In New York in the autumn of 1929, the speculative bull market of the late 1920s broke apart over a few days in late October — Black Thursday on 24 October and Black Tuesday on 29 October — and the collapse helped tip the United States into the Great Depression. The Dow Jones Industrial Average, which had peaked at 381.17 on 3 September 1929, would fall, over the next three years, to 41.22 on 8 July 1932, a loss of about 89 percent. It is the defining financial crash of the twentieth century and the event against which every later panic is measured.
The mania that preceded it ran on borrowed money. Through the 1920s, ordinary Americans were drawn into the stock market in unprecedented numbers, and many bought “on margin” — putting down a fraction of a stock’s price and borrowing the rest from a broker, who in turn borrowed from banks. By the summer of 1929 these brokers’ loans exceeded 8.5 billion dollars, more than the entire stock of currency then circulating in the country. Margin let a small rise in a share produce a large gain on the cash invested; it also meant a small fall could wipe a buyer out entirely and force the sale of his stock to repay the loan.
That structure made the market exquisitely fragile. When prices began to slide in September and then plunged in late October, falling values triggered “margin calls” — demands that borrowers post more cash — and buyers who could not pay had their holdings dumped onto a falling market, which drove prices lower still and triggered further calls. On Black Tuesday, 29 October, some 16.4 million shares changed hands in a cascade of forced and panicked selling. A pool of leading bankers had tried to halt the slide the week before by ostentatiously buying shares, and for a day it worked; within days it failed utterly.
The crash did not single-handedly cause the Depression, but it destroyed savings, shattered confidence, and accelerated a collapse that would see thousands of banks fail and unemployment reach roughly a quarter of the workforce. Out of the wreckage came a generation of reform — the Pecora investigation, the Glass-Steagall separation of commercial and investment banking, and the creation of the Securities and Exchange Commission — built on the recognition that a market financed by debt and faith in permanent prosperity had been a disaster waiting for its trigger.
In the United States between roughly 1995 and 2000, a speculative mania for internet stocks drove the technology-heavy Nasdaq Composite index to a peak of 5,048.62 on 10 March 2000, after which it collapsed, falling about 78 percent to a low near 1,114 by October 2002 and erasing on the order of 5 trillion dollars in market value. The dot-com bubble is the defining financial mania of the internet age: a frenzy in which companies with no profits, and often no plausible path to them, were valued at billions on the strength of a story about the future.
The mania ran on a new and corrosive idea about value. As a genuinely transformative technology arrived, investors and entrepreneurs persuaded themselves that the old measures — revenue, earnings, the price-to-earnings ratio — no longer applied to internet companies, and that growth in users, page views, and “eyeballs” was the metric that mattered. A start-up’s strategy became “get big fast”: raise enormous sums, spend them at a furious “burn rate” on marketing and expansion to capture a market, and trust that profits would somehow follow scale. By the peak, the great majority of newly public technology companies were losing money, yet were valued as if dominance were already theirs.
The plumbing of the boom was the initial public offering. Underwriters and a credulous market rewarded internet start-ups with spectacular first-day stock “pops,” so that founders, venture capitalists, and early employees grew rich the moment a company went public, regardless of whether it ever earned a cent. That rewarded raising and spending money over making it, and it pulled ordinary investors — newly armed with online brokerage accounts and a financial media that treated tech founders as visionaries — into buying at any price, certain a greater fool stood behind them.
The break came in the spring of 2000. The Federal Reserve had been raising interest rates, making the cheap capital that fed the burn rates costlier, and a market that had run on belief began to question it. The Nasdaq peaked on 10 March, slid, and then plunged through April; over the following two years the unprofitable companies ran out of money and failed in waves — Pets.com, Webvan, eToys, Boo.com, and hundreds more. The technology was real and would remake the world, and a handful of survivors, Amazon and eBay among them, justified the early faith. The prices, for almost everyone else, did not.
In the United States between roughly 2000 and 2006, the price of the typical American house nearly doubled, propelled by an almost universal conviction — held by borrowers, lenders, rating agencies, regulators, and the largest banks on Wall Street — that house prices could not fall nationwide. That conviction collapsed in 2007–2008. The S&P/Case-Shiller national home price index, which peaked in the first quarter of 2006 at about 198, fell to roughly 114 by early 2012, a decline of more than 40 percent from peak to trough, and the financial machinery built on the assumption of ever-rising prices failed catastrophically.
The delusion was not chiefly about flowers or tulips but about correlation. Lenders extended mortgages to borrowers who could not plausibly repay them — the subprime loans that grew from about 5 percent of originations in the mid-1990s to roughly 20 percent, around $600 billion, by 2006 — because the loans were not meant to be repaid so much as refinanced or sold. Wall Street pooled those mortgages into securities and sliced them into tranches, and the rating agencies blessed the senior pieces as nearly riskless on the statistical premise that home prices in different regions would not all fall at once. They did all fall at once.
When prices turned in 2006 and defaults rose, the chain ran in reverse. In 2007 two Bear Stearns hedge funds invested in mortgage securities imploded; through 2008 the losses spread until the investment bank Lehman Brothers filed for bankruptcy on 15 September 2008, the largest such filing in US history, and the global financial system seized. US household net worth fell by an estimated $13 trillion; foreclosure filings surpassed 3 million in 2008 alone; and the recession cost roughly 9 million jobs. The episode proved a mania need not be confined to amateurs: the most sophisticated institutions in the world, armed with risk models and credit ratings, talked themselves into the same single error — that the thing going up would keep going up — and built a global edifice of leverage on top of it.