Canadian Bacon
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If we look back to the 1930's for an answer, then stock amrket crashes are caused when too many people buy things on credit.
In the 1930's credit was a fairly enw concept, and people loved it. They racked up massive bank debts, discovered they couldn't pay them, and turned to the stok market as a bit of a get rich quick scheme. They 'bought on margin' which means they bought low and sold as soon as it went up, thus getting a bit of profit. The problem is that people were buying those stocks on credit as well.
All of this buying and selling of shares had an interesting effect on the companies themselves. It created artificial demand, and so the value of many companies was misleadingly inflated. The worth of company's kept on growing, like filling a balloon with air.
Bear in mind that at this point, a whole a$$ ton of people have bought shares on credit, and have big debts that are unpaid. The banks who loan these people money were running low because people aren't paying their debts, so the banks also invested in the stock market.
So, the price of shares all over went up, and up, and up, and it seemed too good to be true. People began to get nervous about the inflation, and about how the prices would likely fall lower at any time. So, they sold all their shares to get their profit before the values dropped.
What happened is that once some people started selling, everbody started selling. Very quickly the companies that on the rpevious day were very valuable were now completely worthless. Because of the sudden loss of demand for shares, many many people lost alot of money when the values fell. The banks had lost their investors' money, so when people went to the bank to take out their cash they discovered that their money was gone.
In fact, it was absolutely gone, removed form the economy. The economy before the crash had perched itself upon a balloon of illusionary wealth. Everyone thought they had money, but in fact it was all tied up within the stock market. When the balloon popped, all of that money completely vanished. |
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