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THE GREATEST MARKET
CRASHES AND BUBBLES1. A crash is a significant drop in the total value of
a market
2. It is a situation wherein the majority of investors
are trying to flee the market at the same timeand consequently incurring massive losses.
3. Attempting to avoid more losses, investorsduring a crash are panic selling, hoping to
unload their declining stocks onto otherinvestors.
4. This panic selling contributes to the decliningmarket, which eventually crashes and affectseveryone.
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HISTORIC MARKET
CRASHES
1.1. TULIPMANIATULIPMANIA
2.2. SOUTH SEA BUBBLESOUTH SEA BUBBLE
3.3. FLORIDA REAL ESTATEFLORIDA REAL ESTATECRAZECRAZE
4.4. GREAT DEPRESSION INGREAT DEPRESSION IN
USAUSA
5.5. CRASH OF1987CRASH OF19876.6. ASIAN CRISISASIAN CRISIS
7.7. THE DOTTHE DOT--COM CRASHCOM CRASH
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TULIPMANIA
(HOLLAND 1634-1637)Tulip mania was a
period in the Dutch
Golden Age during
which contract pricesfor bulbs of the recently
introduced tulip flower
reached extraordinarily
high levels and thensuddenly collapsed.
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1. In 1593 tulips were broughtfrom Turkey and introduced tothe Dutch.
2. The novelty of the new flowermade it widely sought after and
therefore fairly pricey.3. After a time, the tulips
contracted a non-fatal virusknown as mosaic, which didn'tkill the tulip population butaltered them causing "flames" of
color to appear upon the petals4. After a time, the tulipscontracted a non-fatal virusknown as mosaic, which didn'tkill the tulip population butaltered them causing "flames" ofcolor to appear upon the petals
Anonymous 17th-century
watercolorof the Semper Augustus,
famous for being the most
expensive tulip sold during tulipmania.
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Tulips bloom in April and May for only about a week, and thesecondary buds appear shortly thereafter.
Bulbs can be uprooted and moved about from June to September,and thus actual purchases (in the spot market) occurred duringthese months.
During the rest of the year, traders signed contracts before a notaryto purchase tulips at the end of the season
In 1636, the Dutch created a type of formal futures markets wherecontracts to buy bulbs at the end of the season were bought andsold.
Soon, prices were rising so fast and high that people were trading
their land, life savings, and anything else they could liquidate to getmore tulip bulbs
Many Dutch persisted in believing they would sell their hoard tohapless and unenlightened foreigners, thereby reaping enormousprofits.
During this time, the bubonic plague was killing off 1 out of every 7people per year, so the common man saw little reason not to invest
foolishly with a chance of making a substantial profit.
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Many Dutch persisted in believing they would sell theirhoard to hapless and unenlightened foreigners, therebyreaping enormous profits
As it happens in many speculative bubbles, someprudent people decided to sell and crystallize theirprofits.
A domino effect of progressively lower and lower pricestook place as everyone tried to sell while not many werebuying.
The price began to dive, causing people to panic and sellregardless of losses.
Dealers refused to honor contracts and the governmentsattempts were futile.
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THESOUTHSEA BUBBLETHESOUTHSEA BUBBLETHESOUTHSEA BUBBLE
The South Sea Companywas a British joint stockcompany that traded inSouth America during the18th century.
Founded in 1711, thecompany was granted amonopoly to trade in Spain'sSouth American colonies aspart of a treaty during theWar of Spanish Succession.
The primary element of trade
was slaves. In return, the company
assumed the national debtEngland had incurred duringthe war.
HOGARTHS SOUTH SEA BUBBLEHOGARTHS SOUTH SEA BUBBLEHOGARTHS SOUTH SEA BUBBLE
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The few companies offering stockat that time were all solid butdifficult investments to buy.
The South Sea Company wasperched on top of what wasperceived to be the most lucrativemonopoly on earth.
