countries as currency declines spread rapidly across, and they saw a drop in capital inflows of over $100 billion.
The Asian crisis eventually destabilized the global economy at the end of the 1990s.
The “Roaring 20s” were an age of excess and wild speculation. That all came to an end in September and October 1929, culminating in Black Tuesday, 29 October, when 16 million shares were sold on the NYSE in one day and the market collapsed
On 21st October, panic selling kicked off and by the tragic 29th, prices fully collapsed.
Finance legends like the Rockefeller family and William Durant ventured to correct the market by purchasing large quantities of stocks, but the rapid price drops did not stop.
By 1930, America was in the Great Depression — possibly the most painful crash in recorded history.
It spread well beyond the US, and by 1932, the world’s GDP had contracted around 15%.
On the historic Black Friday, 9 May 1873, unlimited speculation in banks and companies that existed only on paper set off a massive fall in value of shares on the Vienna stock exchange and caused a wave of panic selling.
This marked the beginning of a lesser-known Great Depression that lasted five years and spread across Europe and to the US.
The crash brought economic growth in the Habsburg Monarch to an end, and harshly impacted a group of bankers, some counselors of the imperial court and friends of the Emperor, including the imperial family itself.
The Tulip mania was one of the first recorded financial bubbles, and occurred primarily in the Netherlands between 1634 and 1637.
After tulip bulbs contracted a non-fatal tulip-specific mosaic virus, their prices rose steadily and made the already overpriced flower even more popular and exotic. Tulip bulbs then saw a 20-fold increase in value in just one month.
But as it happens in speculative bubbles, holders eventually began to sell off their tulips to solidify their profits resulting in a doom loop of continuously lower prices. Although it was not a widespread craze, it hurt a handful of buyers in the short-lived luxury market.
More than anything, the tulip bubble crash serves as a lesson for the perils that excessive greed and speculation can lead to.
Three little words strike more fear into investors’ hearts than anything else: stock market crash.
It’s not just that they mean losses (another word that scares investors). It’s also that no one knows for sure when a stock market crash is going to happen – though the signs were often there in retrospect – or even exactly what it is. There’s no one official definition.
Generally, though a stock market crash is seen as a single trading day in which a stock exchange/market drops by at least 10%. But it can also be “anytime there’s suddenly a lot of volatility that makes you wonder whether the world is coming to an end tomorrow,” says Terry Marsh, a finance professor emeritus at Haas School of Business at the University of California Berkeley.
Here’s the scoop on eight of the most notable stock market crashes in recent financial history, their causes, and their fallout. Unless otherwise noted, they occurred on US exchanges, though the effect often spread to other countries.
1. The Panic of 1907
What happened: A group of investors borrowed money from banks to finance an effort to corner shares of United Copper Company. UCC went bust under the weight of speculation, and then other firms followed: Stocks lost 15% to 20% of their value. Public confidence in banks fell and depositors rushed to withdraw their money, causing ruinous runs.
The damage: Some banks and stock brokerages failed, and many top executives at surviving financial institutions either resigned or were fired. Businesses couldn’t get bank loans, causing them to fail.
What resulted: “We learned that when more than one financial institution is in trouble,someone must inject liquidity” into the system, says Carola Frydman, a finance professor at Kellogg School of Management at Northwestern University. At the time, private financier J.P. Morgan put together a rescue package that finally restored order on the exchanges. Realizing how economically significant the stock market had become, however, the US government created the Federal Reserve System to formulate monetary policy and provide emergency funds in crises.
2. Black Monday and Tuesday, Oct. 28-29, 1929
What happened: For nearly a decade, the stock market had kept rising in a speculative spiral. Overproduction in factories and a Roaring 20s giddiness led consumers to take on too much debt and believe financial instruments would climb perpetually higher. Finally, catching on to the overheated situation, seasoned investors began cashing out. Stock prices dropped first on the 24th, briefly rallied – and then went into free fall on Oct. 28-29. The Dow Jones Industrial Average dropped 25% in those days. Ultimately, the market lost 85% of its value.
