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Analysis and Argument Essay on ‘Black Tuesday’ Stock Market Crash Financial systems both money markets and capital markets all across the world have always been susceptible to shocks of varying proportions. The stock markets for instance are very vulnerable to daily variations in the forces of demand and supply. That is, when supply of a given stock outweighs its demand, the price of that stock is expected to fall and when demand outstrips supply, the price is expected to rally. Though these changes are viewed as normal, at times the prices plummet to a level that it sets in a wave of panic among the investors (Rothman, Par 1). These panicking investors rush to liquidate their stocks leading to further dip in prices. Such huge falls in stock prices can lead to what we call a stock market crash. One of the most documented crashes in the world is the United States stock market crash of 29th October 1929 popularly known as the Black Tuesday. On that dreaded Tuesday Dow Jones had shed 13 % while eight weeks prior to that the bourse had lost 40 % of its value (Lancaster, par 2). This paper aims to analyze what happened on, before and after that Tuesday, what could have caused the crash and what measures can be taken to prevent future crashes. Prior to the 1929 crash, the United States of America had experience a period of stable economic growth. This was characterized by a period of improved industrial production, for instance mass production of cars and radios in the 1920s (Lancaster, Par 4). During this period the consumption expenditure was high. There was no doubt that the standards of living in America were improving very fast. Buoyed by a robust financial market and a period of strong economic outlook, speculative tendencies were on the rise. People were borrowing from banks to finance stock purchase. Banks were creating excess reserves which were not backed by any security. These excess reserves were passed over to the clients as loans to purchase stocks. During that period, the financial markets were not well regulated and this created a lot of loopholes of which the financial institutions could use to make more profits. These overly liberal credit policies encouraged Americans to take too much debt in order to invest more heavily on stocks in the 1920s (Latson, Par 5 ).Besides there were evident weaknesses with the financial system at that time which are believed to have contributed to the near collapse of the stock markets. Some of the weaknesses may have included policy errors by the federal reserves, risky business models of banks, over optimism of the investors and so on. These factors are believed to have blinded economists from detecting what could go wrong. Lancaster outlines that during the 1920s stock markets had undergone a rapid expansion period reaching its peak in august 1929 after a period of wild speculation. After that production declined and unemployment rose leaving stocks in great excess of their real value (par 4). This triggered the beginning of the gradual fall of stock prices. This decline is a believed to have been catapulted with low wages, proliferation of debt, struggling agricultural sector and excess large bank notes that could not be liquidated. In the next two months leading up to October the bourse had already shed about 40% of its value. In the week leading up to the crash major bankers had exuded confidence that the falling prices being experienced were just temporary .On that fateful Tuesday investors exchanged a record 16,410,030 shares on the New York Stock Exchange (NYSE) in a single day. That resulted into billions of dollars lost and thousands of investors wiped thus the name black Tuesday. According to Rothman, the black Tuesday was just the beginning of the worst period in the American economic history. She claims the policy makers of that time floundered while economists were confused on what action to take (par 2). This stock market crash is believed to be one of the major triggers and the immediate precursor to the great depression (1929-1939). Lancaster explains that the federal reserves bank may have contributed a great deal to the great depression and the stock market crash. In years leading up to the great depression, the federal reserves bank had created excess reserves which were not backed by gold first to increase reserves of the American banks and secondly to stop the gold flight from the Britain to the United States and help the dwindling fortunes of the Britain’s economy(par 11). These actions of the federal reserves are also believed to have contributed heavily to the crash and the depression. Periods after the stock market crash were the defining moments of the study of economics. Different schools of thoughts came up with theories on how to handle future financial crisis. Fisher, a believer in market economics, argued that monetary policy could sufficiently prevent a future crash. According to Fisher, increasing money supply in the economy through open market operation could lower the interest rates thus release money for investment then economy would grow again. Another economic school of thought led by Keynes argued that market economics was the cause of the crash and the depression in the first place. A degree of government intervention is needed to spur economic growth. He argues that wages and prices are sticky while the interest rates were already very low that no amount of monetary policy would trigger growth. They also raised questions concerning the despondency and pessimism of private investors during such times. There proposal was an expansionary fiscal policy where the government would invest more on the infrastructural projects and other economic stimulus programs in order to trigger economic growth and also create employment(Djuraskovic 5, Par 2). In comparison to the 2007-2008 financial crises, one common reason for both remains insufficient regulation. According to Duraskovic, financial institutions must be regulated on their spending, how much money they could lend and even how much innovation can be allowed. Just like 1929 crash banks played a big role in the financial crisis of 2007- 2008 (7,par 1).In 1929 banks could lend money to clients to purchase securities, similarly, in 2007-2008 crisis banks issued unsecured mortgage backed securities that is mortgage loans could serve as assets. This also came after a period of strong economic growth and banks were using all means to make huge profits. Some banks were paying hefty bonuses to their directors even when they were making losses. This freedom among the banks in their operations contributed a huge deal to the financial crisis of 2008. Some of the mentioned weaknesses of the pre crisis period were unregulated derivatives in the OTC market, risky financial innovations, lack of understanding of risks, poor risk management, inappropriate model of regulation and some risky business models of banks (Djuraskovic 2, Par 3). Despite numerous similarities between the two crises, the 2007- 2008 crisis did not lead to the great depression. This can either mean the latter crisis was handled better or the magnitude of the former was bigger. In conclusion, by looking at actions taken to solve the 2007-2008 crises and the 1929 stock market crash, this paper will suggest some of actions to be taken in lieu of the two analyses. The US government applied the expansionary fiscal policy propagated by Keynes in the 30s.They designed bailouts for American major banks and companies; they increased spending on infrastructure and social insurance. The US also applied quantitative easing (buying financial assets and mortgage backed securities from banks) to increase money in circulation thus bring the economy back to growth path and revert deflation. In Europe, a mixture of both monetary policy and fiscal policy were applied where austerity measures were applied to curb spending and control deflation. Austerity measures in Europe meant huge cuts in spending and cancellation of some programs. Germany and the United Kingdom seems to have emerged out of the crisis while countries like Portugal, Spain, Greece and Ireland seems to have sank deeper into the credit crisis. Both policies have led to mixed outcomes with some countries in Europe plunging deeper into recession while the in the US the growth has been very dismal. In a nutshell, economists still have a lot to do when it comes to issue of financial markets and macroeconomic policies. According to Fox, it is only by augmenting macroeconomics theories and financial markets dynamics that we will be able to understand, predict and prevent future economic and financial crises (par 14).

References
Djuraskovic, Jovan. 'The Global Economic Crisis Through The Prism Of The Great Depression'. ManageFon 19.71 (2014): 39-48. Web.
Fox, Justin. 'What We've Learned From The Financial Crisis'. havard business review 91.11 (2013): 94-101. Print.
Lancaster, Richard. 'Black Tuesday October29, 1929 Revisited'. www.goldeagle.com. N.P., 2002. Web. 1 May 2015.
Latson, Jennifer. 'Worst Stock Tip In History'. Time 2014: 1. Web. 1 May 2015.
Rothman, Lily. 'How We Underestimated The Black Tuesday Stock Market Crash'. Time 2014: 1. Web. 1 May 2015.