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THIS JAGGED LINE IS A PORTRAIT OF A FINANCIAL NIGHTMARE.

It represents the plunge of the New York Stock Exchange in October 1987. In just one day the market fell a staggering 508 points and dragged down with it the other top 22 markets of the world. Why did the markets fall so far? What did their crash mean for you?

A Global Crash

OCTOBER 19, 1987, was a strange day on our planet. On that day a storm was unleashed that swept the globe and wreaked havoc in dozens of nations. Yet the storm was windless. It sent no pelting rains, blew no houses over, killed no one. That day a crash reverberated around the world, and for a while a charging bull became a runaway bear.

Windless storms? Bulls turning into bears? As you may know, this storm had nothing to do with the earth’s weather but, rather, with its economy. October 19 was the day of the now famous Crash of 1987, when Wall Street’s stock market took the deepest, fastest plunge in its history, setting off panic around the world. The market stopped charging upward in value (a “bull market”) and temporarily turned to run madly downhill (a “bear market”).

While the crash was without real sound and the bear without real claws, the victims were real. A reporter in Zurich overheard a man cry out, “I’m ruined, totally ruined,” and noted that the people in the financial district reading the newspapers looked as if they were reading their own obituaries. In Hong Kong the panic reached such a fever pitch that the market was shut down for four days. It fared worse than any other market in the crash, losing some 33 percent of its value. One Hong Kong businessman alone lost $124 million. In New York a 63-year-old widow found not only that the crash had wiped out the value of her portfolio of stocks but also that she now owed her broker over $400,000!

Millions Poorer

Helmut Schmidt, former chancellor of West Germany, said in Die Zeit, a German newspaper: “The fall of stock markets all over the world by more than $1 trillion has made 100 to 200 million households in the West poorer than they had believed themselves to be before the crash.” Yet the crash was not limited to the West. Markets toppled like dominoes in Hong Kong, Tokyo, Singapore, Taiwan, Australia, South Africa, and Latin America, as well as in Europe and North America.

Le Quotidien of Paris bore the bold headline “LE CRASH.” Cambio of Lima, Peru, proclaimed “PANIC IN NEW YORK, TOKYO AND LONDON!” The Australian Financial Review of Sydney asserted that Wall Street had “fallen with a thud equivalent to a dead bull being thrown off the Empire State Building.” But as former chancellor Schmidt pointed out, these falling markets meant more than a jumble of numbers and screaming headlines. The crash meant real losses to many who had to sell their stocks at the lower levels. Life savings, pension funds, nest eggs put up for retirement, plans to buy a house, plans for the care of children​—all were vulnerable in the financial storm.

The optimism of the runaway bull market leading up to the crash only made matters worse. The number of direct investors in the U.S. stock market nearly doubled between 1975 and 1985. The number of those who own stock indirectly through pension funds, insurance companies, and banks had increased during the same period by nearly 35 million. The charging bull market drew investors like flies to honey. Many invested too late, paid too much, and couldn’t get out again fast enough.

Another Depression?

As the crash rippled outward from Wall Street and around the world, people began to recall another year infamous in economic history: 1929. In that year, a similar stock market crash led to a global depression. The world still cringes at the thought of that era, with its breadlines, soup kitchens, rampant unemployment, and poverty. Would the new crash lead to a similar depression? After all, on the worst day of the 1929 crash (Black Tuesday), the market dropped by 12.8 percent. But on Black Monday of 1987, it plummeted by 22.6 percent. A New York Times headline of October 20, 1987, asked, “Does 1987 Equal 1929?”

The answer, to the great relief of multitudes, turned out to be no. Nearly two years after Black Monday, many experts surveying the lasting damage done by the storm found it to be minimal. The U.S. economy was still expanding. The unemployment rate was low. After all, even after Black Monday the market was only 4 percent lower than it had been a year earlier; it even managed to finish out the year slightly ahead.

Many experts regarded Black Monday as the mere bursting of a bubble, a much needed correction of bloated stock market prices. If the crash has had any enduring legacy, it has been the record flight of many individuals from the market. ‘Never again,’ they vow. They seem to mean it.

Does that mean that Black Monday was unimportant? Far from it! Some experts feel that the crash should be taken as a warning, that it illuminated some deep flaws that run from Wall Street through the world’s economy. But has the world in general heeded the warning? Not according to an economics professor, who told Time magazine: “It’s like a bunch of drunken teenagers driving a car and thinking that just because they made it through the last curve, they’ll be able to make the next one as well.”

Just what went wrong with Wall Street? Could it crash again? And does any of it affect you personally?

How Does Wall Street Affect You?

ECONOMICS has been called the dismal science. Still, it’s a science that touches the lives of all of us. The prices you pay in the store, the availability of jobs, the services your country’s government provides​—they all depend on the strength of the economy in your land.

‘But what does that have to do with Wall Street?’ some might ask. ‘It’s too far away to matter to me.’ Well, the stock market is like a mirror of the economy. And today the nations of the world are so interdependent that no economy is an island.

