Thirty years since Wall Street’s “Black Monday”

By Nick Beams
19 October 2017

Thirty years ago today, on October 19, 1987, the New York Stock Exchange experienced what remains its largest one-day fall in history. On “Black Monday”, the Dow Jones fell 22.6 percent with the S&P 500 index dropping 28.5 percent for the period October 14-19.

The total loss of financial wealth during the crisis has been estimated to be around $1 trillion. But unlike 2008, the financial crisis did not precipitate a broader economic crisis and was over relatively quickly due to a major intervention by the US Federal Reserve, operating both directly and through the pressure it applied to major banks to extend liquidity to financial firms.

But that is not to say that its effects were transitory or that it merely represented some kind of brief malfunction in an otherwise sound financial system. In fact, what can be seen, both in the crash and the response to it, are the immediate origins of the processes that have led to the series of financial storms over the past three decades, the most serious, so far, being the crisis of September 2008.

The period leading up to “Black Monday” was one of great transition in the US economy and financial system, as well as globally. Whole areas of US industry were devastated by the high-interest rate regime, initiated by Carter appointee Paul Volcker as Federal Reserve chairman in 1979, a policy that was continued and deepened during the first years of the Reagan administration in the 1980s.

It was a process replicated around the world as key sections of industry, built up during the post-war economic boom, were laid to waste in what, to that point, was the most serious recession since the 1930s.

As industry was being destroyed, regulations that had been introduced to constrain the operations of finance started to be dismantled in order to clear the way for the accumulation of profit through speculative operations.

This was the start of the era of leveraged buyouts, using so-called junk bonds of dubious quality, in which whole firms could be gobbled up in hostile takeovers and then carved up and sold off at great profit. New financial instruments were developed to facilitate financial speculation that were to play a significant role in the 1987 crash.

In the lead-up to “Black Monday”, the Dow Jones index had raced ahead, rising by 44 percent in the seven months to the end of August, leading to expressions of concern that a financial bubble was being created. But despite these warnings, the speculation continued.

In 1985, the major industrial nations of the G6—France, the US, Britain, Canada, West Germany, Great Britain—had reached a deal (the Plaza agreement) to allow the US dollar to depreciate. But two years on, this was causing inflation concerns, leading to a new agreement, the Louvre accord, in February 1987, which was aimed at trying to halt the slide of the dollar and stabilise currency alignments.

However, in October 1987, Germany, which had agreed to keep interest rates low, moved to raise them due to inflation fears, causing the Fed to lift its discount rate to 7 percent and sending the rate on US treasury bonds to 10.25 percent. The shift in interest rates was the immediate trigger for the collapse of markets that was to follow.

With the announcement of a larger-than-expected trade deficit, a fall in the value of the dollar and fears that interest rates would rise, the markets began to fall from October 14. By the end of trading on Friday, October 16, the Dow was down 4.6 percent on the day and the S&P 500 had dropped by 9 percent in the previous week, setting the stage for what was to happen.

When international exchanges opened on Monday, before US trading began, it was a bloodbath in Asia and the Pacific as markets plummeted—the New Zealand market dropped by 60 percent.

The US market crashed from the opening bell in what was the first global financial sell-off. The plunge was exacerbated by a series of financial innovations that had been introduced in the previous years in order to facilitate speculation.

US investment firms had developed new financial products known as “portfolio insurance”. They were supposedly designed to protect investors from the effects of a downturn through the use of futures options and derivatives. The problem, however, was that they all operated on fundamentally the same model so that when the crash began there was a simultaneous rush for the exits.

Another factor was the introduction of computerised trading in which large numbers of stocks were sold, again on the basis of similar mathematical and financial models. Such was the volume of the trades that many of the reporting systems were simply overwhelmed. On the New York Stock Exchange, trade executions were reported up to an hour late, causing great confusion.

At the end of Black Monday, there were great fears about what was going to happen the next day. Before markets opened, the newly appointed chairman of the Federal Reserve, Alan Greenspan, who had taken over from Paul Volcker the previous August, issued a statement that was to become the basis of Fed policy from then down to the present day.

