A brief history of financial woe

Kansas City StarOctober 5, 2008 

It's a recurring theme of capitalism. Speculative manias, loose money and sharp operators combine to inflate asset bubbles that eventually burst. Every time, though, the market recovers — eventually. Here's a quick overview of financial crises and recoveries.

1907

Context: San Francisco earthquake of 1906.

Cause: Speculation in copper and railroad stocks fueled by trust companies.

Key moment: Speculative peak in early 1907 followed by a market crash in October. Stocks plunged about 50 percent from peak to trough.

Solution: Private-sector financier J.P. Morgan assembled a syndicate of bankers to lend $25 million to provide liquidity to help stem the panic.

Legacy: Crisis helped lead to the creation of the Federal Reserve System in 1913.

1929

Context: Post-World War I boom during the "Roaring '20s."

Cause: Speculation on new technologies fueled by borrowed money. Stocks were undermined by an economic slowdown and fear that Congress would pass the Smoot-Hawley Tariff Act.

Key moment: After peaking Sept. 3, the Dow Jones industrial average plunged on Black Thursday, Oct. 24, prompting Wall Street traders to leap from windows. Over 71 days, the Dow fell 47.9 percent. The crash presaged the Great Depression, which stretched over the following decade.

Solution: Massive government intervention after President Franklin Delano Roosevelt took office helped somewhat. Among other things, the Federal Deposit Insurance Corp. and Securities and Exchange Commission were created in 1933. But it took the military buildup during World War II to finally put the Great Depression in the past.

Legacy: Government took a greater role in the economy.

1987

Context: Five-year bull market after a decade of recessions and oil shocks.

Cause: Mounting speculation in stocks, luxury housing and commercial real estate undermined by tax law changes, a slowing economy, worries about insider trading and surging interest rates.

Key moment: Black Monday, Oct. 19, when the Dow fell 22.6 percent, its all-time worst one-day percentage drop.

Solution: Federal Reserve injected massive amounts of cash to clear the credit markets.

Legacy: Pumping cash into the system became the favored tool for curing market ills. Federal Reserve Chairman Alan Greenspan's reputation is established.

2001

Context: Tech and telecom bubble deflated, and economy entered a recession in March.

Cause: An era of "irrational exuberance" drove stock market prices much higher than their underlying earnings could justify.

Key moment: Sept. 11 terrorist attacks, which brought down the twin World Trade Center towers and closed Wall Street. When the stock market reopened Sept. 17, the Dow plunged 7.1 percent.

Solution: At the urging of Greenspan, the Fed orchestrated a series of short-term interest rate cuts to 1 percent. President Bush asked for, and received, another round of tax cuts.

Legacy: Historically low interest rates and lax regulation fueled a housing bubble. Millions of subprime and other exotic loans to borrowers with often-sketchy credit are bundled up and sold worldwide as securities, inflating housing prices and building activity to unsustainable levels.

2008

Context: Mortgage credit crisis.

Cause: Trillions of dollars in toxic, unmarketable mortgage-backed securities declined in value with home prices, wiping out capital at financial institutions and freezing credit markets.

Key moment: Major stock indexes have plunged more than 20 percent since late 2007, punctuated by a 7 percent decline in the Dow on Sept. 29.

Read more stories at kansascity.com

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