Question

Following a stock exchange crash in 1987, there was a temporary fear of a recession because of an anticipated reduction of consumption expenditure.

(a) What was the basis of this fear?

(b) Was the fear justified?

(c) Would things be any different now?

Answer 1

1. The crash in stock exchange in US extended to other stock markets accross the world sparking fear of extended slowdown in economic activity. It is widely believed that cause of this crash laid in a series of monetary and foreign trade agreements– specifically the Plaza Accord and the Louvre Accord–that were implemented in order to depreciate the U.S. dollar and adjust trade deficits.

It is also beleived that algorithm based computer programs led to hyper activity in stock market leading to increase or decrease in value of stock.

2. The fear was based solely on decrease of stock market however there was no real economic data to drive this decrease. In fact, the economic data continue to show increase in GDP growth. There was no real basis of this fear.

3. In the current environment, a fear similar to 1987 crash has been lingering in minds of people however experts believe that current decrease in stock prices are correction because market had been at their highest level since 2008. Further, circuit breakers installed at the stock exchanges prevent similar run of 1987 crash today. further, investor education level has increased and social media feeds every news to people on real time basis creating sensitivity in people and improving decision making.