15596386 Final Project Report On Stock Market

CIRSES 1987 ANITA NIKAM On Monday, October 19, 1987, stock markets around the world crashed, shedding a huge value in a very short period. The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1739 (22.6%).By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover. (The terms Black Monday and Black Tuesday are also applied to October 28 and 29, 1929, which occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929. In Australia and New Zealand the 1987 crash is also referred to as Black Tuesday because of the time zone difference.) The Black Monday decline was the largest one-day percentage decline in stock market history. Other large declines have occurred after periods of market closure, such as on Monday, September 17, 2001, the first day that the market was open following the September 11, 2001 attacks. (Saturday, December 12, 1914, is sometimes erroneously cited as the largest one-day percentage decline of the DJIA. In reality, the ostensible decline of 24.39% was created retroactively by a redefinition of the DJIA in 1916.) Interestingly, the DJIA was positive for the 1987 calendar year. It opened on January 2, 1987, at 1,897 points and would close on December 31, 1987, at 1,939 points. The DJIA would not regain its August 25, 1987 closing high of 2,722 points until almost two years later. A degree of mystery is associated with the 1987 crash, and it has been labeled as a black swan event. Important assumptions concerning human rationality, the efficient market hypothesis, and economic equilibrium were brought into question by the event. Debate as to the cause of the crash still continues many years after the event, with no firm conclusions reached. In the wake of the crash, markets around the world were put on restricted trading primarily because sorting out the orders that had come in was beyond the computer technology of the time. This also gave the Federal Reserve and other central banks time to pump liquidity into the system to prevent a further downdraft. While pessimism reigned, the DJIA bottomed on

October 20. Following the stock market crash, a group of 33 eminent economists from various nations met in Washington, D.C. in December 1987, and collectively predicted that “the next few years could be the most troubled since the 1930s.” On Monday, October 19, 1987, the Dow Jones Industrial Average fell to 1738 points from 2246 points, triggering a reduction in the value of all U.S. outstanding stocks and earning that fateful day the unenviable title of Black Monday.But while much attention is paid to October 19 because of the harrowing situation, October 1987 in general was a trying period, as key stock indexes lost over 30 percent of their value in the U.S. The response was quick and decisive as the U.S. central bank and the Fed stepped forward to help during this event. Experts believe that it was the quick thinking on the part of the two aforementioned entities that enabled both the Dow and the S & P which had fallen to 225.06 points from 282.7 points on Black Monday to regain their lost value within 24 months. The relatively quick recovery eliminated the very serious possibility of a recession. The stock market crash of 1987, according to some reports, signaled the end of a five-year bull market. But the market proved to be more resilient following the crash of 1987 than it had been following the crash of 1929. The day after the crash of 1987, for instance, the market posted a record single-day gain of 102.27. Many explanations have been given to account for why the stock market crash of 1987 occurred, but none of them provide a full explanation for the happenings on that blackest of Mondays. Also confounding to some experts is how soon the markets rallied following a serious setback. A number of changes were introduced after the 1987 debacle. For instance, more stipulations were applied to program trading. which involves computers programmed to automatically order stock trades whenever certain marketplace conditions are present. Currently, if the Dow drops more than 250 points in a day, program trading is prohibited to provide enough time for dealers and brokers to touch base with their clients. At the end of the day, however, many believe that if the 1987 crash had one positive impact it was that it warned the powers that be, yet again, that market discipline is necessary. CRASH

There is no numerically-specific definition of a crash but the term commonly applies to steep double-digit percentage losses in a stock market index over a period of several days or A precipitous drop in market prices or economic conditions also called crash. "A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. " "What goes up must come" down are the simple lines but when it applies to stock market,this old saying carry a lot of weight.because when a stock market comes down after having went up over a long period, the devastation it sometimes leave behind is horrible.Crashes usually occur under the following conditions: ➢ A prolonged period of rising stock prices and economic optisim, ➢ A market where P/E ratios exceed long-term averages, and ➢ Extensive use of margin debt and leverage by market participants The Stock Market Crash of 1987 The stock market crash of 1987 was the largest one day stock market crash in history. The Dow lost 22.6% of its value or $500 billion dollars on October 19 th 1987! In order to understand the crash, we must first study the cause. 1986 and 1987 were banner years for the stock market. These years were an extension of an extremely powerful bull market that started in the summer of 1982. This bull market had been fueled by hostile takeovers, leveraged buyouts and merger mania. Companies were scrambling to raise capital to buy each other out, in essence. The philosophy of the time was that companies would grow exponentially simply by constantly purchasing other companies. In leveraged buyouts, a company would raise massive amounts of capital by selling junk bonds to the public. Junk bonds are simply bonds that have a high risk of loss, so they pay a high interest rate. The money raised by selling junk bonds, would go towards the purchase of the desired company. IPOs were also becoming a commonplace driver of the markets. An IPO is when a company HTTP://PAKISTANMBA.JIMDO.COM

