Friday, October 20, 2017

In St. Louis, Protests Over Police Violence Disrupt Economy, and Win Attention

Protesters blocked an intersection after a community forum hosted by the St. Louis Young Democrats at Harris-Stowe State University this month. Credit Whitney Curtis for The New York Times
ST. LOUIS — Chris Sommers, who runs a chain of successful pizza restaurants here, has long supported both sides in the fierce standoff between police officers and black residents playing out in this city.

He donated to civil rights groups after the August 2014 shooting of Michael Brown in Ferguson, Mo., which is just 10 miles away. He also backed officers, giving them discounts at his pizzerias and supporting the mayoral candidate endorsed by the police union.

But Mr. Sommers chose sides about a month ago.

After protesters peacefully marched past one of his restaurants one night, Mr. Sommers said riot-ready police officers came through the empty street. He said they indiscriminately fired pellets, shot tear gas as his patrons dined on the sidewalk and chased after him when he cursed at them to stop. It was an inexplicable and unnecessary show of force in his view.

“I was an outspoken critic already of the criminalization of being black,” said Mr. Sommers, who is white. “It wasn’t as personal until the police tried to wreak havoc on me and my business. Unfortunately, it took that for me to get as angry as I need to be.”

Mr. Sommers, a prominent civic benefactor who owns Pi Pizzeria, assailed the 
police on social media. He ended discounts for officers and joined a chorus of activists calling on Mayor Lyda Krewson to replace the police chief.
 In the weeks since, a small but spirited group has taken to the streets of St. Louis and surrounding communities almost every night to protest police violence, inspired by the acquittal last month of Jason Stockley, a white former police officer, in the fatal shooting of Anthony Lamar Smith, who was black.

Although the demonstrations have not drawn the crowds or national media attention of those in nearby Ferguson and other cities, the outrage of Mr. Sommers reflects the surprising impact they have had.

While regional leaders say they are confident the area can thrive economically amid the demonstrations, protest leaders have gotten their attention. The protesters have largely won the public relations battle against the police — who have made some embarrassing missteps in their handling of the demonstrations — and have seized the media narrative, with the local press reporting on their complaints against particular officers and police tactics.

With a focus on disrupting the city’s economy, the protests have forced the city to pay more than $3 million in police overtime and have led to lost revenue after a couple of major concerts were canceled. Demonstrations — or even just the fear of them — have prompted grocery stores and malls to temporarily close. And some wonder whether the unrest will harm the region’s bid to lure the new Amazon headquarters.
State Representative Bruce Franks Jr., right, and other activists in St. Louis observed a moment of silence for Anthony Lamar Smith. Credit Whitney Curtis for The New York Times
Since the protests started, Ms. Krewson, who came to the mayor’s job this year lacking a reputation as a racial justice advocate, has vowed to work quickly to enact police reforms and address racial inequities. She has publicly criticized Lawrence O’Toole, the interim police chief she selected, and questioned the tactics his officers employed during the protests, calling for an independent investigation into allegations of brutality — a call that Chief O’Toole joined.
Joe Reagan, the president of the St. Louis Regional Chamber of Commerce who is white, published an opinion piece in a local African-American newspaper urging swift police reforms to help the region’s economic health, and voiced support for an investigation.

“I think people are nervous about irreparable harm to the civic identity,” said the Rev. Starsky Wilson, a co-chairman of the commission created in the aftermath of the Ferguson shooting.

If nothing else, said Mr. Wilson, who is black, the persistent protests should alert cities nationwide that people will not be satisfied by endless commissions and policy proposals that do not result in action.

“They’ll be back if you don’t take seriously their concerns,” he said.
Still, demonstrators are not declaring victory.

For as much as they have gotten Ms. Krewson’s attention, she has not heeded one of their loudest demands — to immediately replace Chief O’Toole, who is white, with a chief they believe would work better with the community.

Many of the changes they are asking for — more robust civilian oversight, a more diverse department, bridging racial inequalities — are fixes that will take time. And many familiar racial divisions remain: At a recent St. Louis County Council meeting over police pay raises, the pro-police crowd was largely white, applauding those who spoke in favor of officers but remaining silent when others advocated reforms.

