March 14, 2008 3:25 pm
The share price of one of Wall Streets most venerable investment bankers
fell off off a cliff this morning as their value dropped a dizzying 53 % on rumours that the firm faced enormous losses over exposure to the sub prime markets. The Federal Reserve Bank of New York and J.P.Morgan have bailed out Bear Stearns for the moment.The stock markets reacted very negatively to the news and at 3:00 pm the market in New York was down 260 points on the Dow Jones index.
Irrational market psychology and panic play a major role in market behaviour. A number of analysts in the past including Koning, J.K.Galbraith, Robert Schiller and others have pointed out that mass behaviour is often irrational and also replicates events from the past because they are burned into the collective memory of those who make up the contemporary market.So Koning for example argues in an intriguing paper that the crash of 1987 when the stock market lost 23 % in one day was an echo of the crash in 1929 because many market participants in 87 had read about and absorbed the events of 29 and incorporated that into their memory and behaved accordingly. The program traders had also incorporated that event into the analog models they constructed of stock market behaviour that they used to guide them in their trading activity, particularly the traders who were working with George Soros in 1987 who according to Koning anticipated the crash of 1987.Recall, however, that the markets recovered all of their lost value in the next two years.
So far in 2008 we seem to be replaying some of the same scenarios as in the past. We shall see if the Fed's sensible but bold intervention along side the stimulative stance of the budget will be enough to stem the tide of nightmares from the deeper past.1987 and 1997 were short lived disruptions. 1929 was not.
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