Securities Markets in the 1980s: The New Regime, 1979-1984

Securities Markets in the 1980s: The New Regime, 1979-1984

Securities Markets in the 1980s: The New Regime, 1979-1984

Securities Markets in the 1980s: The New Regime, 1979-1984

Synopsis

Securities Markets in the 1980s is the first of two volumes that provide a uniquely comprehensive history of stock, bond, and merger markets in the 1980s as well as the economic and policy environments in which they took place. This volume analyzes the dramatic recovery in the stock and bond markets and the surge in merger activity in the first half of the 1980s, following the dismal record of the 1970s. Author Barrie Wigmore demonstrates that the period from 1979 to 1984 was a sharp departure from the economic regime of the past decade. Wigmore expertly relates the change to the new policy regime created by the Reagan administration, Federal Reserve monetary policy, falling oil prices, and the strong dollar. Although the securities markets, the economy, and inflation were performing favorably by mid-decade, this book reveals the stress and pain that were required to position them so favorably--contrary to rational expectations theory. Stocks and bonds reached their nadir in 1982, there were persistent financial crises that had to be surmounted, and many capital goods and commodities industries contracted permanently. With a practitioner's eye for important inter-relationships, Wigmore reveals the impact of the Reagan administration on investor optimism and sorts out the influence of the Federal Reserve and the budget deficit on interest rates. He vividly recounts the crises that had to be surmounted in international and domestic finance, and provides unique insight into the role of antitrust policy, lower bank lending standards, and junk bonds in the merger boom. Wigmore also describes the roots of some of the decade's later speculative excesses in treasury bond trading, the futures markets, mortgage-backed securities, and the junk bond market. Written by a former general partner at Goldman Sachs, the insights this book offers into the workings of the securities markets will be of great interest to investors generally, academics and students in the field of finance, professionals in securities firms, and government policy makers.

Excerpt

This book is about the transition from erratic policies and crisis-riddled securities markets in the 1970s to steady economic growth and attractive securities markets in the 1980s. the transition reflected conscious policy changes by the Federal Reserve and the Reagan administration, but also fortuitous changes, such as the decline in oil prices and the strong dollar. This theme is very much of a piece with contemporary economic theory of rational expectations under changing policy regimes, but I did not go looking for it; it forced itself on me. I began simply with the idea of chronicling the history of an interesting period in the securities markets.

The story parts with rational expectations notions, however, in that many markets reflected the new regime slowly, and in no case were the changes painless. the transition was punishing, and major sectors of American industry were permanently disrupted.

There is already an oversimplified image of securities markets in the 1980s that misses this transition. Investment lore, the media, and even presidential politics paint the decade as one of record stock returns, huge bond profits, and rampant mergers fueled by declining inflation, steady growth, lower taxes, and free markets in which financial buccaneers created some of the largest fortunes since the 1920s. This image reflects the last half of the 1980s rather than the first half of the decade, which began with financial markets in despair over accelerating oil prices, inflation, and a declining dollar that had produced almost ten years of persistently poor returns in the stock and bond markets. It took almost two years for the markets and the economy to evolve into the steady growth that characterized the rest of the decade.

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