FOR DOWNLOADING THIS REPORT AND FOR MORE PROJECTS, ASSIGNMENTS, REPORTS ON MARKETING, MANAGEMENT, ECONOMICS MARKETING MANAGEMENT, ACCOUNTING, HUMAN RESOURCE, ORGANIZATIONAL BEHAVIOR, FINANCIAL MANAGEMENT COST ACCOUNTING VISIT HTTP://PAKISTANMBA.JIMDO.COM issues stock for the first time. “Microcomputers” were also a top growth industry. People started to view the personal computer as a revolutionary tool that will change our way of life, and create wonderful profit opportunities. The investing public was caught up in a contagious euphoria, similar to that of any other bubble and market crash in history. This euphoria made people, once again, believe that the market would always go up. THE CRASH OF 1987 In the days between October 14 and October 19, 1987, major indexes of market valuation in the United States dropped 30 percent or more. On October 19, 1987, a date that subsequently became known as "Black Monday,".The Dow lost 22.6% of its value or $500 billion dollars on October 19 th 1987.The Black Monday decline was the second largest one-day percentage decline in stock market history. Initial blame for the 1987 crash centered on the interplay between stock markets and index options and futures markets and many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline. Some economists theorized the speculative boom leading up to October was caused by program trading, while others argued that the crash was a return to normalcy.

Market crashes are random, unpredictable events,certain warning signs exist, which characterize the end of a bull market and the start of a bear market. By learning these common warning signs, you can liquidate your investments and prosper by shorting the market. New York - On October 19, 1987, the Dow Jones Industrial average declined 22.6% in the largest singleday drop in history. Black Monday, as it has become known, was almost twice as bad as the stock market crash of of October 29, 1929 . The 1929 decline approximated 11.7% and started the Great Depression.The Securities Exchange Commission, academic professors, financial writers and every financial security firm has analyzed the stock market crash of 1987 in about every way possible. Some believe the market crash was caused by an irrational behavior on the part of investors. Some analysts believe that excessive stock prices and computerized trading were the cause. The key finding is that no single news event occurred that could account for the crash. The stock market was doing quite well for the first nine months of 1987. It was up more than 30%, reaching unprecedented heights. That was after two consecutive years of gains exceeding 20%. By 1997, interest rates began to climb. Three days before Black Monday, the stock market gains for the year dropped by 11.6%, including the effects of a 9.5% drop on October 16, 1987. The three day drop was caused be several macroeconomic factors. Long-term bond yields that has started 1987 at 7.6% climbed to approximately 10%. This offered a lucrative alternative to stocks for investors looking for yield. The merchandise trade deficit soared and the value of the U.S. dollar began to decline. After a speech by Treasury Secretary Jim Baker, investors began to fear that the weak US dollar would cause further inflation. On Monday, the Dow dropped about 200 points or 9% in the first hour and half. During the day, most institutional investors implemented various computer-based portfolio insurance programs. Portfolio insurance was destabilizing because it required selling stock as prices declined. The more stocks fell, the more stocks were sold. As the market did not have the liquidity to support the sales, the stock market fell even further. Buyers waited, knowing the more the market dropped, the more selling would have to take place. By the end of the day, the Dow had lost 508 points. One important lesson came out of the stock market crash - is that investors who sold, took a bath. Those who held and continued a disciplined and systemic approach received rewards. In fact, by the end of 1997, total return for the year, including dividends, approximated 5%.