“We haven’t seen any real, tangible, systemic change at all, from how the police are allowed to police us to how they’re allowed to engage with us during protests,” said Dhoruba Shakur, a 27-year-old black man, as he marched alongside a group of about 50 protesters on a recent evening with an AR-15 rifle slung over his shoulder. “But we’re not done.”

There have been protests nearly every day since the verdict in the Stockley case on Sept. 15. The core group organizing the demonstrations cut their teeth in Ferguson and say they have adjusted their strategy based on their experiences there.
Demonstrators have taken to the streets almost every night to protest police violence, inspired by the acquittal last month of Jason Stockley, a white former police officer, in the fatal shooting of Mr. Smith, who was black. Credit Whitney Curtis for The New York Times
They focus on protests that cause economic disruption, often targeting white neighborhoods.

“We are bringing it to the doors of people who do not have to live this life and just giving that little bit of uncomfortableness,” said LaShell Eikerenkoetter, a protest leader who is black. “Now you understand what we as black folks feel and why we are out here.”

The demonstrations employ an element of surprise to throw off the police. They have attracted a diverse crowd and word is spread by live-streaming demonstrations online.

“Ferguson, we were driven off passion, anger. We were just flat out mad,” said Bruce Franks Jr., a state representative who is black, and who began his activism in Ferguson. “Now we’re mad, we’re still passionate, we’re still angry. But we concentrate heavily on strategy now.”

The demonstrations have made some people afraid to come to the city because they fear that there is chaos and that police officers are afraid to do their jobs, said Brad Waldrop, a real estate developer who is white. Mr. Waldrop is skeptical that the attempt by protesters to apply economic pressure will lead to broad reforms, because of all the municipalities and counties in the region that operate independently.

Some of the activists’ biggest victories have come at the expense of the police.
Officers have made more than 300 arrests, some of them questionable. They have swept up an undercover officer, an Air Force lieutenant, a reporter for The St. Louis Post-Dispatch and people who were not protesting. The newspaper published accounts of people who said the police struck or pepper-sprayed them after they had been taken to the ground.

The police took on more criticism when video captured some officers stealing a protest chant: “Whose streets? Our streets.” Chief O’Toole only made things worse when he later declared that the police had “owned tonight.” And many were outraged at a photo that showed a suburban police officer with his hand around the throat of an elderly black woman during a demonstration in a shopping mall.

The episodes have eroded trust in a force already struggling to improve community relations in a city trying to rein in its high murder rate, residents said.

“The Police Department has taken a black eye,” said Heather Taylor, a police sergeant here who is president of the Ethical Society of Police, the union representing black officers. “I think we’ve earned it.”

Ms. Krewson, who is white, made the unusual step of publicly criticizing her chief, calling his remarks inflammatory. She requested that the Justice Department investigate allegations of officer misconduct in their response.
“I hear them louder,” Ms. Krewson said of the protesters. “I understand them better because we’re living this day-to-day.”

