China's Black Monday and the history of great financial crashes

Chinese media have called it "Black Monday" – the Shanghai Composite index closed down 8.5% at 3209 points, the worst single day losses since the financial crash circa 2008. The painful unravelling of China's over-leveraged equities will probably go down as a reminder that laissez faire markets and planned economic strategies don't mix.

China's Communist government tried to intervene and provide a quick fix to its stock market problems: firstly they tried to pump lots of capital into Chinese blue chip stocks to prop up the market, and later prevented investors from selling their falling equities.

It also highlights the dangers of over-zealous and scaled up shadow banking activities. There are about 90 million private Chinese investors, many of whom have availed themselves of all manner of margin loans and casual credit facilities. The resulting mess will probably require root and branch regulatory reform to sort out, once the blood has stopped flowing.

To celebrate this unfortunate incident, IBTimes looks back at some other memorable financial crashes.

The 2008 global financial crash

We are still in recovery from the financial crash of 2007/2008, which is considered to be the worst collapse since the Great Depression. It precipitated a global recession which officially ran from 2008-2012 and also spawned a sovereign debt crisis in Europe, which Greece most notably remains consumed somewhere within.

The causes of this series of events are complex, but consensus points to a combination of structured debt products being passed around by banks and hedge funds, derived from an over-heated US housing market which peaked in 2004. This led to reams of restructured and repackaged subprime mortgage debt infesting the financial system. The rout spread from Wall Street across the planet and finally the entire banking system had to be bailed out by respective governments.

The fact that bankers and money managers carried on extravagant lifestyles fuelled by enormous bonuses, has left a bad taste in the austerity period that followed, and probably ruined people's trust in the financial system for good.

The Dotcom bubble of 2000/2001

Around the turn of the millennium, you could switch on your TV and every single advert during a commercial break was for some sort of dotcom company. Companies attached an "E" to the start of their name and a ".com" at the end, and investors seemed happy to overlook traditional valuation metrics such as P/E ratio.

The Nasdaq hit a climatic peak of 5,132.52 on March 10, 2000. The indeterminate revenue model of online firms was further bolstered by a confidence in wireless technology, waiting in the wings to bring the internet to mobile devices. In this respect the ensuing bust that followed could be put down to premature market expectations and bad timing.

Although some companies vanished completely, others lost a large portion of their market capitalisation but remained stable and profitable (Cisco Systems saw its stock decline by 86%), while the likes of eBay and Amazon would later surpass their dotcom bubble peaks many times over. Today's crop of billion dollar start-ups (known as "unicorns") concentrated in trending areas like P-2-P lending should take note.

Black Monday (1987)

The exact date in question is 19 October 1987, which saw a stock market crash that began in Hong Kong and spread to Europe and the US. The losses came fast and very large: the Dow Jones shed 508 points to 1,7387.74, a drop of 22%.

The transition to computerised program trading on Wall Street was where most of the blame eventually fell. London's stock markets also switched to computerised trading earlier that year, the fabled "Big Bang".

The media informed a dismayed public that program trading continued blindly selling stocks as markets fell, exacerbating the decline. Some economists said computerised trading was behind a speculative boom which led up to the crash, which was simply a return to normalcy.

The Japanese asset price bubble (1986-2003)

Japan was one of the undisputed economic powerhouses of the 20<sup>th century, leading the world in car production and consumer electronics. But an economic bubble inflated thanks to overheated and rapidly accelerating asset prices across real estate markets and stock prices in the period from 1986 to 1991. The bursting of this bubble led to what has been called "the Lost Decade".

By 1990 Japan's Nikkei stock index had fallen to half its peak and the Bank of Japan was exercising repeated monetary tightening. Japan's economy continued to decline over the next ten years weighed down by a huge accumulation of non-performing asset loans.

The Wall Street Crash of 1929 and the Great Depression

The stock market crash which began on 24 October 1929 is also known as Black Tuesday. It was the most devastating in US history, signalling the start of the 10-year Great Depression, affecting all industrialised nations.

The decade prior to the Wall Street Crash was of known as the "roaring twenties", a period of post-war optimism characterised by plenty of greed and excess. It was fuelled by an exodus towards big cities and concentrated in industrialisation. Emigration from rural communities saw a huge decline in agriculture, which would be later seen as a factor. It was also an era when many people speculated on Wall Street thinking the stock market would continue to rise indefinitely.

The US Federal Reserve issued warnings on 25 March 1929 after a mini-crash happened when lots of investors tried to sell stocks at the same time. But this shaky foundation was bolstered by a promise from the banker Charles E Mitchell of the National City Bank, to provide $25m in credit to stop another market slide.

Despite ominous signs in the form of easy credit being bandied around and a drop in steel production, increases went on unabated. A nine year bull run had seen the Dow Jones Industrial Average increase in value ten times over; it gained some 20% between June and September of 1929.

The London Stock Exchange officially crashed on 20 September of that year, after British investor Clarence Hatry and his associates were jailed for fraud and forgery, an event which weakened US investment in overseas markets.