What Next?

The market convulsions of the last few weeks have shaken the world. We are still far from understanding exactly what happened and why; but we know that without the intervention of governments a serious financial crisis would have gone out of control. For the moment they have succeeded in stabilizing the situation and we may have bought the time, and created the political climate, to deal with some of the causes of these convulsions. We are still facing, however, an extremely volatile and dangerous situation.

Before looking for “solutions” to “problems” we must get some perspective about what the facts are and how they are related to one another. Most of the time the facts themselves will point, if not to the solution, at least to a direction that, over time, can improve the situation.

In the case of financial market crises the difficulty in getting facts is compounded by the psychological factors connected with the market. Trying to outguess the markets may be interesting but it is highly uncertain. We really know very little about why the markets collapsed at this particular time. The federal budget and trade deficits were not new; nor was pressure on the dollar, which, only recently, was supposed to be a positive development. Relatively modest increases in interest rates earlier this year were thought to be troublesome but far from disastrous. The underlying economic statistics were unchanged for some time.

Was there anything really new? The answer may be that what was new was that the Dow Jones average reached 2700 and that the market was being driven upward by the most aggressive level of speculation seen in decades. Continued irresponsible fiscal behavior on the part of government combined with continued irresponsible behavior on the part of the financial community, throughout the world. The crash occurred, ricocheting around the world.

What happened subsequently is also worth noting:

1) The day after Black Monday the markets threatened to go into free fall and we came within an eyelash of shutting down our markets in the face of an uncontrollable panic. What saved the situation, at that time, was not only the self-correction of a free market but vigorous, direct intervention by government and business. The Federal Reserve injected billions of dollars into the system and drove down interest rates; a number of blue-chip companies announced huge programs to repurchase their shares. The result was to drive the market averages back up. The Japanese government urged its securities industries to support the Tokyo market.

2) In addition to the effects of this swift and direct intervention, confidence was maintained by the existence of safety nets and regulatory bodies created by the New Deal during the 1930s—the Federal Deposit Insurance Corporation, Social Security and unemployment compensation funds, the SEC, federally guaranteed pensions, etc. There was not a murmur of concern about the soundness of the banking system, since the public assumed, correctly, that the government was the lender of last resort.

3) The market may or …

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