Why Silicon Valley Is Going Gaga for Bitcoin

Illustration by Vanity Fair; Photo by Chris Ratcliffe/Bloomberg/Getty Images.
Should I buy bitcoin? As a technology reporter, the questions I receive from random people at birthday parties, say, or seatmates on a plane, are usually emblematic of what is going on in the digital world. (And, increasingly, the real one, too, for that matter.) Not too long ago, the predominant question was Should I buy the new iPhone? Then it became Do I need to be on Twitter? or Do I need to be on Facebook? or Do I need to be on Snapchat? (That question has since come full circle to Should I quit Twitter and Facebook?) These days, the question I hear the most—well, besides whether Twitter should ban Trump—is Should I buy bitcoin?
I usually respond with the story of Laszlo Hanyecz. If you’ve come within 500 feet of bitcoin, or any other cryptocurrency, over the past few years, the name alone will make you cringe. Back in 2010, when the currency was in its infancy, Hanyecz went “mining” for bitcoins for a few months and collected 10,000 of them; he subsequently traded them, in what would be the first cryptocurrency transaction in history, to a guy who bought him two Papa John’s pizzas with a couple sides of that tasty, buttery garlic sauce. Back then, Hanyecz’s bitcoins had no value, and the $30 value of two pies and an accoutrement made his individual bitcoin units worth 0.003 cents apiece. Today, at their current market valuation, bitcoin units are worth around $5,800 each, which means Hanyecz’s 10,000 bitcoins would be worth around $58 million. “It wasn’t like bitcoins had any value back then, so the idea of trading them for a pizza was incredibly cool,” Hanyecz told me in 2013, when bitcoin was already valued at $1,242 each. “No one knew it was going to get so big.”
For a lot of people on the periphery of this technology, the extraordinary rise in bitcoin’s value has become cause for alarm. The Web is littered with news articles, blog posts, and white papers warning that bitcoin and its sibling currencies are worth nothing, and the rise and fall of the currencies’ worth, which can fluctuate by billions of dollars a minute, certainly backs that up. But while Jamie Dimon and other bankers might scoff at these digital currencies, Silicon Valley is extremely bullish. There’s a reason, too: if Dimon had invested in bitcoin when he first called it a joke, in 2015, he would have received a tenfold return on his investment.
There are a number of reasons why bitcoin and cryptocurrencies are doing so well right now. One of the more plausible scenarios was outlined this week in a very clever post written by Adam Ludwin, an investor and co-founder of, a bitcoin developer platform, which argues that bitcoin is an entirely new asset class, similar to equities and bonds, and that “bitcoin is capitalism, distilled.” The “capitalism” part of the sentence helps explain why some in Silicon Valley are so specifically exuberant about it right now. “In the short-run, there will be extreme volatility as FOMO competes with FUD, confusion competes with understanding, and greed competes with fear (on both the buyer side and the issuer side),” Ludwin wrote. “Most people buying into crypto assets have checked their judgement at the door.”
This gets someone like me a bit nervous about what cryptocurrencies could end up doing to society in the long run. Silicon Valley culture is largely fueled by people who love to decimate industries that don’t work, often without any thought of how the disruption could lead to other negative results happening in society (see the recent social-media debacle around the election ). In typical Valley fantasy, people are seeing only the positive potential with bitcoin, not the potentially ugly outcomes when humans molest it for their own interests.
One of the many factors currently fueling the ascent of bitcoin is the rise of initial coin offerings, or I.C.O.s, where some lucky investors are reaping astounding returns. You can think of these like a traditional initial public offering, or I.P.O., but without the layers upon layers of regulation and government bureaucracy that come with a company going public. With an I.C.O., a start-up raises money for a new venture by selling “coins” that are very similar to shares of a public company. The coins then rise and fall as the company’s value oscillates. In 2014, when the founding of a new cryptocurrency called Ethereum was announced, it raised $18 million by selling a new digital coin called “Ether” for 40 cents per coin. Today, Ethereum has a market cap of around $30 billion. So if you had spent $100 on Ether during the I.C.O., you would have made $74,900 in profit. As Nathaniel Popper detailed in The New York Times earlier this summer, I.C.O.s have been generating billions of dollars in returns for some—and a lot of scams, too.
The lack of regulation in the cryptocurrency world, after all, means that there is a lot of fraud, extreme volatility, and coin values can jump up or down in mere seconds. Someone I recently spoke with who works with, and monitors, the crypto I.C.O. markets pointed out that some of these I.C.O.s feel awfully similar to the Dot Com public offerings of the late 90s, where the public was buying into nothing and ended up with exactly that when the entire market came crashing down and trillions of dollars were wiped off the stock market. In China, I.C.O.s became so troubling that they were banned earlier this year. In September, the People’s Bank of China issued a blunt statement saying that this practice was “illegal and disruptive to economic and financial stability.” I.C.O.s in China were occurring at an astounding rate, with one report claiming that more than $750 million was raised in I.C.O.s in July and August alone. A lot of people think the ban by China is temporary, slowing the dizzying speed of these offerings.
As a result of all the movement in the cryptocurrency market over the past couple of years, there are a lot of options out there for people who want to try their hand in crypto-investing. There’s bitcoin, the first and most well known of all the currencies, which currently oscillates in value at around $5,000 a coin. I’ve heard predictions all over the map, from bitcoins one day being worth as much as $500,000 each to units being worth absolutely nothing if a better coin comes along. (My personal prediction is that they will continue to rise for at least the next couple of years.) Ether had remained relatively flat until earlier this year when it spiked in value to over $350 apiece. (It’s since fallen to $300 each.) The current coin du jour is called Litecoin, which is getting a lot of attention because it’s still priced relatively low, at around $55 each, and is expected to rise considerably over the next year or so on account of new features that will be added to enable more privacy options. Then there are a slew of other coins to explore, including Monero, which is an open-source currency that was developed in April 2014, but which spiked this year after the illegal drug market AlphaBay was taken down. Monero, unlike other currencies, is truly anonymous, making it the perfect currency with which to buy and sell drugs, guns, and other illegal contraband on the Dark Web. If you look at the World Coin Index Web site, you can see a long list of other coins and their values over time, including Ripple, Bitcoin Cash, Qtum, NEO, Nav Coin, NEM, and a number of other coins.
For Silicon Valley, betting on one of these early can mean profiting beyond all imagination, exceeding even the famed 1,000x start-up returns from companies like Facebook and Uber. Earlier this summer, I interviewed Tyler and Cameron Winklevoss, the twins who co-founded The Facebook with Mark Zuckerberg, and they are now obsessively investing in cryptocurrencies. In a settlement with Facebook, the two brothers were awarded $60 million, but to hear them talk about it, it appears their investments in bitcoin and other currencies are going to reap a far bigger return over time. I’ve spoken with countless other people about the current state of bitcoin and cryptocurrency, and I’ve heard two truths that seems consistent. No one—and I mean no one—knows exactly which digital currency will be successful in the future. It could be bitcoin, it could be Litecoin, it could be something that hasn’t even been created yet. But, the other resounding feeling is that these currencies are here to stay in one form or another and there is nothing anyone can do to stop them. Which brings me back to that question that I’m often asked these days: “should I buy bitcoin?”
There’s an old saying in real estate that “you shouldn’t wait to buy, but rather you should buy and then wait.” That’s the way I feel about these cryptocurrencies. If you’re looking for a quick and dramatic financial boost, realize that you could probably get similar odds by buying a plane ticket to Las Vegas, walking into the first casino you see, and putting all your money on black or red. But, if you’re willing to wait it out, there’s a chance that your investment in a cryptocurrency could make for an impressive return over time. Just be prepared to go it the long haul. Or at least until the price spikes tomorrow.
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The Finance 202: Now, the hard part: Writing a tax bill

