Harrowing Hype

It's the end of the world as we know it
And I feel fine

-REM

The financial world has ended at least seven times in the last 20 years. While each of those world endings was different, none of them truly represented the end of the world. But market participants, consumers, lenders and government leaders alike will recall each of these times as the potential end of our financial system.

1987 Stock Market Crash
On October 19, 1987 the stock market fell 20 percent and that day going forward was forevermore labeled "Black Monday." Newly created "program trading" created automated sell orders once markets reached certain depths, thereby propelling them further downward. The bear market as a whole saw the S&P 500 drop 32 percent, chopped from its valuation, and it took some 20 months to regain its previous height of 328.

1990 S&L Crisis
In 1998, S&L's that had been encouraged through lack of regulation and oversight to make risky real estate loans - commercial real estate, that is - began to go belly up. The government eventually closed over 1000 institutions with assets totaling a then mind-numbing $519 billion.

1994 Orange County
Somewhat mislabeled, this crisis took place on the residential side of the real estate market, although the real activity occurred in the aftermarkets. Regional brokers or "bucket shops" pushed incredibly risky mortgage-backed structures on unwitting investors, including those who invested in Orange County, California among many other municipalities. The losses taken were massive and repercussions included such far-flung effects as colleges reducing or eliminating sports programs and Indian tribes losing as much as one-third of their net worth.

1997 Asian Contagion
Asian currencies fell precipitously in the summer of 1997 as currency speculators, led by George Soros, unleashed a massive assault on the awkwardly overvalued monies. As Asian governments shifted from fixed or near-fixed exchange rates to floating methods, The International Monetary Fund stepped in with a $40 billion program to stabilize currencies in the region.

1998 Long-Term Capital Management
Several brainiacs, including two Nobel Prize winners, controlled a massive hedge fund whose strategy was to pick up nickels in front of steamrollers. In 1998, the steamrollers finally caught their prey and panic spread through Wall Street as it became apparent no one really knew the extent of the trades to be unwound. The Fed, led by Alan Greenspan, intervened, forcing a consortium of Wall Street firms to take over the fund's positions. The alternative, we were told, was that the entire financial system could have collapsed.

2000 Dot-Com Bubble Bursts
In March of 2000 the stock market peaked with the S&P and Nasdaq indices at 1527 and 5048 respectively. The market bubble fueled by incredible investor euphoria, creating many 20-something multimillionaire retirees, came to a shocking and drastic burst. The S&P 500 finally topped its 2000 high in 2007, peaking at 1565, while the Nasdaq has come nowhere near reaching its previous nosebleed level.

2001 9/11
Investor confidence took its most drastic assault as Wall Street was attacked both physically and monetarily. All trading halted for six days as New Yorkers scrambled for safety, shelter and a sense of normalcy. Richard Grasso lead the NYSE back to its feet, but was later vilified for his bonus payments.

A quick glance at the timeline laid out above reveals seven years since the last "world ending" event and a maximum of four between any others. This implies many 28-year-olds have never really experienced a recession in their working lives, which surely exacerbated the level of panic.

Today, the ground has stopped shaking and the markets are on the rise. While the economy has a long way to go, rest assured more financial crises will come. The lessons learned from this one were hard-fought, but cycles are part of the bargain when it comes to a free market economy. How you manage through them will ultimately determine your fate.

Key Developments
The Federal Reserve Board left its target rate unchanged at a range between zero and 0.25 percent. The accompanying statement was more upbeat regarding economic recovery than the August statement as the Fed recently asserted "economic activity has picked up following its severe downturn." In August, the Fed stated that "economic activity is leveling out." Additionally, the Fed reiterated their purchases of $300 billion of Treasury securities will be completed by the end of October 2009.

The pace of economic recovery could be curtailed as demand for U.S. durable goods unexpectedly fell in August and the pace of new home sales rose less than forecast in the same period. Durable goods dropped 2.4 percent versus a forecast for a 0.4 percent increase, while new home sales rose only 0.7 percent to a 429,000 annual pace.

The University of Michigan consumer confidence index rose to the highest level since January 2008. Americans' perception of their financial health rose to 73.4 as a result of the slowdown in job losses and recent rally in the equity market.