TIMELINE Timeline compiled by the Federal Reserve. SIn 1986, the United States economy began shifting from a rapidly growing recovery to a slower growing expansion, which resulted in a "soft landing" as the economy slowed and inflation dropped. The stock market advanced significantly, with the Dow peaking in August 1987 at 2722 points, or 44% over the previous year's closing of 1895 points. On October 14, the DJIA dropped 95.46 points (a then record) to 2412.70, and fell another 58 points the next day, down over 12% from the August 25 all-time high. On Friday, October 16, the DJIA closed down another 108.35 points to close at 2246.74 on record volume. Treasury Secretary James Baker stated concerns about the falling prices. That weekend many investors worried over their stock investments. The crash began in Far Eastern markets the morning of October 19. Later that morning, two U.S. warships shelled an Iranian oil platform in the Persian Gulf in response to Iran's Silkworm missile attack on the U.S. flagged ship MV Sea Isle City. TIME BEFORE CRISES Now it is turn to talk about the period before the crises of 1929 and 1987. What a kind of period was it? What were the conditions? Well, almost each person in the United States of America was a participant in the process of buying, selling different shares. Everyone thought about money. It was the period of speculators. For shareholders the best way to save money, to their mind, was stock. But it turned to be wrong. It was just a hypothesis. Was it really safe?During the researching the situation in 1987, the situation was the same. People were so stupidly involved in the process of buying stocks that they forgot that terrible crisis. It was true endless process: big companied wanted to be larger with the help of small one by buying the shares. After that they sold unnecessary bonds to others with elevated interest rate. But that process was under the risk as well. Also for that period the preposition that microcomputer would be a great investment was wrong. But people could foresee so far and that is why bought the stocks of those corporations which were connected with such kind of field. One reason for significant supply-side outcomes was grounded on the fact that employees waited that they could get large compensation from their investments. And they

believed that Internet or work salary would be smaller compensation: they trusted only in their stock. It is important to speak on the point concerning the place of the biggest stock exchange market in the world - New York Stock Exchange, during those crises. Well, this market is the head of dollar amount. Nowadays the amounts are remarkable and shocking: the capitalization is more than 23 trillion dollars. COMMODITY PRICE EFFECT In 1987 the situation for commodity prices was very different. The CRB index had made its all time high of 338 in 1980, a year of surging metals prices, and a 20% prime rate. But the price action since then was not in a consistent decline, but erratic with large rallies and declines, and from August 1986 it had been rising strongly. Furthermore after two wild days in the CRB pit caused by the stock exchange crash, the CRB index resumed its erratic rise. Commodity prices both before and after the 1987 crash were therefore a strong indication that the crash problem was specific to the mechanics of the stock market, and not a general monetary or economic phenomena. In particular it was related to derivatives trading. The money managers had not fully understood the lack of liquidity in the futures pits. Their rush to sell created 10, 15, and 20 and even 40 handle discounts in the futures pits, compared to cash prices (a “handle” represents 100 points in the index). Those who bought futures from them at these discounts, then rushed to offset their positions by selling the underlying stocks, “at the market.” This process was repeated all day for two days, and that’s what caused the meltdown of the New York Stock Exchange in October 1987. Also attached are chart #5 - the US Dollar Index, 1987 crash; and chart #6 - the % year Treasury bond, 1987 crash, for your information on their behavior during this crisis.The daily trading limits established by the Stock Exchange and the Chicago Mercantile Exchange (the S& P pit) as a means of breaking panics gave participants a moment to think about what they were doing. One last unfortunate 87 crash incident from the NYFE floor should be mentioned to Europeans, to show the mentality of much of the exchange trading community. On Friday afternoon the week of the crash, one of the NYFE clerks hired a professional stripper, to perform in the NYFE Lounge. I watched most of the traders and clerks again abandon the exchange floor

