It is useful to remember that the yoyo performance of the stock markets last week had litle to do with reality. The hard-eyed moneymen who populate Bay and Wall streets had taken leave of their senses over the past 20 months or so, pushing share values far beyond rational levels. It will take some time before sweet reason returns to the trading floor. The subsequent disenchantment over the stock market as a ticket to ride for guaranteed riches will be as painful as the original illusion was beguiling.
The trick will be to keep the fire storm from spreading beyond the stock exchanges to the economy at large and reversing an already fragile rate of growth hampered by unsupportable trade and budgetary deficits. Perhaps the only way this can be achieved is to reassert the supremacy of such productive facilities as factories, farms, small businesses and other expressions of human endeavor that produce something more inspiring than grown men and women yelling at one another while waving pieces of paper.
The main preoccupation of North American business has become financial speculation, with equity stocks treated like lottery tickets, instead of pieces of paper representing the ownership of corporate entities whose employees are real people producing real goods and services. There is an element of social productivity involved in such endeavors that is clearly missing from those of the people who buy and sell merely “financial products.”
Even bankers aren’t trustees of the private sector any more. They have become money salesmen, more concerned with new ways of shovelling out highinterest investment opportunities than with preserving economic values or perpetuating productive enterprises.
The excesses of the stock market knew no bounds over most of the past two years, with not only margins and options multiplying the risks, but options on options, as well as futures on options, and leveraged buy-outs—all undermining real worth. The first loyalty of most fund managers was not to their customers—and certainly not to the names on the pieces of paper they were trading—but to their own compensation accounts.
What made the crash—and the subsequent partial recovery—possible was computers, machines that replace hu-
man judgment with mechanical efficiency, buying and selling at pretriggered levels that have little or no connection with any qualitative assessment of what is actually happening. They have virtually eliminated the thought process and ability to respond to perceived subtleties, which once was the shrewd floor trader’s main stockin-trade. Using computers to make the large buy and sell decisions isn’t that different from walking into an arcade
and shooting down a squadron of Martian flying saucers—except that all of us become the victims of those little green blips that now illuminate every floor trader’s desk.
Another factor in the debacle undoubtedly was the wave of deregulation that has swept the financial markets in recent months. The original notion was to eliminate some of the outmoded rules that had originally been put in place after the Great Crash of 1929. But in the process, many worthwhile regulations
that placed elementary controls over human greed were also eliminated—and last week’s crash was the inevitable result. The many Wall Street insider trading scandals were an obvious warning of what was about to happen; when handcuffs became an almost daily feature of Wall Street life, it was a clear signal that greed had overtaken common sense and that the bubble was about to burst.
Now that it has, too many observers have drawn the wrong conclusion, warning us that it’s 1929 all over again and that we better get ready for the soup lines. It isn’t—though if people get to believe it, history could repeat itself, and we could slide into a deep recession.
What most of the gloomsters forget is that had the economy been fundamentally sound in 1929, the effect of the stock market crash would have been temporary and minimal. On Black Thursday (Oct. 24, 1929) 12,894,650 shares changed hands at prices which, according to John Kenneth Galbraith, “shattered the hopes and dreams of those who owned them.” In Canada, on Black Tuesday, which followed on Oct. 29, 1929, half a million shares were unloaded on the Montreal Stock Exchange, 500 per cent more than the customary turnover. On the then-smaller TSE, 330,000 shares fell under the hammer and the Morse ticker machines used for reporting transactions fell so far behind that some desperate shareholders bulled their way into the visitors’ galleries and yelled down sell orders to their brokers.
The Great Depression which lasted for most of a decade saw unemployment in Canada rise to close to two million (12.8 million in the United States) and the price of farm produce reduced to one-eighth of 1928 levels. Private-sector investment in the Dominion plummeted by 1933 and 85,000 business bankruptcies were recorded. But none of them involved a significant Canadian bank. South of the border more than 9,000 banking institutions went into receivership, eliminating nine million savings accounts.
No one knows at the moment in which direction the world’s stock markets are headed. But as long as we remember that they deal in fear and greed rather than real values, we may survive intact. Meanwhile, as Baron Nathan Rothschild said during a stock market eruption a long time ago, “The best time to buy is when blood is running in the streets.”
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.