The damage: The Crash of 1929 didn’t cause the ensuing Great Depression, but it served as a wake-up call to massive underlying economic problems and exacerbated them. A panicked rush to withdraw money caused overextended banks to fail, depriving depositors of their savings. Deprived of lenders, businesses began to collapse, leading to scarcities of goods. As many as 25% of Americans ended up jobless, spurring foreclosures, migration, and demoralizing poverty. Gross domestic production (GDP) dropped 30%. The economic woe spread overseas, hitting Europe particularly hard.
What resulted: A slew of reforms and new legislation. They included the Glass Steagall Act of 1933, which separated retail banking from investment banking – and led to the creation of the Federal Deposit Insurance Corporation (FDIC) to insure bank depositor funds. The National Industrial Recovery Act was passed to promote stable growth and fair competition, and the Securities and Exchange Commission (SEC) was established to oversee the stock market and protect investors from fraudulent practices.
3. Black Monday, October 19, 1987
What happened: Sinking oil prices and US-Iran tensions had turned the market pessimistic. But what led to the wipeout was the relatively new prevalence of computerized trading programs that allowed brokers to place bigger and faster orders. Unfortunately, they also made it difficult to stop trades soon enough once prices started to plummet. Ultimately, The Dow and S&P 500 each dropped more than 20% and Nasdaq lost 11%. International stock exchanges also tumbled.
The damage: Fortunately, the crash didn’t cause a recession or hardship. Trader Blair Hull helped set things right by putting in a large order for options at the Chicago Board Options Exchange on Black Monday. The main casualty of the crash was consumer confidence. It was essentially a computer-IT “plumbing problem” that “scared people,” says Marsh.
What resulted: The financial community realized how stock exchanges around the world were interconnected. The SEC implemented circuit breakers, also known as trading curbs, to halt trading for the day once a stock exchange declines by a given amount. To ensure liquidity, then-Federal Reserve Chairman Alan Greenspan ensured credit was available and made it clear that “the Fed has your back,” says Marc Chandler, a chief market strategist at Bannockburn Global Forex.
4. Japanese Asset Bubble Burst, 1992
What happened: Japan’s real estate and stock markets had flown to unprecedented heights in the 1980s. At first backed by fundamental economic growth, the spiral had become speculative by the decade’s end. In 1992, the bubble of inflated real estate and stock prices finally burst.
The damage: The Nikkei index fell by nearly half, setting in motion a minor, slow-moving Japanese recession. There were never mass business closures – though “high-end restaurants didn’t do as much business,” says Marsh – but not much growth either. US investors weren’t hurt badly because they typically had only small amounts of Japanese stocks in their portfolios. Japanese investors, however, never fully regained their confidence in the stock market.
What resulted: The Japanese government placed subtle controls on its financial system. “Still, it took decades for the Japanese [stock] market to recover,” says Tyler Muir, an associate professor of finance at UCLA Anderson School of Management. The economy too: In fact, the 1990s are dubbed “The Lost Decade” in Japan.
5. Asia Financial Crash of 1997 (aka Tom Yum Kung Crisis)
What happened: Under pressure because the country borrowed too many US dollars, Thailand saw its baht currency collapse on July 2, 1997, declining 20% in value, and spurring debt and defaults that sent a ripple effect throughout several Asian financial systems.
The damage: Currency in other Asian countries, including Malaysia and Indonesia, tumbled as well. “In South Korea, women were giving the government their gold rings to melt down” and make into ingots for international sale to help a suddenly bankrupt nation pay off its debt, says Chandler.
What resulted: “East Asia got the lesson to self-insure” after the International Monetary Fund imposed tough measures in exchange for financial relief, says Marsh. And the crash raised awareness of the interconnectedness of regional financial markets and economies.