“The Federal Reserve, consistent with its responsibilities as the Nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system,” the statement read.

It was the beginning of what subsequently became known as the “Greenspan put”, understanding that the central bank would always be on hand to step in and support the financial markets.

The statement was backed up by action. In testimony given to the Senate Banking Committee in 1994, Greenspan said that “telephone calls placed by officials of the Federal Reserve Bank of New York to senior management of the major New York City banks helped to assure a continuing supply of credit to the clearinghouse members, which enabled those members to make the necessary margin payments.”

In 1990, Ben Bernanke, the future chairman of the Federal Reserve, noted that making such loans must have been a money-losing strategy from the point of view of the banks, otherwise Fed persuasion would not have been necessary, but it was a good strategy for the “preservation of the system as a whole.”

The extent of the intervention can be gauged from the fact that the lending of Citigroup to securities firms increased from a normal level of $200 to $400 million per day to $1.4 billion on October 20, after the bank’s president had received a call from the president of the New York Fed.

The policy of Fed intervention was to continue through the 1990s and into the new century. However, the fundamental contradictions of the capitalist financial system were not overcome but intensified. Consequently, when the crisis of 2008 struck, the Fed policy of leaning on the major banks was completely inadequate because it was the banks themselves that had either gone broke or were on the brink of collapse.

The Fed and other central banks around the world stepped in with massive bailouts and have sustained financial markets since then through their policies of financial asset purchases—quantitative easing—and ultra-low and even negative interest rates.

The outcome has been to neither restore economic growth nor create financial stability. Assessments of the price-earnings ratio of US markets have found that they are at elevated levels, exceeded only by 1929 and the dotcom bubble of the early 2000s. This is under conditions where economic growth, productivity and international trade—measures of the real economy—remain below their pre-2008 trends.

In 1987, the securities firms were bailed out by the banks. Little more than two decades on, the banks themselves had to be bailed out. But in another financial crisis, the central banks themselves will be directly involved because of their massive holdings of tens of trillions of dollars of government bonds and other financial assets.

In assessing the present situation, it is worth recalling an analysis made of the 20th anniversary of “Black Monday” by the Australian news outlet, the ABC—no doubt typical of many.

In the midst of a period of economic growth—the IMF had noted in 2006 that the world economy was expanding at its fastest rate for three decades—it cited financial analysts who maintained that a crash on a similar scale to 1987 was unlikely to be repeated. There was not the same interest rate structure and “we have a far more internationally coordinated banking system than was the case in 1987,” according to one of them.

“With rapid economic growth expected to continue in Asia,” the article concluded, “the market consensus appears to be that the bull run still has some way to go.”

Just 11 months later, in September 2008, the world was plunged into the deepest economic and financial crisis since the Great Depression of the 1930s.

http://www.wsws.org/en/articles/2017/10/19/blkm-o19.html

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1987 is the most important year in alternative rock

From chart hits to mainstream breakthroughs, it was the year modern rock came into its own

Why 1987 remains the most important moment in alternative rock
The Psychedelic Furs; Depeche Mode; Echo & the Bunnymen(Credit: Legacy/Sire)

The National has achieved many things in its career: music festival headlining slots, Grammy nominations and near-chart-topping albums. However, the brooding, Brooklyn-via-Cincinnati band hasn’t had a No. 1 single — until now.

Billboard reports “The System Only Dreams in Total Darkness,” a song from the National’s forthcoming “Sleep Well Beast” album, reached the top slot of the Adult Alternative Songs chart for the week of August 19, beating Arcade Fire’s “Everything Now” by a measly two spins.

In addition to the National and Arcade Fire, the rest of the Adult Alternative Songs chart top 10 includes a slew of seasoned artists: Portugal. The Man, Spoon, The War on Drugs, The Killers and Jack Johnson. Sonically, these acts don’t overlap much. However, on an aesthetic level, they all promulgate a musical approach predicated on constant metamorphosis.

The Killers’ “The Man” is an icy, funky strut; the War on Drugs’ “Holding On” is rife with sparkling Springsteenisms; Portugal. The Man’s “Feel it Still” is a taut, soulful shimmy. The biggest chameleons might be Spoon, whose latest effort is the ominous, funky “Can I Sit Next to You,” which feels like Duran Duran filtered through a paper shredder and pieced back together.