to mob the lounge entrance to ogle the stripper. They considered this a “cool” event. Their mentality was as shallow as the exchange’s liquidity. PRASHANT KADAM CAUSES Potential causes for the decline include program trading, overvaluation, illiquidity, and market psychology. The most popular explanation for the 1987 crash was selling by program traders. U.S. Congressman Edward J. Markey, who had been warning about the possibility of a crash, stated that "Program trading was the principal cause. "In program trading, computers perform rapid stock executions based on external inputs, such as the price of related securities. Common strategies implemented by program trading involve an attempt to engage in arbitrage and portfolio insurance strategies. The trader Paul Tudor Jones predicted and profited from the crash, attributing it to portfolio insurance derivatives which were "an accident waiting to happen" and that the "crash was something that was imminently forecastable". Once the market started going down, the writers of the derivatives were "forced to sell on every downtick" so the "selling would actually cascade instead of dry up." As computer technology became more available, the use of program trading grew dramatically within Wall Street firms. After the crash, many blamed program trading strategies for blindly selling stocks as markets fell, exacerbating the decline. Some economists theorized the speculative boom leading up to October was caused by program trading, while others argued that the crash was a return to normalcy. Either way, program trading ended up taking the majority of the blame in the public eye for the 1987 stock market crash. New York University's Richard Sylla divides the causes into macroeconomic and internal reasons. Macroeconomic causes included international disputes about foreign exchange and interest rates, and fears about inflation. The internal reasons included innovations with index futures and portfolio insurance. I've seen accounts that maybe roughly half the trading on that day was a small number of institutions with portfolio insurance. Big guys were dumping their stock. Also, the futures market in Chicago was even lower than the stock market, and people tried to arbitrage that. The proper

strategy was to buy futures in Chicago and sell in the New York cash market. It made it hard -the portfolio insurance people were also trying to sell their stock at the same time. Economist Richard Roll believes the international nature of the stock market decline contradicts the argument that program trading was to blame. Program trading strategies were used primarily in the United States, Roll writes. Markets where program trading was not prevalent, such as Australia and Hong Kong, would not have declined as well, if program trading was the cause. These markets might have been reacting to excessive program trading in the United States, but Roll indicates otherwise. The crash began on October 19 in Hong Kong, spread west to Europe, and hit the United States only after Hong Kong and other markets had already declined by a significant margin. Another common theory states that the crash was a result of a dispute in monetary policy between the G7 industrialized nations, in which the United States, wanting to prop up the dollar and restrict inflation, tightened policy faster than the Europeans. The crash, in this view, was caused when the dollar-backed Hong Kong stock exchange collapsed, and this caused a crisis in confidence. 1. DERIVATIVE SECURITIES :Initial blame for the 1987 crash centered on the interplay between stock markets and index options and futures markets. In the former people buy actual shares of stock; in the latter they are only purchasing rights to buy or sell stocks at particular prices. Thus options and futures are known as derivatives, because their value derives from changes in stock prices even though no actual shares are owned. The Brady Commission [also known as the Presidential Task Force on Market Mechanisms, which was appointed to investigate the causes of the crash], concluded that the failure of stock markets and derivatives markets to operate in sync was the major factor behind the crash. 2. COMPUTER TRADING :In searching for the cause of the crash, many analysts blame the use of computer trading (also known as program trading) by large institutional investing companies. In program trading, computers were programmed to automatically order large stock trades when certain market trends prevailed. However, studies show that during the 1987 U.S. Crash, other stock markets which did not use program trading also crashed, some with losses even more severe than the U.S. market. 3. ILLIQUIDITY :-

During the Crash, trading mechanisms in financial markets were not able to deal with such a large flow of sell orders. Many common stocks in the New York Stock Exchange were not traded until late in the morning of October 19 because the specialists could not find enough buyers to purchase the amount of stocks that sellers wanted to get rid of at certain prices. As a result, trading was terminated in many listed stocks. This insufficient liquidity may have had a significant effect on the size of the price drop, since investors had overestimated the amount of liquidity. However, negative news to investors about the liquidity of stock, option and futures markets cannot explain why so many people decided to sell stock at the same time. While structural problems within markets may have played a role in the magnitude of the market crash, they could not have caused it. That would require some action outside the market that caused traders to dramatically lower their estimates of stock market values. The main culprit here seems to have been legislation that passed the House Ways & Means Committee on October 15 eliminating the deductibility of interest on debt used for corporate takeovers. Two economists from the Securities and Exchange Commission, Mark Mitchell and Jeffry Netter, published a study in 1989 concluding that the anti-takeover legislation did trigger the crash. They note that as the legislation began to move through Congress, the market reacted almost instantaneously to news of its progress. Between Tuesday, October 13, when the legislation was first introduced, and Friday, October 16, when the market closed for the weekend, stock prices fell more than 10 percent -- the largest 3-day drop in almost 50 years. In addition, those stocks that led the market downward were precisely those most affected by the legislation. [Ultimately, the legislation was stripped of the provisions that concerned the stock market before being enacted into law. 4. U.S. TRADE AND BUDGET DEFICITS :Another important trigger in the market crash was the announcement of a large U.S. trade deficit on October 14, which led Treasury Secretary James Baker to suggest the need for a fall in the dollar on foreign exchange markets. Fears of a lower dollar led foreigners to pull out of dollardenominated assets, causing a sharp rise in interest rates. One belief is that the large trade and budget deficits during the third quarter of 1987 might have led investors into thinking that these deficits would cause a fall of the U.S. stocks compared with foreign securities (this was the largest U.S. trade deficit since 1960). However, if the large U.S. budget deficit was the cause, why did stock markets in other countries crash as well? Presumably if unexpected changes in the trade deficit were bad news for one country, it would be good news for its trading partner.