6. Dot-Com Bubble Burst, 2000-02
What happened: In the 1990s, with the internet revolutionizing professional and personal life, stocks in companies with “.com” after their names surged. Twelve large-cap stocks rose more than 1,000%; one, chipmaker Qualcomm, saw its stock increase more than 2,500%. Investors gobbled up shares of tech IPOs but seemed unaware that not every company tied to the World Wide Web could sustain its growth – or even had a viable. “A new economy was being born and it was hard to place a value on it,” Chandler says. But finally, people did – aided by some tighter money policies imposed by the Federal Reserve. They started to sell. By October 2002, the tech-heavy Nasdaq had fallen more than 75% from its March 2000 crescendo of 5,048.62.
The damage: Pets.com, Toys.com, and WebVan.com went out of business, along with numerous other internet companies large and small. Even larger, blue-chip tech companies suffered.
What resulted: Along with revealing that many tech startups had no clothes, “the overall downturn also exposed things that otherwise would have stayed hidden” in other firms, like accounting irregularities, says Muir. The Sarbanes-Oxley Act of 2002 was established to protect investors from corporate fraud. And “a lot of broker-dealers probably did more due diligence before they put more money into any internet funds,” says Marsh.
7. Subprime Mortgage Crisis, 2007-08
What happened: At the turn of the 21st century, real estate was hot. Hungry for commissions, lenders practically gave money to under qualified homebuyers. Investors bought up mortgage-backed securities and other new investments based on these “subprime” loans. Eventually, though, the inevitable happened: Burdened by debt, borrowers began to default, property prices fell, the investments based on them dived in value. Wall Street noticed, and in 2008 the stock market started to decline. By early September, it was down almost 20%. On Sept. 15, the Dow Jones Industrial Average dropped nearly 500 points.
The damage: Financial giants that had invested heavily in real estate securities, including venerable firms Bear Stearns and Lehman Brothers, failed. Businesses couldn’t get loans because banks “didn’t know who to trust,” says Muir. Unemployment approached 10%. The misery spread overseas, where the Nikkei dropped almost 10% on Oct. 8, 2008. The US entered the Great Recession, which officially lasted until 2009, though economic recovery remained sluggish for years.
What resulted: Through the Troubled Asset Relief Program, or TARP, the federal government rescued hobbled financial institutions; it also assumed control of other agencies, like troubled mortgage-market-makers Fannie Mae and Freddie Mac. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 regulated swaps and other exotic investments for the first time and led to the creation of the Consumer Financial Protection Bureau.
8. COVID-19 crash, March 16, 2020
What happened: By the beginning of 2020, COVID-19 had spread widely in China and then to Europe – notably Italy – and to the US, where restaurants and nonessential stores closed to stem the tide of infection.
As investors realized the extent to which the coronavirus could spread and negatively affect the economy, the stock market began to quiver. On March 16, with mandatory lockdowns being announced,the Dow Jones Industrial Average lost nearly 13% and the S&P 500 dropped 12%.
The damage: Struggling businesses furloughed or laid-off workers and some shuttered forever. Restaurants were limited to deliveries only and then partial-capacity table service. Travel restrictions kneecapped the airline and hotel industry. The human loss of the COVID pandemic has been devastating, with more than 300,000 deaths in the US and 1.5 million worldwide. As of September, more than 31 million people were either unemployed or lived with an unemployed family member, according to the Center on Budget and Policy Priorities.
What resulted: The Cares Act of 2020 allowed extended unemployment payments, and government stimulus funds helped Americans stay afloat. The stock market bounced back as e-commerce companies like Amazon, makers of personal protection equipment, and pharmaceutical companies surged in value. Many businesses whose employees worked remotely during the COVID crisis said they would continue a similar arrangement once the pandemic passes, but “it remains to be seen whether it’s a permanent shift,” says Muir.
The Financial Takeaway
Many of the above examples demonstrate how disasters that strike stock exchanges can leave positive legacies in their wake – even though they cause plenty of immediate pain.
Some stock market crashes maul economies for years. Others merely shake up investor confidence, making people more cautious in their choices. They can cause human tragedies and result in game-changing government reforms.
While the triggering events for stock crashes vary – involving everything from copper-mania to condo prices – the ultimate outcome has always been the same: The market recovers.