Play Video 1:17
Senate passes Republican-proposed budget blueprint
Senate Majority Leader Mitch McConnell (R-Ky.) praised the budget blueprint passed in the Senate on Oct. 19, by a vote of 51 to 49. (U.S. Senate)
Senate Republicans just paved their yellow brick road to a $1.5 trillion tax cut. 
After an anticlimactic vote-a-rama on Thursday evening, the upper chamber voted along party lines — minus Sen. Rand Paul (R-Ky.) — to approve a spending blueprint that will allow Republicans to pass a massive tax cut without Democratic votes.
The Senate budget also authorizes lawmakers to blow a gaping hole in the deficit, roughly twice the size of the 2009 stimulus package that 38 then-Senate Republicans opposed, despite earlier pledges to offset its cost. The House version prescribed a deficit-neutral approach, but House Republicans now are likely to accept the Senate plan in the interest of accelerating work on a tax overhaul.
“I applaud the Senate for passing a budget,” Speaker Paul Ryan (R-Wis.) said in a statement. “This action keeps us on track to enacting historic tax reform that will mean more jobs, fairer taxes, and bigger paychecks for American families. We want Americans to wake up in the new year with a new tax code, one that is simple and fair.”
My colleague Elise Viebeck lays out the next steps that Republican leaders are already negotiating:
House and Senate leaders — with White House encouragement — were in discussions about making last-minute adjustments to the Senate budget resolution that would allow them to bypass having a conference committee that could drag on for weeks. If House leaders were pleased with the Senate changes, they could simply vote on the precise language in the final Senate resolution, allowing them to pivot directly to the tax-cut negotiations in the coming weeks.
And President Trump has been personally lobbying House Republicans this week to swallow the Senate budget to speed up the process. He tweeted praise of Senate Majority Leader Mitch McConnell (R-Ky.) after passage, and marked the occasion again this morning:

Thursday’s foreshortened vote-a-rama had more to do with positioning than tax policy. Nevertheless, Senate Republicans demonstrated unity they’d do well to bottle as their push enters a make-or-break series of weeks.
No GOP senator broke ranks to side with Democrats as the minority offered a series of amendments aimed at extracting maximum political pain. Those included an amendment from Sen. Heidi Heitkamp (D-N.D.) that would prevent tax increases on people making less than $250,000 a year and another from Sen. Sherrod Brown (D-Ohio) to reward “patriot” employers that invest in American jobs.
Significantly, one change Republicans did adopt would allow lawmakers to bust through spending caps to boost defense spending, a key win for defense hawks like Sen. John McCain (R-Ariz.). Politico: “Under the amendment, the Pentagon's fiscal 2018 budget could be increased to $640 billion — without offsets — if lawmakers reach a deal to raise the current spending caps.”