5. INVESTING IN BONDS AS AN ATTRACTIVE ALTERNATIVE :Long-term bond yields that had started 1987 at 7.6% climbed to approximately 10% [the summer before the crash]. This offered a lucrative alternative to stocks for investors looking for yield. 6. OVERVALUATION:Many analysts agree that stock prices were overvalued in September, 1987. Price/Earning ratio and Price/Dividend ratios were too high [Historically, the P/E ratio is about 15 to 1; in October 1987 the P/E for the S&P 500 had risen to about 20 to 1]. Does that imply that overvaluation caused the 1987 Crash? While these ratios were at historically high levels, similar Price/Earning and Price/Dividends values had been seen for most of the 1960-72 period. Since no crash happened during that period, we can assume that overvaluation did not trigger crashes every time. 7. GENERAL FACTORS :Talking about general factors concerning the appearance of two crises it is very essential not to forget one of the major factors that play one of the important roles – human one, or to be more concrete – psychological. Its impact on economical system is very strong, and that fact was introduced through many newspapers. They underlined that very psychological factor was not probably noticeable, the economists didn’t pay attention to it, but the prices were managed by that very human factor. In order to get something new and to have the possibility to compare we should research the views of different representatives from that epoch. As for the year of 1929, well, John Kenneth Galbraith said that in the stocks there was an extreme speculation and Federal Reserve had to control the usage of the credits. From another point of view, the specialists told that the process of price-investing selling was activated by the markets. But that action promoted the aggressive institutions to vend in anticipation of price changes. In order to make a conclusion concerning the same lines of the crises in 1929 and the one of 1987 we should underline the next point: a number of same reasons, the major and more important was of course the changes in prices; but the changes also were present; they were connected with the consequences and the character of the governmental actions. And the most

invisible but very powerful factor presented and in 1929 and in 1987 was of course the psychological, or in other words, human factor, which made a great sign in the history of two greatest stock crises. PRAJAKTA AUTI Financial System in Collapse, Credit Crisis Worst Yet to Come :Fundamental Causes of the Crisis Beginning in 1971, for the first time in the history of global finance, no currency in the world has been backed by anything. This monetary experience should be properly called an experiment, which is now reaching its logical conclusion. This includes some curious facts, such as the Estonian kroon, which is backed by a reserve currency, primarily the Euro, while at the same time the Euro itself is backed by nothing. And the Estonian Kroon is not backed by euro banknotes, but instead, in all likelihood, is backed by a mixture of German, US, and Japanese treasury bills. These are only government promises to pay that will, at the end of the crisis, make Estonia's entire foreign reserves, gathered for bad times, almost worthless. If money is backed by nothing more than government seals, decorated paper, and strongly voiced promises, greed enters into play. No army in history has hindered central bankers and governments from creating money out of thin air and then spending it according to their own vision. The modern term for this is credit money, the loaning of credit by the central bank that becomes money itself. In normal and stable systems, bankers have only been able to loan out money that they have in their own vaults, and they were also always ready to exchange issued paper money and obligations for the gold bars stored in the vault of the bank. However, there has come a moment when bankers realised that people were not coming back to request gold, the result of which was that worthless pieces of paper (read: banknotes and electronic impulses) were placed into circulation and if they issued supplementary paper currency, which lacked any coverage, nothing happened, at least initially. In the old days, the mess would eventually surface and the matter ended with either the bankruptcy of the bank or the destruction of the state's monetary system through hyperinflation.

