Crashing up: The endless cycle of booms, busts, and human folly

Key topics:

• Boom-and-bust cycles repeat throughout financial history

• Market crashes begin when optimism detaches from reality

• Every financial collapse reshapes economies and human behaviour

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By Peter van der Walt

Hard times make tough men.
Tough men make good times.
Good times, make soft men.
Soft men make hard times.
Rinse, repeat.

Economists call it the boom bust cycle.

First a new trend arrives. A new tech, trend, craze or gimmick. One so shiny that all the smart people agree that this time, it’s different. Then the world at large proceeds to lose all their sense and they go ga-ga for it. Everyone gets in on the action. The Rise is so dramatic that it changes portfolios, changes the game, changes the very laws of physics. In the 2000s its computers and websites. It always goes up. And up. And up.

Until of course it doesn’t.

The hangover is unpleasant, but the ride had benefits. By the time the world economy darn near crashed, everyone had a computer. That counts for something.

Markets do not crash because someone rings a bell. They crash because, for one dizzy moment, everyone believes tomorrow will be exactly like today, only more so. Then tomorrow arrives wearing a different face, and the stampede begins. The cycle mirrors the human psyche, which might mean it is inevitable. Hubris and humble pie, a self-replicating dichotomy that echoes through the ages (and comes recommended by your certified, authorised and approved independent advisor).

That’s why it’s part of history.

Take the South Sea Bubble, aka, how to lose £500 million in six weeks.

In 1711 Britain needed cash to fight the Spanish. The South Sea Company offered a devil’s bargain: give us your government debt, we will pay you 6% forever, and you get shares in a company that has monopoly rights to trade with South America. The only problem: Spain controlled South America and had no intention of letting the English anywhere near it. No matter. By January 1720 the stock had risen from £128 to £550 on nothing more than parliamentary gossip and Isaac Newton losing his wig over margin calls. At the peak in August, it touched £1,000. Newton, who had sold early, panicked, bought back in, and lost £20,000 (roughly £4 billion today). By December the shares were £124. Parliament banned jointstock companies for a century. The word “bubble” entered the language because polite society needed a new term for collective insanity.

But then, the Spaniard monopoly was also at a close. Perhaps for different reasons, coincidentally. But nevertheless.

Or take the Panic of 1907, which saw 50% shaved off the Dow in just one year. America had no central bank yet, just a handful of New York trust companies lending recklessly against copper and railroad stocks. When the Knickerbocker Trust failed on 22 October 1907, the dominoes fell in real time. The New York Stock Exchange lost half its value in twelve months. Banks refused to honour checks. The money supply shrank 12% in weeks. That’s an immediate pay cut of 12% to everyone, everywhere, at once, right now. Riding to the rescue, J.P. Morgan, age seventy. He physically locked the city’s bankers in his library until they pledged $25 million of their own money to backstop the system. Congress watched the old man play Federal Reserve for a weekend and decided maybe America needed an actual one. And that was the upside.

There is, of course, the big one. The Wall Street Crash - all caps - of 1929.

89% wiped out, four years flat. It’s canonical knowledge: On Black Tuesday, 29 October 1929, the Dow fell 12% in a single session. But fewer remember that the market had already dropped 20% in September and would keep falling until July 1932. Peak to trough: 381 points to 41 points, an 89.2% loss. Margin debt had reached 12% of GDP; brokers’ loans hit $8.5 billion (over $140 billion today). On a single day in 1931, 522 banks failed. By 1933, 11,000 of America’s 25,000 banks had vanished. Unemployment hit 25%. The crash did not cause the Great Depression. Tariffs, debt deflation, and the gold standard did that, but it was the gunshot that started the riot. Is it bad to see an upside in a series of events so traumatic for humanity? Perhaps a culture of respect for the value of things as opposed to the energy of idealistic speculation. Or, less nobly, the fact that more millionaires were made during the Great Depression than any other time in American history.

With the knowledge of the Great Depression now enshrined in all textbooks, that single day drop of 12% - in swans Black Monday. On 19 October 1987. Down 22.6% in one day. That alone and it’s panic – but with big, eighties hair. The largest single-day percentage drop in history. The Dow fell 508 points, from 2,246 to 1,738, before most humans could figure out what a “portfolio insurance” computer was doing. Futures markets in Chicago froze, specialists on the NYSE floor could not answer their phones, and the brand-new electronic trading systems turned into accelerants rather than brakes. By the close, $500 billion had disappeared (about a trillion in 2024 money) with no war, no recession, no obvious trigger beyond the terrifying new realization that machines could panic faster than people. The next morning the Fed flooded the system with liquidity and the market recovered most losses within two years. Lesson: when computers sell, humans had better be ready to buy with both fists. Upside: let’s put in extra safeguards (don’t worry about the AI, this time it’s different).

Then there’s the other big one. The one everyone used to just call, in hushed tones, Two-Thousand-And-Eight. More properly, The Great Financial Crisis of 2007-2009. $15 trillion in global wealth erased.

This one was slow-motion carnage. From October 2007 to March 2009 the S&P 500 fell 57%. Lehman Brothers, a 158-year-old firm, filed the largest bankruptcy in history ($619 billion in debt). Global stock markets lost $30 trillion at their nadir. American house prices fell 30% nationally, 60% in the sand states. The culprit was simple arithmetic disguised as genius: banks had written $2 trillion in subprime mortgages, diced them into AAA securities, insured them with undercapitalized companies like AIG, and then levered the whole tower 30-to-1. When house prices stopped rising, the tower fell on everyone. By the bottom, one in four American mortgages was underwater, 8.7 million U.S. jobs had vanished, and the phrase “too big to fail” entered the language like a curse. Upside? Ways were mended (sort of). And, perhaps, a healthy distrust of the smart people entered the psyche.

What ties every crash together is not greed – greed is constant. It is the moment when borrowed money meets borrowed time. Leverage turns bull markets into moonshots and bear markets into elevators with cut cables. Each generation swears it has invented an entirely new paradigm and the old ways no longer apply. Then the music stops, the chairs disappear, and suddenly everyone remembers gravity still works.

It’s at times like this that one wishes there was a lot less “we’re so smart and innovative” and a whole hell of a lot more reading Benjamin Graham’s book.

he numbers are staggering, but the real story is simpler: markets run on stories until the stories run out of cash. When that happens, the only question left is how much of the future we mortgaged to live the story one extra quarter.

History does not repeat, but it does echo like a drunk uncle at closing time. Loud, embarrassing, and impossible to ignore once he starts singing the same song again.

But then… every crash also signals the boom that foreshadowed it. And there are benefits to that boom, just as there are painful benefits woven into the bust.

Hard times make tough men.
Tough men make good times.
Good times, make soft men.
Soft men make hard times.
Rinse, repeat.