Senate Approves Budget Plan That Smooths Path Toward Tax Cut

Senators Lindsey Graham of South Carolina and John McCain of Arizona, both Republicans, on their way to vote on Thursday night. Credit Al Drago for The New York Times
WASHINGTON — The Senate took a significant step toward rewriting the tax code on Thursday night with the passage of a budget blueprint that would protect a $1.5 trillion tax cut from a Democratic filibuster.

The budget resolution could also pave the way for opening up the Arctic National Wildlife Refuge in Alaska to oil exploration by ensuring that drilling legislation can pass with only Republican votes.

Despite having full control of the government, Republicans have so far been unable to produce a marquee legislative achievement in the first year of 

President Trump’s tenure, putting even more pressure on lawmakers to succeed in passing a tax bill. The budget’s passage could keep Republicans on track to approve a tax package late this year or early in 2018.

As early as next week, the House plans to take up the budget blueprint that the Senate approved on Thursday by a 51 to 49 vote. Doing so would allow for the tax overhaul to move ahead quickly.

Speaker Paul D. Ryan will need most House Republicans to back the blueprint without changes; in the Senate, Rand Paul of Kentucky was the lone Republican to vote against the measure on Thursday, in protest of what he deemed excessive spending. If House Republicans were to insist on negotiating a compromise that melds the Senate and House budget plans, tax legislation could be delayed.
The Senate approved the budget after a so-called vote-a-rama, a legislative whirlwind in which amendments are considered one after another. One proposal would have deleted language that could allow for drilling legislation; the amendment failed, 48 to 52.

“The Arctic National Wildlife Refuge is one of the most pristine areas of the United States, and we have been protecting it for decades for a reason,” said Senator Maria Cantwell of Washington, the top Democrat on the Energy and Natural Resources Committee.

But Senator Lisa Murkowski, Republican of Alaska and the chairwoman of the energy panel, said erasing the language would “deprive us of a substantial opportunity to benefit our country at the same time that we care for our environment.”

In Congress, the annual budget resolution provides an outline of federal spending and revenues. The Senate’s blueprint, for the 2018 fiscal year that began Oct. 1, claims to achieve a balanced budget within a decade, assuming greater economic growth and using an accounting method that excludes Social Security. In order to erase projected deficits, it calls for trillions of dollars in spending cuts over the coming decade.

But the cuts exist only on paper, without legislation to achieve them.
Even so, Democrats sounded the alarm, warning that the aspirational cuts in the budget plan called for slicing more than $1 trillion from Medicaid and about $470 billion from Medicare over a decade.

They also lamented the approach that Republicans are taking on taxes, which mirrors the strategy that they employed in their failed effort to repeal the Affordable Care Act. On that matter, Republicans successfully laid the groundwork for a repeal measure that could pass without any Democratic votes, but party leaders could not ultimately get 50 Republican senators to agree on a health bill.

Though Democrats have pleaded to have more say in the tax overhaul, parliamentary language in the budget resolution would allow Republicans to pass a tax bill without any cooperation from the minority party. The tax measure could add as much as $1.5 trillion to budget deficits over a decade.

“Passing this budget is not a requirement for passing tax reform,” said Senator Gary Peters, Democrat of Michigan. “Passing this budget is only a requirement to pass a tax bill with as few votes as possible, without input or buy-in from members of the minority.”

For Republicans, the budget debate provided a moment to showcase their main goal in the coming months: Approving an overhaul of the tax code for the first time in decades, which they hope will lead to greater economic growth.

The House approved its budget resolution, which had long been stalled, on Oct. 5. The House budget also lays the groundwork for a tax bill, but, unlike the Senate’s approach, it calls for the legislation to not add to the deficit.