Currently, the entire monetary system is global, and therefore has lasted longer than usual. The process, which took place in Germany in the 1920's over a period of 3-4 years, will last for 3-4 decades on the global market. Throughout history there has been no monetary system that was not backed by a precious metal or some other equivalent accepted by all, ever, without exception, that has remained standing. The current experiment cannot remain standing either. We have created financial “capital” in a heretofore unseen extent. This “capital” is incorrectly believed to be wealth, because it could be exchanged for actual wealth during certain historical stages. Unfortunately, all this financial “capital” and all of this financial “wealth” have little backing in real goods or productive assets. This is an inherent property of our modern-day fractional-reserve banking system. Te result is that, whether we want it or not, the entire global financial system will fall into chaos and will destroyed, and hopefully a new and better system will be created. What will happen is another important question, and impulse psychology comes into play here. People have a tendency to view things, above all, with a short-term time horizon. This “shorttermism” can be seen on the stock markets and by the developments in the financial world. Even though the crisis had already been predicted at the end of the 1990's, financial analysts were guided by “mystical” numbers and assessed the condition of the current situation as good. This type of analysis reminds of the anecdote where a man falls out of a skyscraper; when asked by someone from the fifth floor window how things are going, he answers “so far so good, I'm simply moving quickly”. The Initial Phase – Financial Crisis Unfortunately, the depth and length of the crisis are currently being discounted. At the moment, the crisis is in its initial phases. What is taking place only has affected mostly the financial sector; there has been only a minimal effect on the real economy. However, at the latest by next year, the second phase of the crisis will begin, with spillover effects into the economy. In 2009, the weakness of the global economy will become central. The current economic system is built on providing loans in ever increasing amounts, not on saving and the repayment of debt over time. If a private person builds his life on a series of new loans, where he repays old debt with new debt, then he would be considered crazy and would inevitably end up either in debtor's prison or bankruptcy. If the same thing were to take place at the corporate and state level, then nobody would dare say anything. It would be considered perfectly normal. Where is the child from the fairytale who wasn't afraid to cry out that the king was naked!

Companies have become accustomed to taking new loans, although the financial system is attempting to correct. A contraction of bank credit to the private sector is in place, and inevitably the economy will not receive the money (read: credit) that it was planning on receiving. In addition, financial companies are unable to sell financial securities to finance themselves, since even the currently successful companies that kept free funds in shares and securities in order to earn a higher return, have lost over half of their value. This first initial phase is well familiar to us. We have lived with it for almost two years. The media has called it by various names: “The Subprime Crisis”, “The Credit Crunch”, and “The Credit Crisis”. The Second Phase – Economic Crisis The lack of money becomes evident in the second phase of the crisis – the financial crisis is replaced by an economic crisis, triggering massive bankruptcies that would spread globally in a chain reaction. After the series of initial difficulties encountered by home borrowers and the construction companies, there have been no bankruptcies so far in manufacturing, shipping, media, food processing, not to mention luxury goods like luxury cars, yachts and watches, or exotic businesses like space tourism. But their time will come. During the second phase of the crisis, another large sum of capital will “evaporate” from the market, because a company which is going bankrupt will leave nothing for shareholders and very little for its bondholders. In the second stage of the crisis, unemployment will begin to grow along with the wave of bankruptcies. The final quarter of 2008 is only the beginning. Remember that in 1931-1932, the unemployment rate in the USA was 20%, with one in five people unemployed. The Third Phase – Hyperinflation Throughout the series of crises, politicians will attempt to interfere in the game, but the third stage of the crisis will nevertheless begin. Since banks were “saved” with large bailouts, politicians will also begin to lavish corporations with various aid packages. The recent charade of automakers begging for money is only the beginning. Thus, measures will be undertaken that, in the opinion of politicians, will help the economy and save jobs, something that will likely become known as Obama's “ New New Deal”. This will include a multitude of spending programs and, above all, the loaning of credit with astronomical increases in the money supply, together with the classifying of the corresponding numbers into the trillions. Just like now nobody talks any more in terms of millions, so in the not so distant future no one will be talking any more in terms of billions. Trillions will be the order of the day. Perhaps bank lending