The first issue of stock didn't evensatiate the voracious appetite of the
hardcore speculators. So nobody questioned the repeated
re-issues of stocks by the South SeaCompany--people just bought theexpensive stocks as fast as theywere offered.
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They were blind to many indications that theSSC was run too poorly to break even
Eventually the management team of SSC tooka step back and realized that the value of theirpersonal shares in no way reflected the actualvalue of the company or its dismal earnings.
So they sold their stocks in the summer of1720 and hoped no one would leak the failureof the company to the other shareholders
Like all bad news, however, the knowledge ofthe actions of SSC management spread, andthe panic selling of worthless certificates
ensued. The huge hole in the south sea bubble also
punctured the unrealistic values of othercompanies like the Mississippi and both camecrashing down.
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FLORIDA REAL
ESTATE CRAZE
The Florida land boom of the 1920s was
Florida's first real estate bubble, which burst
in 1926, leaving behind entire new cities and
the remains of failed development projectssuch as Isola di Lolando in north Biscayne
Bay.
The preceding land boom shaped Florida's
future for decades and created entire new
cities out of the Everglades land that remain
today.
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THE RISE In 1920, Florida became the popular U.S.
destination/ residence. Due to its economic prosperity, property prices
rose rapidly on speculation and a land and
development boom ensued.
So, once people began pumping huge amountsof money into the real estate market, it took off.
Soon everyone in Florida was either a real
estate investor or a real estate agent.
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THE FALL The rules are the same whether you pay too
much for a stock or for a piece of land: youhave to make that much more to claim a
profit.
This did happen for awhile, and land pricesquadrupled in less than a year.
Eventually, With thousands of sellers andvery few buyers, prices came down with asickening thud, twitched a bit, and then
crawled down even lower.
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THE GREAT DEPRESSION IN
USA
The Great Depression began withthe Wall Street Crash of October,1929 and rapidly spreadworldwide.
The market crash marked thebeginning of a decade of highunemployment, poverty, lowprofits, deflation, plunging farmincomes, and lost opportunitiesfor economic growth andpersonal advancement.
The depression caused majorpolitical changes in America.
High Tariffs and war debtsoccurred.
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Since the stock market was believedto be a no-risk, no-brain world whereeverything went up, many peoplepoured all their savings into itwithout learning about the system orthe underlying companies.
With the flood of uneducatedinvestors, the market was ripe forsome manipulation and swindling.
When the public noticed theprogression of price on the tickertape, everyone would buy the stock.
So, the market manipulators wouldthen sell off their overpriced sharesfor a healthy profit.
On and on the cycle went asuneducated investors turned a profitby selling the manipulated, over-priced shares to someone whowanted to have a rising stock.
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THE CAUSES AND EFFECTS
CAUSES
Unequal distribution
of wealth.
High Tariffs and war
debts.
Over production inindustry and
agriculture.
Stock market crash
and financial panic.
EFFECTS
Widespread hunger,
poverty, and
unemployment.
Worldwide
economic crisis. Democratic victory
in 1232 election.
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THE CRASH OF 1987 (USA)
In finance, Black Monday refers to Monday,19October,1987, when stock markets around the worldcrashed, shedding a huge value in a very short time.
The crash began in Hong Kong, spread west through
international time zones to Europe, hitting the UnitedStates after other markets had already declined by asignificant margin.
In the wake of the crash, markets around the worldwere put on restricted trading primarily becausesorting out the orders that had come in was beyond
the computer technology of the time. This also gave the Federal Reserve and other central
banks time to pump liquidity into the system toprevent a further downdraft.
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CAUSES Potential causes for the decline include program
trading, overvaluation, illiquidity, and marketpsychology.
The most popular explanation for the 1987 crash wasselling by program traders. In program trading,computers perform rapid stock executions based onexternal inputs, such as the price of relatedsecurities.
U.S. pressure on Germany to change its monetarypolicy was one of the factors that unnervedinvestors in the run-up to the crash. The crash, inthis view, was caused when the dollar-backed HongKong stock exchange collapsed, and this caused a
crisis in confidence.
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