Saturday, May 08, 2010

Who's to Blame for the 1000 Point Drop in the Dow

The Dow decline of 1000 points on May 6, 2010 has led to much speculation about the causes, which include the Greek debt crisis, a "fat finger" entry by a trader, and computer trading programs. What surprised me is that a few of the "usual suspects" were not included in the discussion. So in the interest of completeness, I acknowledge them in this post:
  • Greedy financial institutions. After all, they gave us the last financial crisis with subprime mortgages, collateralized debt obligations or securitization, and credit default swaps. It should be easy to add "market manipulation" to the list. High on the list of "usual suspects" would be Goldman Sachs, which is currently being investigated by the SEC.

  • George W. Bush and 8 years of Republican control. The current administration seems to have inherited every financial issue from the previous administration. Adding another inherited issue to the list would be simple enough:-)

  • Hedge funds. The managers of these funds are creating major market swings to take advantage of the individual investors, who will panic, which will allow the hedge funds to profit.
  • If it only were so easy to place blame with one of these causes. Then we could pass financial reform and forever protect the market from a future collapse :-) The reality is we'll probably never know the complete cause of the decline. However, I do believe the 1000 point drop is an indication that volatility will be high for now, as investors get through the current period of high uncertainty.

    For more on Reflections and Musings, check back every Saturday for a new segment.

    This is not financial advice. Please consult a professional advisor.

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