Lessons of Black Monday
The 1987 stock market crash led investors and regulators straight into the 2007 financial crisis.
We “failed to learn anything” from the 1987 stock market crash, said The Economist. In the Black Monday crash, 25 years ago last week, the Dow Jones industrial average fell nearly 23 percent in a single day—“still a record decline.” Instead of serving as a warning, that failure led investors and regulators straight into the 2007 financial crisis. The biggest mistake was monetary policy. Federal Reserve Chairman Alan Greenspan responded immediately to the 1987 crash by lowering interest rates. But when the dot-com and housing bubbles started forming, Greenspan refused to reverse the easy-money policy, insisting that it “was not the job of central banks to outguess markets.” Investors got a clear and troubling message: “Central banks would intervene when markets were falling, but not when they were rising.” The 1987 crash was made worse by the wide adoption of portfolio insurance, which traders wrongly hoped would hedge against market declines. Yet 20 years later, investors again loaded up on derivatives that only deepened the market’s implosion. The lesson: Unless we truly absorb the consequences of our mistakes, we’re bound to repeat them.