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.


‘Dunkirk’ Avoids Politics and Melodrama to Deliver a Powerful Human Survival Story

Posted on Jul 22, 2017

By Allen Barra

  A scene from Christopher Nolan’s “Dunkirk.” (Screen shot via YouTube)

Read Allen Barra’s piece on the historical context of the Dunkirk evacuation here.

If you go to see Christopher Nolan’s “Dunkirk” expecting a war movie—or even an antiwar movie—you’re going to be disappointed. Nolan has said it himself in an interview: “I don’t see it as a war film, I see it as a survival story.”

The battle and evacuation of Dunkirk in 1940 is the greatest story to come out of World War II, and, amazingly, it has been given very little cinematic attention. It was the backdrop for the 1942 Greer Garson vehicle, “Mrs. Miniver,” directed by William Wyler. There was a competent 1958 British production, “Dunkirk,” directed by Leslie Norman, with John Mills, Richard Attenborough and Bernard Lee as the journalist around whom the story is framed. Dunkirk’s most effective rendering was in Joe Wright’s “Atonement,” with James McAvoy as a Tommy (a British soldier) stranded on the beach, staring across the English Channel.

Nolan’s film is not only different from any other ever made on the subject. It’s different from any other film connected to war. If Sir Richard Attenborough had made the movie, it would have been respectable, ponderous and laced with a strong dose of stiff upper lip. If made by Spielberg, it would be painted in broad strokes with primary colors and bolstered with nostalgia and Eisenhower-era patriotism. If directed by the Michael Bay of “Pearl Harbor” … let’s not go there.

Nolan’s “Dunkirk” eschews politics and practically leaves out the point of view of the enemy altogether. (There is scarcely a single close-up of a German soldier in the entire film.) Instead of laboring to make the point that the Germans are people just like us—or would be under the proper circumstances—as in “The Longest Day” or “Saving Private Ryan,” Nolan subtly makes the point that despair, courage and hope aren’t national but human characteristics.

The film opens with a handful of British soldiers walking down the deserted streets of what we quickly learn is the village of Dunkirk. Leaflets are falling from the sky. They are German propaganda with a map showing how hopelessly surrounded the British and still-resisting French were. The actual leaflet the Germans dropped featured the message “La guerre est finie pour vous!” (The war is finished for you). This ingenious device tells the viewer exactly where the soldiers are and what their situation is.

The scene turns out to be just one of three intertwined narratives which ultimately come together to tell the whole story of the battle and evacuation. It’s a device Nolan has used in several of his films, but here it does not seem strained or pretentious. “Dunkirk” may be the first time Nolan has relegated his technique to the service of the material.

And the material needs no artificial embellishment. The story of how hundreds of fishermen, ferry captains, yachtsmen and tugboat skippers rescued more than 335,000 men seems almost incredible. Nolan nudges, rather than pushes, the story along. There is a minimum of dialogue.

The great Tom Hardy as a Spitfire pilot has perhaps six lines to speak and does most of his acting with his eyes and facial muscles. Mark Rylance, the 2016 Best Supporting Actor Oscar winner for “Bridge of Spies,” plays the owner of a small yacht who embarks on the rescue mission with his young son aboard and conveys his emotions in hushed tones that draw one’s ear closer.

Nolan directs without hyperbole. There is surprisingly little action in “Dunkirk,” but the suspense is so heightened that you may not realize it until the film is over. Hans Zimmer, who has dealt out his share of schlock for “Batman v Superman” and one of the “Pirates of the Caribbean” movies, seems inspired when he scores for Nolan. His spare, throbbing background sounds are less music and more an aural rendering of the characters’ subconscious. He may be the first composer capable of reflecting the collective subconscious of hundreds of thousands.

“Dunkirk” may be the first movie about a battle that cuts through the barriers of class and nationality. It’s the first I’ve ever seen about death and survival that doesn’t manipulate audience emotions but connects them with the emotion inherent in the story.


The refugee crisis and the polarization of Europe


11 March 2016

Idomeni, Lesbos, Calais … every day one sees pictures that for decades one could not have imagined in Europe: refugees, including families with small children, living in improvised tents and burrows, drowning in rain and mud, lacking medication and food. And again and again: closed borders, barbed wire and heavily armed police who attack desperate refugees with tear gas and batons.

Large sections of the population look on these brutal scenes with horror and disgust, but the official political debate on the refugee crisis takes place within a narrow spectrum ranging from the right to the ultra-right. In politics and in the media, the only voices allowed are those arguing for unrestrained nationalism and the sealing-off of Europe’s internal borders, or those who, in the name of a “European solution,” support the militarization of the EU’s external borders and a dirty deal with the Turkish government.