A Globalized Economy

The president of the American Stock Exchange said that the shock of Black Monday “made it abundantly clear that no country is totally in control of its own destiny.” In Italy a writer for La Repubblica put it this way: “West Germany’s taxes yesterday, the Latin American debt today, and . . . legislation by the U.S. Congress tomorrow are events that once were isolated from one another or interconnected only over a long period of time. Today they are welded together instantaneously. To realize this, just step into the trading room of a big international bank, where a kind of electronic spaceship is linked day and night with all the world markets.”

What country, what economy, can claim isolation from this globally interconnected and interdependent system? African countries? The editors of a business monthly that monitors the African economy say that “African economies are very vulnerable to exterior shocks.” What about Latin-American countries? An editor of Jornal do Brasil said that the stock market crisis was part of an international financial crisis. What about the Middle East? The deputy editor of Ma’ariv of Tel Aviv cited a saying of a former prime minister of Israel: “If America catches cold, Israel sneezes.”

Who, then, is safe from today’s economic storms? If a passenger basking on the deck of an ocean liner was told that the ship had sprung a leak in the hull below, could he reasonably feel safe from danger just because the trouble spot was so far away? No; all parts of the ship are connected​—not one of them floats alone. The same might be said of the world’s economies. Trouble in one may spell trouble for you.

Dangerous Waters for Little Fish

After the crash, small investors left the market in droves. The mass exodus meant severe losses to the brokerage industry, which suffered some 25,000 layoffs after the crash. But it has meant even more trouble for the stock market itself.

What scared many investors away from Wall Street? Obviously, the crash had a lot to do with it. But in other ways too, Wall Street began to seem a hostile environment for the small investor, like waters too dangerous for little fish to swim in. Let’s briefly explore three of the trends that have contributed to this: computerization, the buyout binge, and the debt explosion.

Are Machines Running the Show?

Black Monday was a bad day for computers. The tidal wave of trading that day was more than they could handle. All across the country, brokers watched in impotent rage as their terminals flashed a screenful of question marks or just went blank. In the heart of the storm, the New York Stock Exchange, the crash caused shutdowns in almost every part of the system. But many felt that computers were not just victims of the crash but actually accomplices in generating the selling stampede. One man put it this way to The New York Times: “It’s just computers selling to computers.”

Of course, that’s not strictly true. But with some complex trading schemes favored by big institutional investors, computers are automatically triggered by conditions in the market​—such as a drop in the price of a stock—​to suggest to the broker what he should do. The problem is, he rarely has time to question his computer’s suggestions. Thus, computers can choreograph hordes of traders like a troupe of dancers. They obey their computers in unison, creating huge selling waves that in turn generate other selling waves. So computers may have amplified the crash, much as noise feedback on a public-address system can escalate into an ear-splitting screech. Some blame computers for 300 points of the 508-point drop.

Computers may be indispensable to the stock market, but they made the little fish feel smaller than ever on Black Monday. Individual investors couldn’t even get their brokers on the telephone in order to sell their plummeting stocks. Meanwhile, big investors with their computer-driven program trades were unloading their shares in huge blocks.

A Feeding Frenzy

Many find it worrisome, too, that the large- and medium-sized fish have been embroiled in a feeding frenzy over the last several years, devouring one another in hostile takeovers and leveraged buyouts. “People are buying companies today the way they used to buy stocks,” said one retired investment banker interviewed by Awake!

The leveraged buyout, or LBO, is very popular on Wall Street. One company uses “leverage” (massive amounts of borrowed money it has raised by, for instance, selling junk bonds) to “buy out” another company by buying up the outstanding shares of its stock. Once the predator has bought up its prey, it cuts it up and sells the pieces to pay off all that debt. So the predator may end up owning what is left for free! By selling junk bonds, small companies can afford to devour big ones, like minnows gulping down sharks.

Takeover deals yield almost unthinkable amounts of money to the banks, lawyers, and businessmen that put the deals together. In one gigantic LBO in late 1988, the fees to banks and advisers alone approached $1 billion. Some men who grew famous as predators made hundreds of millions of dollars in just a few years. Not a few ran into trouble with the law.

The Debt Explosion

LBOs are but one illustration of America’s continuing love affair with debt. Individually, Americans save only about 5 percent of their earnings. West Germans save about 13 percent, and the Japanese about 17 percent. Americans’ love of the credit card and the ‘buy now, pay later’ credo have become legendary. U.S. corporations owe over $1.8 trillion, and the federal debt is over $2.6 trillion. The U.S. government has also managed, in just eight years, to go from being the world’s largest creditor to its biggest debtor in its international trade. A writer for Canada’s Globe and Mail summarized the U.S. policy as “spend, spend, and just borrow.”

A recession could spell big trouble for America’s debt-laden corporations. Companies saddled with debt would suddenly become fragile in such a climate. A wave of defaults and bankruptcies could ensue. Banks too are out on the debt limb: They have made billions of dollars of risky loans. Several hundred are in trouble, and many have been forced to close.

