Even Blacker Monday?

Despite its severity, the 1987 crash had a relatively mild impact on the real economy. But what abou

On 19 October, 1987 – so-called, ‘Black Monday’ - the world’s stock exchanges suffered very sharp price falls. The worst, since the Great Crash of 1929.

On that one day, the Dow Jones Industrial Average slumped by 23%, and in the few weeks of October and early November, prices on the exchanges in London, Frankfurt, Zurich and Paris all fell by 34-40% (the Nikkei in Tokyo was down 19%). Thus came to an end five years of strong bull market activity.

Anxieties about US deficits, a declining dollar, the threat of rising interest rates in the face of inflationary pressures and growing US-Iranian tensions were the backdrop to growing market jitters, but analysts have still not been able to come up with a convincing explanation for the severity of the security price falls.

In the immediate aftermath of the crash some pointed – again, without any great conviction - to the possible destabilising effects of recent regulatory changes (such as London’s ‘Big Bang’ of 1986, which allowed greater freedom to financial institutions to move into new areas of business) and to institutions’ growing reliance on computer modelling to determine the timing of buying and selling shares.

Technology has moved on since then, but in today’s turbulent markets, real concerns continue to be expressed about the risk assessment quantitative computer models used by the global financial institutions, particularly the hedge funds.

The fear is that while these models may be fine in processing frequent, short-term variations in the markets, they still seem unable to cope with the infrequent, sharp changes that denote crises.

Despite the severity of the 1987 crash, its most notable characteristic was the relatively mild impact it had on the real economy. In the UK, the National Institute for Economic Research estimated that consumption fell by no more than 0.3% in the first twelve months as a result of the collapse in the equity markets.

There may have been a crash on the stock market, but for jobs and growth there was relatively little fallout. Here, the role of the central banks was benign.

Central bankers are the guardians of systemic financial stability and, in this, their lender of last resort (LOLR) function can be critical during a perceived crisis. However, the task calls for careful judgement and - as we have seen in recent events - central banks will be condemned if they do act; and condemned if they do not.

These public servants are responsible not only for the stability of the financial system but also for monetary stability (especially for moderating inflation). They are also anxious to avoid their actions giving rise to ‘moral hazards’.

An example of such a hazard would be if a central bank was widely perceived as bailing out the incompetent management of a bank by providing LOLR loans on unduly lenient terms. It is for such a reason, that normally, neither fraudulent nor insolvent banks are offered LOLR facilities – in the case of Northern Rock in 2007, of course, the bank was solvent but was suffering from a shortage of liquidity because of its over-reliance on interbank markets that were no longer lending freely.

For central banks, it is a tightrope balancing act. In 1987 the central banks, led by the actions of the then newly-appointed Chairman of the Federal Reserve, Alan Greenspan, had been widely praised for limiting the effects of the stock market collapse on the monetary system (and, thus, the real economy) by supplying the banks with liquidity and keeping interest rates down.

In contrast, the same Greenspan was criticised for prolonging the dotcom boom mentality (or ‘irrational exuberance’ in Shiller’s words) of the 1990s when the Fed followed a similarly liberal policy as it tried to neutralise the effects of the collapse of the leading US hedge fund, Long Term Capital Management, in 1998.

In 2007, the Bank of England’s hard stand against ‘moral hazard’ came unstuck when Northern Rock depositors were unconvinced, confidence evaporated and sparked the first run on a significant British bank since 1878 (not 1866 as has been widely but incorrectly reported).

But this was an error of execution, not of principle. The Bank’s LOLR intervention is wholly justified. So far in the current market turbulence, stock market prices have been rebounding after each sharp fall, but the lesson of previous corrections - including 1987 - is that the end of a run of bull years is usually marked by a phase of oscillation (of the type we have had this year), followed by a sharp downturn.

If it should come, let us hope that the impact on growth and jobs is as mild as in 1987.

Michael Collins is a professor of financial history at Leeds University Business School and is an expert on bank-corporate relations and central banking. His current research projects include ‘Bank Provision of SME Finance, 1940-70’ and ‘Institutional Investors and the Development of the British Capital Market, 1900-1960’. His recent publications include Michael Collins & Mae Baker, Commercial Banks and Industrial Finance in England and Wales, 1860-1913.
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An English hero for the ages: Ian Botham at 60

Botham blends his sportsmanship and deep-seated passion for cricket with a lust for life.

Begging W H Auden’s pardon, it is possible both to honour and to value the vertical man, and in the case of Ian Botham, who turned 60 on 24 November, it is our bounden duty. No sportsman has given Britons so much to enjoy in the past half-century and no sportsman is loved more. Two decades after he retired from first-class cricket, his reputation as one of life’s champions remains unassailable.

