Page 162 - Risk Management in current scenario

The Wall Street crash in 1929 in the US leading to the beginning of 12
years of the great depression was not without warning signals. Prior to
this crash, the world was recovering from the 1st world war, the American
economy showed ominous signs of trouble with declining steel
production, construction was sluggish, automobile sales were down, and
consumers were building up high debts because of easy credit available.
Despite all these economic troubles, the stock market was showing signs
of high and the gains continued almost unabated until early September
1929. The market had been on a nine-year run that saw the Dow Jones
Industrial Average increase in value tenfold, peaking at 381.17 on
September 3, 1929, shortly before the crash.

The Dot-com-bubble had a similar story during 1999-2002 when internet
and World Wide Web (www) was getting popular. That time investors
were eager to invest in any venture that had internet or ".com", Venture
capitalists, eager to profit on this investment demand, moved to raise
and invest capital faster and with less caution than usual. A combination
of rapidly increasing stock prices, market confidence that the companies
would turn future profits.

A very recent 2008 economic crisis is still fresh in the memories of the
people in the back of skyrocketing home prices in US, cheap credit which
made it too easy for people to buy houses or make other investments
based on pure speculation lending loan without collaterals, Private equity
firms leveraged billions of dollars of debt to purchase companies and
created hundreds of billions of dollars in wealth by simply shuffling paper,
but not creating anything of value.

In all the above examples of the economic crisis over the short history
of last 100 years, there were clear signals of extreme optimism or a
sudden rise in a particular phenomenon (dot-com) prior to the debacle.
The public just followed the general public sentiment and kept investing
in any market that gives them return ( stock market or Housing) in a hope
to book quick profit. Even for other disasters, there are good reasons

160 | Risk Management in Current Scenario