In a striking parallel, the composition of the Adult Alternative Songs chart — notably the abundance of veteran bands who are fearless about evolution — echoes the equally transformative alternative bands dotting 1987’s music landscape.

That’s not necessarily surprising: 1987 was an enormously influential year that shaped how fans and artists alike create, consume and appreciate so-called modern or progressive music.

To understand why 1987 is a cultural inflection, it’s best to consider it the year a burgeoning underground movement crystallized and mobilized. Certain facets of this movement were already in place, of course. Specialty national video shows such as MTV’s “120 Minutes” and “I.R.S. Records Presents The Cutting Edge” and USA’s “Night Flight,” as well as regional video shows (V66 in Boston and MV3 in Los Angeles) were already airing clips from new wave and so-called “college rock” bands. Modern rock-leaning radio stations — notably KROQ in Los Angeles and the Long Island powerhouse WLIR — were also giving these new groups a platform.

On a more mainstream level, John Hughes-associated movies such as 1984’s “Sixteen Candles” and 1986’s “Pretty in Pink” combined relatable depictions of teen angst with a cool-mixtape musical vibe. Hughes treated bands such as Thompson Twins, New Order, OMD and the Psychedelic Furs like futuristic pace-setters. The people responded in kind.

In 1986, OMD’s “If You Leave,” from Hughes’ “Pretty in Pink” peaked at No. 4 on the U.S. pop charts. No wonder critic Chris Molanphy, writing in Maura Magazine, points to “how pivotal Hughes was in helping to break what became known as alternative rock in America — he served as a bridge between what was known in the first half of the ’80s as postpunk or new wave and what would be called alt-rock or indie rock by the ’90s.”

Hughes’ imprint reverberated well beyond films. For example, the movie “Pretty in Pink” took its title from the Psychedelic Furs song of the same name. Appropriately, the U.K. band re-cut the tune, which originally appeared on 1981’s “Talk Talk Talk,” for the film’s 1986 soundtrack. This slicker new version landed just outside the top 40, at No. 41. However, the goodwill earned by this re-do buoyed the Furs through 1987: The desperate swoon “Heartbreak Beat,” the lead single from the band’s 1987 LP, “Midnight to Midnight,” became the Furs’ only U.S. top 40 hit, peaking at No. 26 in May.

“Midnight to Midnight” polarized fans: A collection of full-on synth-pop gloss, it bears little resemblance to the group’s early, moody post-punk. Yet bold evolutions were a 1987 trend; multiple established modern and indie bands staked a decidedly contemporary claim, sometimes in ways that completely overhauled (or at least added intriguing new dimensions to) their previous sounds.

(Let the record show that this phenomenon also has precedent: For example, Scritti Politti’s glittering synth-pop gush “Perfect Way,” which reached the top 15 in 1986, is a far cry from the band’s scabrous post-punk roots.)

Elsewhere in 1987, Echo & The Bunnymen buffed up their gloom on a self-titled album with sharper production, while Depeche Mode countered with “Music for the Masses,” an (appropriately) massive-sounding record with a dense, industrial-synth sound. The Replacements, meanwhile, teamed up with producer Jim Dickinson for “Pleased to Meet Me,” their most streamlined and focused rock record yet. R.E.M. forged a production partnership with Scott Litt that would stretch into the ’90s, releasing the loud-and-proud political statement “Document.”

In many cases, these evolutions didn’t necessarily lead to immediate commercial dividends. In fact, the Smiths — inarguably one of the biggest cult alternative acts in the U.S. — broke up in 1987, making their forward-sounding final album, “Strangeways Here We Come,” a posthumous swan song. However, in 1987, the upper reaches of the pop charts were noticeably more amenable to modern bands.

 Consider this a culmination of a slow and steady trend — how the chart inroads made by OMD and the Psychedelic Furs paired with those made by Pet Shop Boys (“West End Girls” hit No. 1 in 1986) and INXS (who set the stage for its blockbuster 1987 record “Kick” with 1985’s top 5 smash “What You Need”).

