Fact Shrine

Market Crashes in Perspective

The most obvious measure of how big a market crash is would seem to be a simple high-low calculation that pits the mania at the market’s peak against its eventual descent into nothingness. By this yardstick, the most commonly cited bubbles in history have been made famous, including the “tulipomania” of the Dutch 17th century and the South Sea Bubble. Others cite the speed and violence of a crash as its defining characteristic, making the 23% one-day DJIA drop in October 1987 the most impressive. By this same benchmark, the Hunt brothers’ 1980 attempt to corner the silver market and silver’s eventual 2-month drop of over 80% rank quite highly.

Boom versus Bust–which matters more?

However, these measures focus to too great an extent on the flashiest figures surrounding a bubble and its bursting. In historical accounts, bubbles attract attention by how ridiculous their participants appear to be–in hindsight–at the market peak. Equal weight should be applied to the absurdly low market levels reached in the despair after a substantial decline. Finally, the size of the market is material as a large market’s proportions mean that more force is required for the boom and bust to unfold. More participants must be dragged into the fray at the top and more non-participants must feel the effects of the anguish that accompanies a low point if the crash is of a truly epic nature.

The biggest market crash ever

And the winner is…

Japan’s boom along with Southeast Asia during the latter half of the 20th century led up to a crash after 1990 that dwarfed even the Great Depression in terms of its knock-on effects on the entire regional economy. The Nikkei 225 index is commonly tracked as a measure of the drastic rise and fall. It fell over 80% from its 1989 peak of nearly 40,000. Leading up to that undoing, stock prices and real estate prices in the country appreciated 10000% and 7000% respectively from the mid-1950s. As with any boom and bust, fundamentals drove the trend that led to speculative excess. Japan’s businesses prospered as they shifted to close government-business partnerships following World War II. Loose lending practices on the part of government-run and private banks fueled the resulting real estate boom in particular. Speculation took over in earnest during the 1980s, leading to a commonplace enthusiasm for share trading that rivalled modern day World Cup fanaticism. Asset valuations relative to those outside the region reached obsene proportions in the late 1980s, where even three years after the Nikkei peak, in 1993, the country continued to be home to the 8 highest-ranked banks in terms of assets. None of these factors alone justifies Japan’s bubble ranking more highly than the 1920s United States boom. What sets its crash apart, though, are its lingering effects, which lasted for upwards of 15 years, drove the local and regional economy into a multi-year downturn, and required outlandish monetary policies from the Bank of Japan to be, at long last, defeated.