Debt on a global scale is even more ominous: Third World countries owe a staggering $1.2 trillion. No wonder, then, that investment banker Felix Rohatyn assessed the economy this way: “We have created a gigantic financial house of cards. We have had fair warning about its weakness.”

The Exodus

So to the small investor, Wall Street may seem dominated by computerized trading making huge waves, the big fish in a feeding frenzy, and a bottomless chasm of debt threatening to swallow the whole pond. Is it any surprise that the little fish have made an exodus from the market?

But even more than fear, there is one trend that has driven many small investors away from Wall Street. It is governed by the same emotion that seems to be running the whole world these days. What is that emotion?

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Several hundred U.S. banks are in trouble, and many have been forced to close

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A Guide to Wall Street Words

What happens on Wall Street may seem foreign to you because the financial world has a language all its own. The following is a brief sampling of Wall Street’s most common words.

◆ STOCK: When you buy a share of stock in a company, you are actually buying a piece of that company. This is one way companies raise money. Periodically, stockholders may receive a small percentage of the company’s profits, called a dividend.

◆ BOND: Another way corporations raise money is to borrow it by selling bonds. When you buy a company’s bond, you are lending it money. The company pays for the use of your money by means of interest payments. Stocks and bonds both fit under the blanket term “securities.” While bonds do not generally grow in value the way stocks sometimes do, they are often considered a safer investment. An exception is the junk bond, one that has been officially rated as very risky. The company that issues it is more likely to default, not paying you as agreed. People buy them because junk bonds pay a high interest rate.

◆ STOCK EXCHANGE: An organized auction, or marketplace, where securities such as stocks and bonds are bought and sold. On the floor of the exchange, brokers carry out the buy-and-sell orders of their clients, investors, and get paid by means of a commission.

◆ THE DOW: Short for the Dow Jones Industrial Average, this is the most popular indicator of the health and value of the New York Stock Exchange. It is an average based on the current value of 30 industrial stocks. When people ask, “How is the market doing?” the common answer is to quote where the Dow stands.

The House That Greed Built

“GREED is healthy. You can be greedy and still feel good about yourself.” Those words, part of a speech to the graduating class of a business school, reportedly met with laughter and applause. (The Roaring ’80s, by Adam Smith) The speaker was one of Wall Street’s great successes, worth hundreds of millions of dollars. Not long afterward, though, Fortune magazine named the same man “crook of the year.” Within months, he was in prison.

Greed, it turned out, was not so healthy after all. But the man’s words are often quoted as typifying the attitude of Wall Street. What do the facts show?

Consider the Wall Street trends we have already observed. Lightning-fast computer trading, frenzied buyouts of companies for enormous profits, mountains of borrowed money, all seem to share a common thread: a focus on the short-term gain.

All eyes are on the instant profit. An editorial in Canada’s Maclean’s magazine phrased the point powerfully: “The newly rich of the 1980s want something for nothing: the most amount of money with the least amount of effort.” Is it any wonder that such a profit-driven society has spawned its own brand of crime? It is called . . .

Insider Trading

“Just what is it?” Awake! asked a retired investment banker. His answer: “In its broadest sense, insider trading is using something that you as a professional know but that the investing public does not know. It gives you an edge if you take advantage of it.”

This practice is illegal. But it became so prevalent on Wall Street during the 1980’s that in just over one year, some 70 Wall Street businessmen were arrested. Like many of Wall Street’s problems, this one too has swept the globe. In Japan a man under investigation for insider trading tried to bribe a legislator involved with the case, kneeling before him with a briefcase stuffed with $40,000 in cash. But he did not know that the whole scene was being filmed and would later be aired on national television!

Other stock markets​—Canada’s Bay Street, France’s Bourse, and Italy’s Borsa among them—​have been rocked by insider-trading scandals. One insider-trading ring that stretched from England to Israel was uncovered. Markets around the world have set up laws to prevent this kind of cheating, but as the aforementioned banker told Awake!, insider trading is “hard to define and even harder to control. We had elaborate systems of security, but information is easier to steal than money.”

The Yuppie Syndrome

While the greed of Wall Street led some into crime, it led many more into materialism. Newsweek magazine reported that Wall Street was the very heart of America’s greedy “money culture.” The bull market of the ’80’s attracted hordes of young graduates intent on making their fortune. They were nicknamed yuppies, for young urban professionals. Known for their high ambitions and incomes to match, yuppies were targeted by advertisers as ideal consumers, veritable spending machines.

A former Wall Street trader who describes himself as an ex-yuppie told Awake! about his life on Wall Street during the boom years. The thinking at his firm, he said, was: “Your job is your life. Everything else is second.” It was common to be up at 5:00 a.m., off to work all day, and then out entertaining clients until late in the night.

He vividly remembers one incident that, to him, summed up the way people were thinking. A colleague showed him a series of photographs of a broker suffering a heart attack on the floor of a stock exchange. Fevered trading went on all around the stricken man; nothing slowed, nothing stopped.

The New York Times reported that the crash would be a blow to yuppies not only because of their borrowing and spending ways but also because of their thinking. Many yuppies just didn’t know the difference between net worth and self-worth.