Greek Debt Causes Panic

On May 6^th, 2010 the stock market experienced a momentary crash. In that brief span of time, a trillion dollars of market capitalization was lost, and many well-known corporations’ stock was reduced to trading at a few pennies.  While the event caused the market to quote unreliable prices for the stocks involved, there was no error, human or computerized.  The pre-programmed instructions behaved exactly as they were designed.  It was simply a case of the market responding to the poor growth ability of the economy, and continued stress on the market from the continuous slow unwinding of bad credit from various sources.

The debt situation in Greece began to look disastrous; The Greeks were protesting a bailout package because of its austerity measures, and the Germans were protesting having to bail them out.  Violence began on Greek streets, it appeared Greece was going to cause a chain reaction of national bankruptcies in Europe, and may even cause the Euro to fail.  Investors sold stocks and moved to gold.  So many people did this that many stocks lost their value throughout the day.  The sale price of certain stocks got so low that it began to trip the preset sale instruction for various groups of stockholders. These instructions are designed to limit stockholders loss in a declining market. So many of these automated sale instructions were executed that the value of the stocks dropped significantly. Almost 1000 points were lost on the Dow Jones Industrial in a straight vertical freefall.

Traders quickly identified that stocks were undervalued and began buying the low priced stocks.  This buying caused the market to rebound just as quickly as it had fallen. The event becomes the new definition for market volatility. The market finally settled under the value it had been trading at before the event.  The commotion affected currency trading as well as commodities, but like stocks, soon returned to stability.  The trades that occurred during this time were later reversed and the SEC is still investigating the cause.

There is still bad housing debt on the books of U.S financial institutions and there is still a backlog of houses that have to be foreclosed on. Bad debt is changing the value of stocks as well as real estate.  Until the bad debt is cleared, there will be many years of volatility to come to both assets.