Thursday, 4 July 2013

Nine Myths About The [1987] Crash

By Murray Rothbard

Ever since Black, or Meltdown, Monday October 19, 1987, the public has been deluged with irrelevant and contradictory explanations and advice from politicians, economists, financiers, and assorted pundits. Let's try to sort out and rebut some of the nonsense about the nature, causes, and remedies for the crash.

Myth 1: It was not a crash, but a "correction."

Rubbish. The market was in a virtual crash state since it started turning down sharply from its all-time peak at the end of August.  Meltdown Monday simply put the seal on a contraction process that had gone on since early September.

Myth 2: The crash occurred because stock prices had been "overvalued," and now the overvaluation has been cured.

This adds a philosophical fallacy to Myth 1. To say that stock prices fell because they had been overvalued is equivalent to the age-old fallacy of "explaining" why opium puts people to sleep by saying that it "has dormitive power." A definition has been magically transmuted into a "cause." By definition, if stock prices fall, this means that they had been previously overvalued. So what? This "explanation" tells you nothing about why they were overvalued or whether or not they are "over" or "under" valued now, or what in the world is going to happen next.

Read about the other myths...

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