Compassion for refugees, hospitality, aid, the right to protection and asylum are all banished from the official discourse, which concentrates exclusively on the most efficient way to deter, criminalise and get rid of refugees. The large majority of the European population who, according to every poll conducted, sympathises with refugees and the untold numbers who have donated their savings and their free time to help them go unrepresented in newspaper columns and on talk shows.

In the German federal states holding elections on Sunday, the Greens, the Social Democrats and, indirectly, the Left Party are promoting the policies of Angela Merkel, who advocates hermetically sealing off the EU’s external borders. The only opposition comes from the right wing of the Christian Democratic Union (CDU) and the extreme right-wing Alternative for Germany (AfD), which want to close off the German borders.

The arguments in Germany resemble those in Great Britain, where voters in the Brexit referendum on whether Britain should leave the European Union, are faced with two equally right-wing alternatives: to support the reactionary institutions of the European Union or endorse a British “independence” that removes all obstacles to the intensified exploitation of the working class and more ruthlessly chokes off immigration into the country.

The restriction of the public debate to right-wing positions, adhered to by the entire media and all established parties, serves a political purpose: to prevent the defence of and support for refugees from joining up with the fight against the capitalist system, which has nothing to offer to wide layers of the population but social misery, repression and war. Those incensed by the racist agitation and arson attacks of the ultra-right are to be directed into the political channels of a government policy that is just as reactionary and which has provided fertile ground for the growth of the extreme right.

The brutal mistreatment of refugees is the culmination of a rightward turn in European politics that has developed over a period of years. The actions taken against refugees are the sharpest expression of this shift to the right so far, but not its cause. The real cause is the deepening crisis of international capitalism and the accompanying sharp social polarization. As was the case in 1930s, the ruling elites react to this crisis by stirring up nationalism and xenophobia, building up the state apparatus and pursuing their international economic and political interests through the means of war.

In 2008, when the criminal machinations of speculators brought the world financial system to the brink of collapse, the governments of Europe, like those throughout the world, pumped trillions in public funds into failing banks to rescue the fortunes of the rich. When, as a consequence, some weaker European countries almost collapsed under their debts, threatening the stability of the Euro, the EU and the German government insisted that the working class bear the cost. They made an example of Greece, forcing its population into bitter poverty.

In 2014, Germany and the EU supported the right-wing coup in Kiev and provoked a confrontation with Russia which has continued to intensify. This coincided with the escalation of the war in Syria. After the US and its European allies destroyed first Afghanistan and then Iraq and Libya, the Syrian conflict has now developed into a war involving great and regional powers, threatening to plunge the world into a third world war.

The victims of these wars who attempt to escape certain death by fleeing to Europe are treated worse than animals. One sees what the ruling elites of Europe are capable of. What began with austerity dictates in Greece and other countries finds its continuation in the inhumane treatment of refugees, and is a signal of what workers and youth can expect in the future. Historical experience shows that agitation against foreigners and members of different religions (then it was Jews, today Muslims) serves as the prelude to the oppression of the entire working class.

Under these conditions, the defence of refugees, opposition to war and militarism and the fight against capitalism are inseparable. Only an independent movement of the working class, basing itself on an international socialist program, can prevent Europe’s regression into nationalism, barbarism and war.

This requires not only opposition to the extreme right, but also, and above all, a relentless political fight against the influence of pseudo-left tendencies that lull workers and youth with left phrases to secure and support the social assaults, the build-up of the state, and the war policies of the ruling elite.

The experience with Syriza in Greece has shown what such parties are capable of. The Tsipras government was brought to power at the beginning of 2015 because it promised an end to the brutal austerity measures of the EU. Since that time, Syriza has drastically sharpened austerity policies and taken on the role of the border police and prison guards for the EU.

The Left Party in Germany, Podemos in Spain and numerous other parties that promoted Syriza and support it to this day play no other role. They do not speak for the working class, but for affluent layers of the middle class who do not want to overthrow capitalism, but rather seek to preserve it at any cost.

There is massive opposition in Europe to the devastating effects of austerity measures, to the attacks on refugees and democratic rights and against militarism and war. But this opposition lacks a perspective and a political leadership. The International Committee of the Fourth International and its sections fight for the unification of the European working class based on a socialist program, for the United Socialist States of Europe.

Peter Schwarz