The House budget resolution also seeks more concrete action when it comes to cutting spending, instructing committees to come up with legislation that would produce at least about $200 billion in savings.

The chairwoman of the House Budget Committee, Representative Diane Black, Republican of Tennessee, had seemed reluctant to jettison that piece of the blueprint. “What part of ‘cut spending’ does @SenateGOP not understand?” she wrote on Twitter last week. But Senate Republicans have shown no appetite to make spending cuts in tandem with the tax overhaul.

Thursday, October 19, 2017

Trump, Trade and Tantrums

MEXICO CITY — Everyone here wants to know what’s going to happen to Nafta — the North American Free Trade Agreement, which has closely linked the economies of Mexico, Canada and the United States for more than two decades. Donald Trump has described Nafta as the “worst trade deal ever made.” But will he actually destroy it?

Until just a few days ago I was pretty sure that he wouldn’t. My guess was that he would negotiate some minor changes to the agreement, declare victory and move on. Markets seemed to agree: The Mexican peso plunged after Trump’s election but then rebounded, effectively reaching the verdict that nothing terrible would happen.

But I’ve been revising that view in light of recent events — especially Trump’s health care temper tantrum. Breaking up Nafta would be terrible for Mexico and bad for the U.S. It would horrify major U.S. business interests, which have spent two decades building their competitive strategies around an integrated North American market. But it might be good for Trump’s fragile ego. And that’s a reason to fear the worst.
Let’s start by admitting that Nafta, although it led to rapid growth in both Mexican exports to the U.S. and U.S. exports to Mexico, hasn’t lived up to the expectations of some of its proponents.


President Trump and President Enrique Peña Nieto of Mexico at the Group of 20 meeting in Hamburg, Germany, in July. Credit Stephen Crowley/The New York Times

Furthermore, growing trade definitely hurt some U.S. workers. Some U.S. companies laid off workers and moved production to Mexico (although others added jobs to produce goods for Mexican markets, or gained a competitive advantage from the ability to purchase components from Mexican suppliers).

By any measure, the costs inflicted by Nafta were far smaller than those created by imports from China — and these in turn were far smaller than those created by changing technology. For example, the decline in coal-mining employment — caused almost entirely by technological change — or the collapse in truckers’ wages — reflecting deregulation and the collapse of union power — had nothing to do with Nafta. Still, the trade deal caused some real pain.

But admitting this unpleasant reality has almost no bearing on the question of what to do now. Nafta’s disruptions are mostly in the rearview mirror.

We now live in a North American economy built around the reality of free trade. In particular, U.S., Canadian and Mexican manufacturing are deeply enmeshed with one another. Many industrial plants were built precisely to take advantage of our economic integration, buying from or selling to other industrial plants across the borders.

As a result, breaking up or degrading Nafta would have the same disruptive effects that came from Nafta’s creation: Plants would close, jobs would disappear, communities would lose their livelihoods.

And, yes, many businesses, small, large and in some cases huge, would lose many billions of dollars.

Oh, and it’s not just manufacturing. What do you think would happen to the farmers of Iowa if they lost one of the most important markets for their corn?

So what I and others have been assuming is that these realities would stay Trump’s hand. No matter how ignorant he may be about the realities of North American trade, we assumed that he would in the end balk at alienating big businesses and big money.
But now I’m not so sure.

For one thing, Nafta negotiations are going very badly. America’s demands — requiring renewal every five years, taking away the ability of businesses to appeal government actions — would undermine the predictability, the assurance of future market access, that was the trade agreement’s main point.

Meanwhile, documents leaked to The Washington Post show key administration advisers attributing virtually every social ill, from spousal abuse to divorce, to the loss of manufacturing jobs — and we know that the administration, wrongly, believes that trade treaties are the cause of those job losses.

Most important, look at what Trump has been doing with his open, indeed gleeful sabotage of the U.S. health care system. Never mind the huge human costs he’s imposing; he isn’t even following any plausible political strategy, since he and his party are likely, with good reason, to be blamed for the damage. Furthermore, his actions will cost big businesses — insurers and health providers — billions; he’s even boasting about how much he has hurt their stock prices.

So we’ve now seen Trump deliberately hurt millions of people and inflict billions of losses on a major industry out of sheer spite. If he’s willing to do that on health care, why assume he won’t do the same thing on international trade policy?

