Presidential candidate Sen. Elizabeth Warren likes to tell everyone that she “has a plan” for virtually every issue facing the country. Most of her plans (tax the rich schemes to pay for massive new government spending) are untested campaign proposals that have little chance of going anywhere in Congress.
But one of her latest plans would restrict corporate takeovers and restructurings. It’s similar to a plan that caused the largest stock market crash in our history the last time it was considered by Congress.
This summer, Warren unveiled a plan to rein in the private equity industry, which she accused of “looting the economy.” Her plan would place restrictions on corporate takeovers and restructurings and repeal the tax breaks related to mergers and acquisitions. This same type of plan was responsible for the stock market crash of 1987.
On Monday, Oct. 19, 1987, the Dow Jones Industrial Average crashed 508 points, a 22.6% drop. That’s the equivalent to a more than 6,000-point drop today. This Black Monday crash was the largest one-day percentage decline ever in our history.
The market decline began the previous week after the House Ways and Means Committee released an anti-takeover bill the evening of Oct. 13. The committee approved the bill on Thursday, Oct. 15. The next day the market dropped 108 points, the first time the market had ever dropped 100 points in a single day. Between Wednesday, Oct. 14, and Friday, Oct. 16, the market dropped by more than 10%, the largest three-day decline since Germany invaded France nearly 50 years before. Today’s equivalent drop would be more than 2,700 points.
That week’s drop set the stage for Black Monday. On that Monday, markets crashed around the world, beginning in Hong Kong and then London before hitting New York and dropping more than 500 points. Black Monday’s stock collapse was worse than any other day in our history, even bigger than the 1929 stock crash that preceded the Great Depression. In the four trading days after the takeover restrictions were unveiled, the stock market experienced its largest declines in history, losing one-third of its value, the equivalent of nearly 9,000 points in today’s market.
The supporters of the House provisions moved quickly to announce that they would reconsider the proposals. The Reagan administration passed word that the provisions were unacceptable and would not become law. The provisions were soon dropped and buried, and the market began to recover.
However, it took two years for stock prices to recover to the levels they were at before Black Monday.
Although some blamed the crash on program trading, trade deficits, or other factors, a study by economists from the Securities and Exchange Commission in 1989 found that “the fundamental factor that initially started the market decline” was the takeover restriction in the proposed House bill.
Such a crash today would have a devastating impact on families, businesses, and the economy. It would wipe out trillions of dollars of retirement savings, pensions, and savings for first homes, college education, and family emergencies. It would slash consumer spending and confidence, reduce business investment and hiring, and likely push the economy into a recession.
No one can be certain that the Warren plan would cause the stock market to crash like it did in 1987. But her plan does call for the same type of restrictions on corporate restructurings that the House plan proposed in 1987 and that precipitated the crash. Any plan that would increase the cost of capital and reduce investment incentives would result in a major negative market reaction. It is safe to say that this is a plan that is not worth the risk.
Bruce Thompson is a contributor to the Washington Examiner‘s Beltway Confidential blog. He is a Washington consultant. During the Reagan administration, he was assistant secretary of the Treasury for legislative affairs.