standards will be relaxed. Perhaps the government will lavish the banks with a lot more money than it does today, just to keep them lending. Perhaps the central bank will directly monetize private debt. Perhaps the government will guarantee many more corporate loans, just like it recently guaranteed the securities/loans of the GSEs. Perhaps GSEs will proliferate throughout the economy, transforming the U.S economy into the “GSE Economy”, transforming a former great capitalist economy into a modern-day nationalsozialistische economy. Perhaps the government will implement all of the above. It will seem for awhile that peace has arrived, that the crisis has been overcome, as if the bankrupt companies have been “saved”, although this will only be the calm before the storm. If there is already more money in the financial system than actual goods, then after the subsequent injections of money, more like dropping money from helicopters or showering corporations with money, the economic ship will begin to heel. In this stage, the third stage, the hyperinflation scenario will begin when people realize that the money in banks will buy them next month half as much as it did this month. Then panic will ensue. People will begin to buy essential and non-essential items, just as long as there is something of value that can be obtained in exchange for their colourful pieces of worthless paper. Manufacturing enterprises would no longer want to sell goods, because the money received in exchange for the sale of their goods is not sufficient to purchase the new raw materials. Everyone who sells an actual object or good for paper money is a loser, since the same money is no longer enough to purchase again the same goods. Money created out of thin air electronically has brought tremendous benefits to the initial users and issuers, but at the expense of the wider masses through the collapse in their standards of living in this stage. The third phase will be chaotic and difficult. The details are difficult to predict, but if history is any judge, the politicians won't be asleep. They will likely pass a number of important laws, prices will be fixed, wages will be standardized, foreign currency accounts will be frozen; in general, everything that could be done, will be done, and this will only serve to extend the agony. Social upheaval and riots will be suppressed by brute force; many democratic freedoms and values will likely be lost. As of today, the hyperinflation spiral and Zimbabwe Syndrome have reached the point of no return. Final Phase – Monetary Collapse In the event that democracy survives, then the fourth and final phase will begin, a phase which can be called The Darkness before Dawn, the final agony before the rising of the sun. This is the

ultimate destruction of the monetary and financial system, the loss of all electronic and financial values that is accompanied by monetary reform throughout most of the world. In the worst case scenario, this will result in the creation of a Global Government; in the best case scenario, the process will take place separately in each country. For example, at the end of the Tulip Mania of the 17th century, all futures transactions with which tulips were bought and sold for millions of florins were declared void. Similarly, all electronic assets, contracts, securities, and futures contracts will be declared void, because the world doesn't have a court or executive power which is capable of enforcing bankruptcies and debt collection resulting from millions of non-performing contracts. Only the actual collateral for loans will be demanded land, houses, apartments. The losers will be private persons, while legal entities, along with their debts and non-existent collateral, will be lost in the virtual world, the place from whence they came. Things will begin again with a clean slate. We will once again all be on an equal level. Railroads and planes, bridges and houses won't disappear. All real wealth will remain, lost is only the paper wealth, those things that people believed they had and that they believed someone else (read: government, banks, pension funds, etc) will preserve for them. At that moment, faith will truly have been lost, as the fruits of a person's life will have, through several metamorphoses, been transformed into banking sector profits and executive bonuses that had been spent by the suits long before the crisis even began. The new economic system will be different than the current one. Its type, shape, or form is impossible to predict at the moment. Similarly to the end of the slave-holding system, it was not possible to see the creation of the feudal system. It was also impossible to foresee the blossoming of capitalism before the industrial revolution in England in 1785. So, it now is impossible to predict all the changes, although those changes are inevitable. Each process must go through its historical development and must reach its natural conclusion. History shows that every changeover from one organisation of society to another has been very painful. Nevertheless, each following step, no matter how painful, has moved humanity forward and offered a better life to more people. Hopefully it will also go forward this time. All we have to do is hang on.

BINOD PRASAD & SACHIN KADAM (Please divide this part in between you tow) GRAFICAL PRESENTAION For a few short days in October 1987 the U.S. financial system came perilously close FOR COMPLETE REPORT AND DOWNLOADING VISIT HTTP://PAKISTANMBA.JIMDO.COM