Nafta, then, is at real risk. And if it does get destroyed, the only question is whether the consequences will be ugly, or extremely ugly.

A Stock Market Panic Like 1987 Could Happen Again

Oct. 19, 1987, was one of the worst days in stock market history. Thirty years later, it would be comforting to believe it couldn’t happen again.

Yet that’s true only in the narrowest sense: Regulatory and technological change has made an exact repeat of that terrible day impossible. We are still at risk, however, because fundamentally, that market crash was a mass stampede set off through viral contagion.

That kind of panic can certainly happen again.

I base this sobering conclusion on my own research. (I won a Nobel Memorial Prize in Economic Sciences in 2013, partly for my work on the market impact of social psychology.) I sent out thousands of questionnaires to investors within four days of the 1987 crash, motivated by the belief that we will never understand such events unless we ask people for the reasons for their actions, and for the thoughts and emotions associated with them.
From this perspective, I believe a rough analogy for that 1987 market collapse can be found in another event — the panic of Aug. 28, 2016, at Los Angeles International Airport, when people believed erroneously that they were in grave danger. False reports of gunfire at the airport — in an era in which shootings in large crowds had already occurred — set some people running for the exits. Once the panic began, others ran, too.

That is essentially what I found to have happened 30 years ago in the stock market. By late in the afternoon of Oct. 19, the momentous nature of that day was already clear: The stock market had fallen more than 20 percent. It was the biggest one-day drop, in percentage terms, in the annals of the modern American market.

I realized at once that this was a once-in-a lifetime research opportunity. So I worked late that night and the next, designing a questionnaire that would reveal investors’ true thinking.

Those were the days before widespread use of the internet, so I relied on paper and ink and old-fashioned snail mail. Within four days, I had mailed out 3,250 questionnaires to a broad range of individual and institutional investors. The response rate was 33 percent, and the survey provided a wealth of information.

A portion of one of the responses to the survey.

My findings focused on psychological data and differed sharply from those of the official explanations embodied in the report of the Brady Commission — the task force set up by President Ronald Reagan and chaired by Nicholas F. Brady, who would go on to become Treasury secretary.

The commission pinned the crash on causes like the high merchandise trade deficit of that era, and on a tax proposal that might have made some corporate takeovers less likely.

The report went on to say that the “initial decline ignited mechanical, price-insensitive selling by a number of institutions employing portfolio insurance strategies and a small number of mutual fund groups reacting to redemptions.”

An avalanche of sell orders exhausted traders in New York. Credit Maria Bastone/Agence France-Presse — Getty Images

The panic in New York spread to the Sydney Stock Exchange in Australia. Credit Fairfax Media, via Getty Images

Portfolio insurance, invented in the 1970s by Hayne Leland and Mark Rubinstein, two economists from the University of California, Berkeley, is a phrase we don’t hear much anymore, but it received a lot of the blame for Oct. 19, 1987.
Portfolio insurance was often described as a form of program trading: It would cause the automatic selling of stock futures when prices fell and, indirectly, set off the selling of stocks themselves. That would protect the seller but exacerbate the price decline.

A car for sale after its owner lost money in the 1929 stock market crash. Credit United Press International, via Corbis-Bettmann

The Brady Commission found that portfolio insurance accounted for substantial selling on Oct. 19, but the commission could not know how much of this selling would have happened in a different form if portfolio insurance had never been invented.

In fact, portfolio insurance was just a repackaged version of the age-old practice of selling when the market started to fall. With hindsight, it’s clear that it was neither a breakthrough discovery nor the main cause of the decline.

Ultimately, I believe we need to focus on the people who adopted the technology and who really drove prices down, not on the computers.

Portfolio insurance had a major role in another sense, though: A narrative spread before Oct. 19 that it was dangerous, and fear of portfolio insurance may have been more important than the program trading itself.

On Oct. 12, for instance, The Wall Street Journal said portfolio insurance could start a “huge slide in stock prices that feeds on itself” and could “put the market into a tailspin.” And on Saturday, Oct. 17, two days before the crash, The New York Times said portfolio insurance could push “slides into scary falls.” Such stories may have inclined many investors to think that other investors would sell if the market started to head down, encouraging a cascade.

