How Wall Street Works and the Biggest Crashes in History
Wall Street is often considered both a symbol and a geographic center of American capitalism. Symbolically, Wall Street refers to all the banks, hedge funds, and securities traders that govern the stock market and the entire American financial system. Geographically, Wall Street is the center of Manhattan's financial district.
How Wall Street Works
Wall Street includes the stock market, bond market, commodity market, futures market, and foreign exchange market. The initial goal of the securities market was to raise funds for the growth of companies, their profitability and job creation. Securities trading has become so profitable on its own that trades have been organized for just about anything you can think of and for many things that you never knew before.
What Changed Wall Street? First, the repeal of the Glass-Steagall Act in 1999. This allowed any bank to use depositors' savings to invest in complex securities called derivatives. They based their value on various types of loans, including credit card debt, corporate bonds, and mortgages. Unlike stocks and bonds, these financial derivatives were not regulated.
Wall Street and Stock Market Crashes
Deregulation was one of the causes of the 2008 financial crisis. Derivatives based on mortgages were called mortgage-backed securities. They were guaranteed by another financial innovation called credit default swaps. All of them were successfully sold on the secondary market until house prices began to fall in 2006. Major mortgages went into default and no one knew how to value mortgage-backed securities. There were so many defaults that companies like AIG, which had guaranteed debt, ran out of cash.
Wall Street panicked, global stock markets fell, and banks stopped lending to each other. Creating the worst recession since the Great Depression. The only thing that stopped the panic was that the federal government saved Wall Street with the TARP program in 2008 and restored confidence with an economic stimulus package in 2009.
The stock market crash in 1929 marked the beginning of the Great Depression. It began on October 24, 1929, the day known as Black Thursday. It deteriorated on Black Tuesday, when the Dow Jones lost all of its annual gains in just a few hours. Wall Street bankers have failed to stem the plummeting stock prices.
Many individual investors have invested their savings in the stock market. When they were destroyed, they lost confidence in Wall Street and the American economy. Others took all their savings from banks, which then collapsed. Only huge government spending on the New Deal and World War II revived economic growth.
In 2010, Congress passed the Dodd-Frank Wall Street Reform Act to stave off a new financial crisis by giving the federal government more control over Wall Street. For example, non-bank financial firms such as hedge funds were required to register with the Securities and Exchange Commission (SEC) and provide information about their trades and total holdings.
Dodd-Frank demanded that the riskiest derivatives be regulated by the SEC or the Commodity Futures Trading Commission. He asked agencies to set up a derivatives exchange center, such as the stock exchange, to make these transactions more transparent.
Occupy Wall Street
Occupy Wall Street was another response to the financial crisis. The Leaderless Resistance Movement began on September 17, 2011 with the takeover of Freedom Square in New York's financial district. It has spread to over 1,500 cities around the world.
Occupy Wall Street has spoken out against income inequality, in which the top percent of the world's population owns most of its wealth. They blamed Wall Street for the financial crisis, recession and, as a result, long-term unemployment.