Causes Of The Stock Market Crash

Andrew West

Ms. Easterling

English IV AP

6 November 2017

Why Does the Stock Market Crash and How Does It Recover? The stock market is a volatile, unforgiving battleground where fortunes can be made and lost within minutes. The first major stock exchange in the United States, The New York Stock Exchange (NYSE), dates back to 1792 when it acquired its first securities. Since then, the stock sarket has reached an astronomical size, with a market volume of over twenty trillion dollars. This success is not without its setbacks, though. The stock market crashes of 1929 and 2008 have single-handedly led to the worst economic recessions America has ever seen. Considering the sharp ramifications of a market crash, it is important to understand why

On this day, panicked investors sold a total of 16 million shares in response to an eleven percent drop in the Dow, an average of the prices of all stocks. These drops of value in the Dow continued for the next three trading days, leaving the Dow down over 25 percent and down $30 billion in market value in a four day span. This drop came after a 20 percent drop over the past two months, making the crash even worse. This triggered the worst economic depression in American history, The Great Depression. The stock market caused this depression because of something called “buying on margin.” Buying on margin was a phenomenon that occurred in the Twenties where people would borrow money from brokers to buy stocks. This brought record numbers of people into the market, and created a price bubble. When the bubble popped, the brokers wanted their money back, and people were forced to sell their property and cash in their life savings to pay the brokers back. These people were barely able to make ends meet, and could no longer afford the luxuries of the Twenties. Because so many people had bought on margin, the economy suffered from a severe lack of activity, creating a nationwide depression. People also lost their savings, as a result of banks using deposits to buy stocks. Other causes of the crash include over-speculation and overreaction. Over-speculation, the act of valuing

Although not as big as the 1929 crash, the crash of 2008 still had a huge impact on Americans. Unlike the crash of 1929, the crash of 2008 was caused by activities outside of Wall Street, namely, the failure of congress to pass the bank bailout bill. The bank bailout bill was made to bailout companies like HSBC and Lehman Brothers, who went bankrupt as a result of poor and illegal business practices. Some of these business practices included money laundering. Money laundering is when someone makes illegally obtained money look like it was legally obtained, or in other words, making dirty money look like clean money. The rejection of the bank bailout bill by congress sent the Dow into a nosedive, dropping almost 800 points in one day, the largest point drop in any single day in history. Another cause of this crash was the subprime mortgage crisis. This crisis occurred when companies hired rating companies like Standard and Poor’s to give good ratings to the mortgages that these banks were giving out to people. These mortgages were sold to other places, such as investment banks and government agencies, as mortgage-backed securities. Mortgage-backed securities are paid like regular mortgages, except that interest and principle payments don’t go to the company that lent you the money. For example, if you get a mortgage from Chase bank, Chase can sell your mortgage to the Federal Home Loan Mortgage Corporation (Freddie Mac). Freddie Mac then