1. Market Crashes: Introduction
  2. Market Crashes: What are Crashes and Bubbles?
  3. Market Crashes: The Tulip and Bulb Craze (1630s)
  4. Market Crashes: The South Sea Bubble (1711)
  5. Market Crashes: The Florida Real Estate Craze (1926)
  6. Market Crashes: The Great Depression (1929)
  7. Market Crashes: The Crash of 1987
  8. Market Crashes: The Asian Crisis (1997)
  9. Market Crashes: The Dotcom Crash (2000-2002)
  10. Market Crashes: Housing Bubble and Credit Crisis (2007-2009)
  11. Market Crashes: Conclusion

The High Bar for Future Crashes

Since the 2007-2009 Global Financial Crisis, there have been some market events that were widely reported as crashes or crises. These include the European credit crisis, which was set off by the Global Financial Crisis and continues even a decade later. There was also the Flash Crash of 2010 where technical glitches and programmatic trading took the Dow down 9% in moments before it recovered minutes later. There was the 2015-16 Chinese stock market crash where the Shanghai stock market lost 30% over a few weeks in July 2015. 

These events should all seem familiar, much like the oil price collapse covered in the third chapter. The reason they don't merit a separate entry is that the increasingly global economy can now take a blow somewhat better than in the past. There are more protections in the system against collapse that ever before and more awareness of what letting a crisis run wild will do to all national economies. This has made governments more likely to push on the regulatory side and more ready to dive in on the financial stability side. With any event approaching crash levels, we now get a near immediate government response aimed at slowing the panic and buying time for the market to adjust without collapsing systematically important institutions. (Related: Quantitative Easing: Does It Work?)

Yet There are New Areas of Exposure

With all due respect to the power of national governments and their powers to do everything from changing laws to printing more money, the fact still remains that the Great Recession of 2007, one of the worst crashes in history - a crash that is neck and neck with the 1929 crash that precipitated the Great Depression - is the most recent. Despite laws, regulations, the SEC, Fannie Mae, Freddie Mac and so on, we still had a massive, made-in-America bubble that nearly took down the global financial system. Worse yet, the core mechanisms of the housing bubble and credit crisis were something we generally value: financial innovation. Even with all the regulations and oversight, there are still cases where the financial innovation coming out of Wall Street and other centers exceeds both the creators' and the regulators' ability to predict the market impact. 

It is also worth noting that financial innovation hasn't really slowed down or changed since 2009. Synthetic CDOs, for example, didn't go away. Neither did mortgage-backed securities. People in finance don't really know how things like dark pools, high frequency trading and self learning AI traders will affect the market during the next crisis. While the world economy is more resilient than ever due to its size and the easy flow of capital, we are continually at risk of unleashing a new financial force that can use that same inter-connectivity to spread the right type of contagion across the globe. Since we can't always be acting out of a place of fear, particularly when it comes to investing, we just have to hope that our regulatory bodies and financial backstops are strong enough to mitigate the damage. If we can take a correction or two rather than a crash, it improves our chances of learning our lessons without losing our shirts. 

Lessons for the Future

On the topic of lessons, we should take the time to highlight what we can learn from these past market slaughters. First off, we should point out that most market volatility is all our fault. In reality, people create most of the risk in the market place by inflating asset prices beyond the value of the underlying company. When assets are flying through the stratosphere like rockets, it is usually a sign of a bubble. That's not to say that assets cannot legitimately enjoy a huge leap in value, but this leap should be justified by the prospects of the underlying companies in the case of stocks, not just by a mass of investors following each other.

The unreasonable belief in the possibility of getting rich quick is the primary reason people get burned by market crashes. Remember that if you put your money into investments that have a high potential for returns, you must also be willing to bear a high chance of losing it all.

Another observation we should make is that regardless of our measures to correct the problems, the time between crashes has decreased. We had centuries between fiascoes, then decades, then years. At the same time, post-2009, our global economy has shown us that what didn't kill it did in fact make it stronger. People are still paying for low oil prices and a slower growth China, for example, but it isn't causing mass failures in the global banking system this time. As an individual, however, the best thing you can do is keep yourself educated, informed and well-practiced in doing research before jumping into an investment of any kind. This may not always save you from the crash or the correction, but your odds are better with these habits than without. 


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