Failure of Leadership
The response of the Reagan Administration’s working group to the stock-market crash of last October will do nothing to restore confidence in the market. Indeed, the timid and incomplete proposals only mask the inability of the leaders to reach agreement on a meaningful response.
This failure is all the more serious because it comes at a time of declining individual investment in the stock market and a concomitant withering of the market as a resource for funds for expanding business. The basic economic health of the nation is affected.
There is an acute need to restore confidence in the stock market as a working place for investors and businesses--not a casino, but a place for serious investment and a resource for equity for improving the productivity of the economy. But in the wake of the October crash the market is no longer perceived as an attractive place for investors, and the declining investment has meant that it is a declining source of financing for businesses. As James Flanigan pointed out in a recent column, individual savings are moving from stocks to certificates of deposit, and from mutual funds that are invested in common stocks to those that are invested in money-market funds. And for good reason. There is a sense of greater security. And the return is equal or higher.
The lost sense of security regarding the stock market grows out of many factors beyond the great loss of value in the October collapse. The economic performance of enterprises has become secondary to immense profits to be made gambling on futures related to stock prices and index trends. The suspension of program trading on their own accounts by five Wall Street firms has done little to reassure private investors trying to comprehend a market still dominated by computer-driven dealings unrelated to the way corporations are managed. The preoccupation with mergers and takeovers, leveraged buyouts and the attendant proliferation of junk bonds has appeared to be at the expense of investment in expanded productivity.
The remedies put forward by the presidential working group are pitiful if not laughable. The stock market will now have a “circuit breaker,” a one-hour suspension of trading if prices plunge 250 points--something that has happened only once in market history. There will be no revision in the ridiculously slim margins allowed for trading on the futures market, encouraging continued rampant speculation. And nothing is to be done about consolidating controls over the markets, which now fall under separate regulatory bodies.
There is no simple answer to the corruption of capital markets by the takeover mania. Initially, the only remedy may be the elimination of tax incentives for uneconomic mergers. But those complex challenges need not retard reforms that can quickly help restore confidence. The Securities and Exchange Commission should be given authority over all elements of stock trading, including futures and index trading in New York, ending the risky division of labor that gives Wall Street to the SEC and Chicago to the Commodity Futures Trading Commission. With this expanded authority should also go greater resources so that the SEC can expand its oversight role. There needs also to be a tightening and standardization of margins on all transactions.
Treasury Secretary James A. Baker III argues that the working group’s priority was to “protect the financial system against large market breaks,” but the remedies proposed fail even to accomplish that goal. Alan Greenspan, chairman of the Federal Reserve, concluded that “most of the crucial areas are already cured either by market levels or by actions already taken.” That is not so clear to investors, however. And the reasons lie in the failure of Baker, Greenspan and the other working-group members to agree on a convincing, effective action program.
Their loss of credibility is, of course, also the President’s loss of credibility. His failed leadership in this area adds yet another problem to the inheritance of the next President, already burdened with the budget-deficit crisis created by under-taxation.
