If all goes according to expectations, next year the federal tax rate on capital gains will rise for the first time in 23 years from 15% to 20%. Though the past isn't always a distant mirror, it's worth taking a walk back in time to 1986 and revisit what happened in that era.

Things were different in those days. The New York Mets won the World Series in 1986. Ronald Reagan was president and Congress, led by Bill Bradley and Jack Kemp, radically overhauled the federal tax code. The highest marginal rate on income was slashed from 50% to 28%. There were two rates on  income, 15% and 28%,  the closest this nation has  come to a flat tax in modern times. As part of the bargain, many loopholes were eliminated (bye, bye limited partnerships), deductions like credit card interest were abolished and the maximum rate on capital gains was increased from 20% to 28%.

It was the age of the corporate raider and folks like T. Boone Pickens. Carl Icahn and Ronald Perelman were making the CEOs of America's biggest companies quake in their stretch limos. With a huge assist from Drexel Burnham Lambert's junk bond department in Beverly Hills, these characters were putting companies into play on a weekly basis. The rest of Wall Street was frantically scrambling to clone Drexel's incredible profit machine and struggling to create their junk bond units to finance LBOs.

How vast were these profits? After Drexel's junk bond maven, Mike Milken, was indicted in late 1988, U.S. Attorney Rudy Giuliani leaked the skinny on Milken's 1986 income of $500 million, prompting even well-heeled Drexel partners to drop their jaws.

When the 1986 tax act became law, these raiders sensed opportunity and took off on a bender that would last for more than two years. Shareholder value was their mantra. Almost every day, they would tee up companies and demand that their boards work over time to quickly complete the deal to give shareholders the full advantage of the soon-to-expire 20% capital gains tax rate. In actuality, most raiders were hoping that a bigger corporation, or so-called white knight, would swoop in and trump their offers.

Did the expiration of the 20% capital gains tax rate in January 1987 hurt stock prices? Hardly. From January to September, equities went crazy. Propelled perhaps by the big cut in income tax rates, the Dow climbed from 1,897  to over  2,700 on August 25 in a frenzy that looked like a runaway train going down Mt. Everest.

Stock prices careened upwards at a faster rate than Giuliani could arrest and indict Wall Street's legion of inside information traders. By then, he was getting lots of help from his new chief assistant, the crooning Ivan Boesky.

Fed chairman Paul Volcker discerned the all-too-obvious symptoms of an overheating economy and decided he'd had enough of all this nonsense. In April, he jacked up interest rates dramatically, triggering a $100 billion bath for bondholders around the globe.

Merrill Lynch alone lost an estimated $400 million in mortgage-backed securities, and the firm fired the trader, Howie Rubin, whom it deemed  most responsible for the fiasco. Rubin's post-Merrill punishment? A few weeks later he was hired by Bear Stearns.

Equity markets showed little sympathy for the woes in bonds. The party rocked on, with the major indexes sporting 40% plus gains by late summer.

Still, momentum was running out of gas. A bad trade deficit number on Wednesday, October 14, sparked a three-day sell-off of more than 400 points on the Dow. On the next Monday, it fell another 500 plus points.

The next day, Tuesday morning, I was interviewing the head of municipal bonds at Goldman Sachs, which was rumored to have suffered huge trading losses during the previous four days. An underling poked his head in the door to report to his boss that the firm "was just on the tape" announcing that Goldman had announced it would lend hundreds of millions to mutual funds to help them with redemptions. Even in those days, Goldman was worried about the little guys.

Leading savants at the firm were all saying that the federal budget and trade deficits were showing how the U.S. was living so far beyond its means. The crash signaled that the recession had begun, Goldman's wise men proclaimed.

Wrong again. Inflation hawk Volcker had been succeeded by the laissez-faire Alan Greenspan, who flooded the system with liquidity faster than he drank Ayn Rand's Kool Aid as a young man in the  1950s.

A recession wouldn't arrive for almost three years. The economy stabilized in 1988. With stock prices off 35% from their 1987 highs, an M&A boom led by corporate acquirers, not raiders, came back stronger than ever, culminating with the KKR buyout of RJR Nabisco in late 1988.

Some deals were comical. Merv Griffin and Donald Trump engaged in a bidding war for Resorts International. Writing in Barron's, the ubiquitous Ben Stein voiced outrage that both Trump and Griffin were robbing all the poor little public shareholders of Resorts. Trump and Griffin ended up splitting up Resorts and within a few years both defaulted on their LBO debt, prompting some to wonder what Stein was smoking.

Signals everywhere were flashing that all was not well. Many overleveraged LBOs, like Revco and Federated Department Stores, quickly declared bankruptcy barely one year after they sold their junk bonds to complete the deals.

By 1989, the economic recovery that began in 1982 was growing very long in the tooth. Boesky and Milken were headed to the pokey, Giuliani was running unsuccessfully for mayor of New York and the Berlin Wall was falling.

Early in 1990, Drexel Burnham paid about $400 million in bonuses. A week later, they filed for bankruptcy. To paraphrase boxing promoter Don King's favorite line, "Only in America," this could happen only on Wall Street. And remember Wall Street firms are the guys who tell Corporate America how to run their finances.

By year's end, the U.S. economy was in its only recession between 1982 and 2000. Facing a huge budget deficit and a war to reclaim Kuwait from Iraq, President George H. W. Bush went back on his no new taxes pledge and raised income taxes during a recession.

History doesn't repeat itself, but watching the stock market sail higher over the last year makes me think that the old cliche about history rhyming has merit.