Once the crash has begun, the stampede in the opposite direction occurs and the mad rush to sell is as fierce as the original eagerness to buy. Most speculative manias end in roughly the same way. It is interesting to note how they usually end.
Firstly, all speculative manias end with a terrible crash. Speculative booms do not run oil” steam gradually, instead they sort of fall off the cliff. An earlier commentator on the stock market had noted that most speculative manias seemed to follow the ‘90 per cent rule’ when they eventually crashed. This rule states that in the crash which follows a speculative mania, the prices usually collapse by 90 per cent or more compared with the peak reached during the speculative boom. Table 3.1 below shows that the ‘90 per cent rule’ was followed by the three manias described in Chapter 1.
Indeed even the Crash of 1973 seems to follow the 90 per cent rule. However, since then, the percentage decline suffered by the stocks had steadily become less and less. As can be seen from Table 3.1, in the latest Crash, the worst performing share fell about 70-80 per cent. This seems to imply that the market is maturing and its fluctuations are getting less extreme. In spite of the aforesaid, it must be noted that the market is still extremely volatile. In the last three crashes, the market fell between 50~75 per cent on an overall basis.
The unfortunate people who were the last to enter the market before the crash would have lost almost all their capital. Many in Malaysia or Singapore were forced into bankruptcy after the-Crash of 1973 and many more could have followed in the Crash of l981. As Galbraith points out in his book, ‘… an outbreak of speculation provides a reasonable assurance that another outbreak will not immediately occur’. But with time, memory fades, another generation of speculators reach the stage where they have enough money to take part and another batch of lambs are ready for the sacrifice.
Secondly, crashes have a very unsettling effect on the country’s economy since many more than the speculators concerned are hurt by the after effect. Researchers in the West have found that people’s expenditure depends a great deal on how ‘wealthy’ they feel. When.stock rices are rising or are at a high level the paper wealth of the nation as denominated by the stock prices is very high. People thus feel rich and tend to spend likewise. In doing so, they tend to push the prices of other commodities houses, land food, consumer durables upwards as well. Unfortunately, stock market upcycles usually coincide with economic booms and as a result, the inflationary pressure tends to be much more pronounced. On the other hand, after the stock market has crashed, people feel so much poorer even if their real income remains the same they tend to spend less. Since crashes usually coincide with recessions anyway, this tends to exacerbate the severity of the slump. The country loses both on the way up and on the way down.