I would like to be a better example than some inherited angst and desperation that has filtered through to me when times are tough, I don’t have think about where the dollar is coming from when it will come in one way or another and that is by redirecting my talents not by concentrating on the stable job with benefits and job securities that used to be guaranteed. I mean if that comes along all well and good but getting older here means one should be less apprehensive  about the market future than they are now.

You see strengths could be revealed by not yielding to fear of what might not be. If one has to succeed in what one does, that means also avoid those employments that are counterproductive and people that pull you down. Being useful means being able to share my experience with others who have not even had a chance to start out living.

Recovery is supposedly here but not in all job sectors. The building sector can boast of renewed spirit and the car makers are lucky citizens have forked more money to them for their restructuring. This means that one could be inadvertently counterproductive by continued worrying about what uses to put my talents to instead of taking action. All one has to do is just keep working the way they have and keep an open-minded spirit about keeping as many doors open as possible without thinking negatively. What one can do is continuing  to diversify and work between the different fields they have have chosen until something strikes pay dirt. Then everything should fall into place. Naturally this discourse although meant for all is easier said then done if you are born into severe poverty or desperation and the ways to escape that are extreme.

The Great Depression (1929)

The Big Crash

After the extravagance of the Roaring Twenties, the American stock market was getting shaky amidst speculative fears. Between 1 September and 21 October, the market fell by 40 percent. On 24 October 1929, the stock market began to drop drastically. It was known as Black Thursday.  By July 1932, it was down by 90 per cent.

By 1933, a quarter of the American workforce was out of job. Widespread unemployment and misery followed. It caused the world to plunge into a global depression that lasted for more than a decade until World War II.

People could be seen everywhere on the streets on Black Thursday, 24 October 1929, as the stock market crashed. (Photo courtesy of Flickr)

Recovery

World War II was declared in 1941 and the preparations brought the economy back on track.

Importance

The Great Depression, which is the worst that the world has ever seen, is still being used as a benchmark for how far the economy can fall.

The Oil Shock (1973)

The Big Crash

It began when the world’s oil producers quadrupled oil prices. On 17 October, they announced that they would stop shipping oil to the United States, its allies in Western Europe and Japan. It was a move to retaliate against US for supporting Israel in the Yom Kippur War against Iraq, Syria and Egypt in 1973.

The surge in oil prices caused a jump in inflation which led to the first instance of stagflation (people were out of jobs but prices remained stubbornly high). It was the worst thing that could happen to an economy.

Recovery

Oil prices stabilised in the late 1970s, but rose to a new peak when war broke out in 1981 between Iran and Iraq. However, it declined gradually again after the war.

Importance

The Oil Shock is brought up as a warning to the economy each time oil prices shoot up to new records.

Black Monday (1987)

The Big Crash

A dark cloud loomed across the nation as the trade deficit continued to widen and there was a rash of investigations into insider trading. On 19 October 1987, jittery investors who were hit by confidence moved en masse out of stocks into safer bonds. Computers automatically cut their traders’ losses by issuing a large number of sell orders. This caused the system to lag, creating mass panic among investors. They reacted by dumping stocks in the darkness before they fell by more.

That day, the Dow Jones Industrial Average saw the biggest percentage drop in history by 22.6 per cent, wiping out US$500 billion in one day.

Panic selling swept through Wall Street as the Dow dropped by more than 500 points. (Photo courtesy of Flickr)

Recovery

Global markets restricted trading. Liquidity was pumped into the system. Recovery was fairly rapid and the Dow rebounded to its previous level within a year.

Importance

Though macro-economic factors played a part, this was the first instance of computer trading systems contributing to such a huge loss. Also, no one knows the exact cause despite the US stock market losing almost a quarter of its value in one day.

The Asian Financial Crisis (1997)

The Big Crash

The Thai government ended the baht’s peg to its US dollar due to the speculative attacks to its currency. As a result, it caused the baht to halve in value and the Thai economy to come to a halt.

Most of Asia was affected as currencies buckled, stock markets crashed and asset price fell. The Thai stock market fell by 74 per cent, followed by Hong Kong’s 23 per cent and South Korea’s 7 per cent in a single day. Asian economies went into recession, causing global growth to slow down.

Local residents rushed to buy bags of government discounted rice with the little money they had in Jakarta, Indonesia, which was one of the countries hardest hit by the Asian Financial Crisis. (Photo courtesy of Flickr)

Recovery

The road to recovery was slow and painful despite help from the International Monetary Fund. It suffered more economic shocks along the way. But the economies in the region got back on track when they were boosted by a global boom.

Importance

Asian governments have learnt their lessons from the financial crisis and built up hefty reserves. Thus, it helps them to be better insulted from the current downturn.

The Dot.com Bust and 9/11 (2001)

The Big Crash

With the rise of internet in 1995, a completely new online market was created. Companies and investors greedily invested into it but their dreams were dissolved as newly listed start-ups folded quickly for having spent and borrowed more than what they could earn in time.

The US Nasdaq lost nearly 9 per cent within a week in March 2000. Furthermore, the terrorist attacks on 11 September 2001 caused The Dow to suffer its worst losses which weakened the economy even further.

Recovery

Western countries such as the United States and the European Union were worst hit. They went into recession. However, the market rebounded in 2003.

Importance

The crisis is the most recent example of what happens when a healthy stock market abruptly crashes when it is being pushed up by speculative activity.

SARS and Iraq War (2003)

The Big Crash

The world was badly hit by the Sars epidemic and the Iraq war. Asian economies were forced back into slower growth and recession fears, just when they were starting to recover from the financial crisis of the 1990s.