“Just Like Heaven,” from 1987’s “Kiss Me, Kiss Me, Kiss Me,” became The Cure‘s first U.S. mainstream top 40 chart hit, peaking at No. 40 in 1988. The shimmering 1987 synth-pop gem “True Faith” also became New Order’s first top 40 single, landing at No. 32. Other bands found even greater success: Midnight Oil’s “Diesel and Dust” spawned that band’s first mainstream hit, the top 20 entry “Beds Are Burning,” while R.E.M. landed its first top 10 single with “The One I Love” from “Document.” Los Lobos’ cover of “La Bamba” hit No. 1 (though having a major Hollywood movie behind them helped tremendously).

What’s interesting: Besides individual radio station charts and specialized trade magazines, these alternative acts didn’t yet have a dedicated Billboard chart. The publication only launched its Modern Rock Tracks chart on Sept. 10, 1988, “in response to industry demand for consistent information on alternative airplay,” as it noted in that week’s issue. In hindsight, it’s easy to see this chart as a reaction to 1987’s alternative groundswell. The influence of these groups was now impossible to ignore, and measuring their reach and impact — no doubt crucial for label bean counters, if nothing else — made sense.

In an interesting twist, 1987’s beginnings and endings were as formative as their transformations. That year’s dissolution of the Smiths and Hüsker Dü led to each band’s frontman — Morrissey and Bob Mould, respectively — launching fruitful and vibrant solo careers that endure today. Debut records from Jane’s Addiction (a self-titled effort) and Pixies (“Come On Pilgrim”), and second albums from Dinosaur Jr (“You’re Living All Over Me”) and Faith No More (“Introduce Yourself”) put forth an aggressive, hybridized rock sound that presaged ’90s grunge, metal and punk. Even Crowded House’s 1986 debut LP finally spawned two hits in 1987, “Don’t Dream It’s Over” and “Something So Strong.”

And, in terms of the touring circuit, plenty of popular 1987 acts continue to find success; U2 playing 1987’s “The Joshua Tree” to packed stadiums is the most obvious one. Depeche Mode is currently embarking on an amphitheater tour while Echo & the Bunnymen and Violent Femmes have toured sheds together all summer. In spring 2017, Psychedelic Furs tapped Robyn Hitchcock as an opener. In the fall, the band is teaming up with Bash & Pop, featuring the Replacements’ Tommy Stinson, for tour dates.

These tour dates in particular have led several writers to recently question whether “80s pop” or “classic alternative” could become the new classic rock. It’s an intriguing idea, although one the radio consultants at Jacobs Media doubt has traction.

“While these bands may do well at state fairs and other summer festivals boasting well-stocked lineups of bands, their ability to support a format is questionable,” Fred Jacobs wrote in a recent blog post. “Classic Rock — and its derivatives — as well as Oldies stations were predicated on the power of nostalgia — not just for a few thousand fans in a market, but for tens of thousands or more of die-hard supporters. We’re talking mass appeal vs. niche.”

Jacobs then went on to point out that Echo & The Bunnymen received only seven spins on a Classic Alternative station in a recent week. “It’s hard to create a groundswell of support for poorly exposed music that’s now 30+ years old,” Jacobs adds.

In a sense, current successful bands like Arcade Fire, Spoon and the National are better positioned than their 1987 analogs to avoid this trap. Multiple channels — radio, video, streaming, live shows — make it easier for bands to gain exposure and reach more people.

At the same time, 2017’s fractured musical culture means that there are plenty of people who either don’t listen (or don’t need to listen) to any of these bands. For proof, just look at the puzzled reactions to Arcade Fire nabbing the Album of the Year Grammy in 2011. One person’s mainstream band is another’s niche or unknown act. Perhaps the underlying concept that drove alternative music culture’s 1987 rise — the mainstream cracking the door open to outsiders — is still alive and well in 2017.

Annie Zaleski is a Cleveland-based journalist who writes regularly for The A.V. Club, and has also been published by Rolling Stone, Vulture, RBMA, Thrillist and Spin.