Newspapers grappled with the biggest one-day stock market decline, in percentage terms, in Wall Street’s modern history.

In reality, my own survey showed, traditional stop-loss orders actually were reported to have been used by twice as many institutional investors as the more trendy portfolio insurance.
In that survey, I asked respondents to evaluate a list of news articles that appeared in the days before the market collapse, and to add articles that were on their minds on that day.

Furthermore, individual assessments of news articles bore little relation to whether people bought or sold stocks that day.

Instead, it appears that a powerful narrative of impending market decline was already embedded in many minds. Stock prices had dropped in the preceding week. And on the morning of Oct. 19, a graphic in The Wall Street Journal explicitly compared prices from 1922 through 1929 with those from 1980 through 1987.

A graphic in The Wall Street Journal on the morning of Oct. 19, 1987, compared current stock trends with those of the 1920s.

The declines that had already occurred in October 1987 looked a lot like those that had occurred just before the October 1929 stock market crash. That graphic in the leading financial paper, along with an article that accompanied it, raised the thought that today, yes, this very day could be the beginning of the end for the stock market. It was one factor that contributed to a shift in mass psychology. As I’ve said in a previous column, markets move when other investors believe they know what other investors are thinking.

In short, my survey indicated that Oct. 19, 1987, was a climax of disturbing narratives. It became a day of fast reactions amid a mood of extreme crisis in which it seemed that no one knew what was going on and that you had to trust your own gut feelings.

The week of Oct. 19, 1987, people around the country kept a close eye on the market. Top left and right, people outside Fidelity Investments at 51st Street and Park Avenue in New York; bottom right, pedestrians in Washington looking at a stock monitor; bottom left, traders on the New York Stock Exchange floor. Credit Clockwise from top left, Keith Meyers/The New York Times; Peter Freed for The New York Times; Associated Press; Paul A. Souders, via The New York Times

Given the state of communications then, it is amazing how quickly the panic spread. As my respondents told me on their questionnaires, most people learned of the market plunge through direct word of mouth.

I first heard that the market was plummeting while lecturing to my morning class at Yale. A student in the back of the room was listening to a miniature transistor radio with an earphone, and interrupted me to tell us all about the market.

Right after class, I walked to my broker’s office at Merrill Lynch in downtown New Haven, to assess the mood there. My broker appeared harassed and busy, and had time enough only to say, “Don’t worry!”

Like the 2016 airport stampede, the 1987 stock market fall was a panic caused by fear and based on rumors, not on real danger. In 1987, a powerful feedback loop from human to human — not computer to computer — set the market spinning.

Such feedback loops have been well documented in birds, mice, cats and rhesus monkeys. And in 2007 the neuroscientists Andreas Olsson, Katherine I. Nearing and Elizabeth A. Phelps described the neural mechanisms at work when fear spreads from human to human.

The Chicago Stock Exchange was drawn into the market fall. Credit Getty Imaages

We will have panics but not an exact repeat of Oct. 19, 1987. In one way, the situation has probably gotten worse: Technology has made viral rumor transmission much easier. But there are regulations in place that were intended to forestall another one-day market collapse of such severity.

In response to the 1987 crash and the Brady Commission report, the New York Stock Exchange instituted Rule 80B, a “circuit breaker” that, in its current amended form, shuts down trading for the day if the Standard & Poor’s 500-stock index falls 20 percent from the previous close. That 20 percent threshold is interesting: Regulators settled on a percentage decline just a trifle less than the one that occurred in 1987. That choice may have been an unintentional homage to the power of narratives in that episode.

But 20 percent would still be a big drop. Many people believe that stock prices are already very high — the Dow Jones industrial average crossed 23,000 this week — and if the right kinds of human interactions build in a crescendo, we could have another monumental one-day decline. One-day market drops are not the greatest danger, of course. The bear market that started during the financial crisis in 2007 was a far more consequential downturn, and it took months to wend its way toward a market bottom in March 2009.

That should not be understood as a prediction that the market will have another great fall, however. It is simply an acknowledgment that such events involve the human psyche on a mass scale. We should not be surprised if they occur or even if, for a protracted period, the market remains remarkably calm. We are at risk, but with luck, another perfect storm — like the one that struck on Oct. 19, 1987 — might not happen in the next 30 years.

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