Recovery

After Sars was contained, many economies including Singapore and China embarked on an economic expansion which was fuelled by the long-delayed property booms, as well as growing demand in exports.

Importance

People remember the downturn as it is still fresh in their minds. Much has been experienced and learnt during the Sars period. As such, countries will be more prepared to combat future epidemics.

The Current Global Economic Crisis (2008)

The Big Crash

The US sub-prime mortgages became worthless when home owners defaulted on their loans. This caused the housing and property market to collapse, which wiped out Wall Street’s revered investment banks. It pulled down companies, stock markets and economies around the world along with it.

On 29 September, the Dow posted its biggest loss in history by falling 777.68 points. As a result, more than US$1 trillion was lost in a single day in the US.

The powerful Group of Seven finance chiefs discussed ways to fight the global economic crisis and to restore confidence in the financial system. (Photo courtesy of Reuters)

Recovery

Countries around the world have come up with drastic measures to counter the financial crisis but recovery is nowhere in sight yet.

Importance

According to experts, this is the closest the world has come in rivalling the Great Depression. With the complex financial system still unwinding by the day, the crisis is nowhere near over. Countries have to stay united to combat it together.

The world has come a long way and has learnt its lessons from past stock market crashes of the century. I am confident it will pull through the current financial meltdown. Let us pray the crisis will end soon. Let us remain as optimistic as we possibly can. Let us stay united together!

With the recognition that the default rates were outside the predicted ranges when the packaged mortgages were sold large investment institutions did not want to purchase new securitized mortgage securities, and therefore banks found it increasingly difficult to sell their mortgages to investment banks that would package them into securities. Banks had to reduce their lending because they could not easily sell their mortgages. Since banks could not sell as many mortgages, the banks’ supply of capital for new loans was significantly reduced. The reduction in lending reduced the demand for homes, causing declines in home values, for the first time in decades.

Meanwhile payments on older adjustable rate mortgages were adjusting upward. As payments rose and home values fell, it created an incentive for homeowners to default on their mortgages, putting more homes into foreclosure and more homes on the market for sale by banks that foreclosed on homes. These foreclosed home sales further depressed home values. Soon, even homeowners with fixed rate mortgages were questioning whether to continue paying their mortgages on their homes with falling values. Many such homeowners began to default on their loans, including an increasing number of “prime” borrowers – those who were not considered at risk of default.

Meanwhile, as defaults rose in the packages of mortgages held by banks, insurance companies, and Fannie Mae and Freddie Mac, the value of those securities began to decline, reducing the value of such assets on the books these firms. Furthermore, these institutions were required to “mark the securities to market” meaning carry the mortgage securities at fair market value. With so many sellers of these securities, the market value was significantly below the original cost to purchase these securities, and in some cases there was no market price – there were simply no buyers. Accordingly, those securities had a zero value on the balance sheet of the institutions.

As a result, the debt to asset ratios of these firms began to rise, and some of these institutions became technically insolvent. Many of these institutions found themselves in violation of their loan agreements on their own borrowing. Most corporate borrowing requires the borrower to agree to maintain a certain level of liquidity – cash reserves or securities that can be readily sold. These agreements are called loan covenants. To increase liquidity, many institutions tried to sell their mortgage securities, and as many institutions tried to sell, suddenly there were no buyers, and the value of those assets declined precipitously. Many hedge funds had purchased securitized mortgages with leverage, borrowing up to 30 times the underlying value of the securities on the theory that home prices only go up and very few homeowners would ever rationally default on their loans because the value of their homes would always increase.

As the new reality of homeowner defaults set in, hedge funds began to dump the securitized mortgages in their portfolios at any price, but that often was not sufficient to raise the capital needed to de-leverage the hedge fund. Therefore, hedge funds began selling any of their liquid assets to raise capital. This depressed the value of many other assets. Many hedge funds could not de-leverage, and defaulted on their loans from banks, and the banks could not sell the collateral (the securitized mortgages) for the loans because there were no buyers. These defaults put further pressure on the banks liquidity: their loan portfolios were declining in value and their securities were declining in value. Many banks, other lenders to hedge funds, and holders of securitized mortgages, were forced to begin selling their other liquid assets, and this selling caused the values of those assets to decline as well. The huge decline in stock prices over the past two months was in part caused by the need of firms to find liquidity from the assets on their balance sheets. Many firms had to reduce their debt burden because of loan covenants. As asset values declined, the firms had to reduce their debt by paying it back, and had to raise cash to do that. Thus, there was a massive amount of “de-leveraging” – reduction of debt.

With de-leveraging and efforts to increase liquidity, banks are not lending or not lending in the quantities they did historically. Turning cash into a loan that might go into default is perceived as too risky during this uncertain time. With banks simply not lending, the credit markets are frozen. This is what was meant by the credit markets “seizing up” creating the current credit crisis.

Exacerbating this credit freeze is that the failure to lend is reaching into other banking areas as well. Loans to construction companies, homebuilders, and letters of credit for shippers of goods, are all expensive or non-existent. Even inter-bank lending and short-term borrowing in what is called the commercial paper market has shrunk dramatically, causing many companies to lay off employees to meet short-term cash needs. State and local governments that historically relied on short-term borrowing in between tax receipt periods have been especially hard hit. In many markets, the lack of lending is founded on a mistrust of the borrower’s ability or willingness to pay back the loan. Thus, there is a crisis of confidence in the loan market that is making the credit crisis worse.