No mere cricketer is he, either. Botham is a philanthropist, having raised more than £12m for various charities, notably Leukaemia and Lymphoma Research. In December, 30 years after his first walk from John o’Groats to Land’s End, he will set off again, in South Africa, where England are on tour. And he really does walk, too, not amble. As somebody who accompanied him on one of his dozen walks said: “You can’t keep up with him. The man is a phenomenon.”

Of all postwar sportsmen, only Bobby Charlton and, at a pinch, Henry Cooper come close to matching Botham’s enduring popularity. But Charlton, a shy man who was scarred by the Munich plane crash of 1958 (and may never have recovered from its emotional effects), has never comfortably occupied a public stage; and Cooper, being a boxer, had a solitary role. Botham, by contrast, spoke for England. Whenever he picked up his bat, or had a ball in his hand, he left spectators in no doubt.

Others have also spoken for England. Bobby Moore and Martin Johnson, captains respectively of England’s World Cup-winning football and rugby teams, were great players but did not reach out to people as naturally as Botham. Nick Faldo, Lester Piggott, Sebastian Coe and, to bring us up to date, Lewis Hamilton have beaten the best in the world, but they lacked those qualities that Botham displayed so freely. That is not to mark them down. They were, and are, champions. But Botham was born under a different star.

It was John Arlott, the great cricket commentator, who first spotted his uniqueness. Covering a match at Taunton in 1974, he asked the young colt to carry his bags up the rickety staircase to the press box, where Arlott, wearing his oenophile’s hat, pulled out a bottle of red wine and invited Botham to drink. Forty years later Botham is a discriminating wine drinker – and maker. Along with his friend and fellow England great Bob Willis, and their Australian wine­making pal Geoff Merrill, he has put his name to a notable Shiraz, “BMW”.

Arlott, with his nose for talent and good company, saw something in the young Botham that Brian Close, his captain at Somerset, was beginning to bring out. Later, Mike Brearley, as England captain, drew out something even more remarkable. As Rodgers and Hammerstein wrote, you’ve got to be carefully taught. And Botham, a fine team man as well as a supreme individual performer, has never withheld praise from those who enabled him to find his voice.

If sport reveals character, then cricket is the game that reveals it most clearly. In no other sport is the individual performance rooted so firmly in a team context. Every over brings a contest of skill and intelligence between batsman and bowler but only a team can win the match. “A cricketer,” as Arlott said, “is showing you something of himself all the time.”

Cricket also reveals national character more than any other sport. Football may be the most popular game in the world but cricket, and cricketers, tell us far more about England and Englishness. It is instructive, in this regard, to hear what Philippe Auclair, a French journalist and author long resident in London, has to say about Botham: “He is essentially an 18th-century Englishman.” In one! It’s not difficult to sense a kinship with Tom Jones, Fielding’s embodiment of 18th-century life, who began his journey, as readers may recall, in Somerset.

A country boy who played for Worcestershire after leaving Somerset, and who lives by choice in North Yorkshire, Botham is an old-fashioned Englishman. Although nobody has yet found him listening to the parson’s sermon, he is conservative with a small and upper-case C, a robust monarchist, handy with rod and gun, and happiest with a beaker in front of him. He represents (though he would never claim to be a representative) all those people who understand instinctively what England means, not in a narrow way, but through something that is in the blood.

Above all, he will be remembered for ever as the hero of 1981. Even now it takes some believing that Botham bowled and batted with such striking success that the Australians, who were one up after two Tests, were crushed. Some of us who were actually at Headingley for the famous third Test – thousands who claim to have been there were not – recall the odds of 500-1 on an England victory going up on the electronic scoreboard that Saturday evening.

Botham made 149 not out as England, following on, beat the Aussies by 18 runs. For three hours the country seemed to stop. In the next Test, at Edgbaston, Botham took five wickets for one run as Australia fell under his spell. Then, at Old Trafford, on a dank Saturday afternoon, he played the most memorable innings of his life and one of the greatest innings ever played by an Englishman: 118 magnificent, joyful runs. Joy: that’s the word. Botham brought joy into people’s lives.

Yet it was the final Test at the Oval, which ended in a draw, that brought from him a performance no less remarkable than those from before. He bowled 89 overs in that match, flat out, continuing to run in when others withdrew with injury. That was the team man coming to the fore. Little wonder his comrades thought the world of him.

Modest, loyal, respectful to opponents, grateful to all who have lent him a hand, and supported throughout a turbulent life by Kath, his rock of a wife, and their three children, this is a cricketing hero to rank with W G Grace, Jack Hobbs, Wally Hammond and Fred Trueman. A feature in the lives of all who saw him, and a very English hero. 

This article first appeared in the 26 November 2015 issue of the New Statesman, Terror vs the State