Chances of a Repeat Small, Fed Chief Says : Greenspan: No Guarantee Against New Crash
Federal Reserve Board Chairman Alan Greenspan told Congress on Thursday that he could not guarantee there would be no repeat of the October stock market crash.
But the chance of another “Black Monday” market collapse--when the Dow Jones industrial index plunged 508 points--is very small, Greenspan told a House panel.
“We cannot provide an ironclad guarantee that there will not be another Oct. 19 in our future,” Greenspan said. “If, however, we succeed in fully addressing the structural inadequacies of our financial markets, we can at least reduce . . . the even now very small probability of a replay of last October,” he said.
Greenspan and the three other members of President Reagan’s working group on financial markets presented their findings to a combative House Energy and Commerce subcommittee on telecommunications and finance.
Rep. Edward Markey (D-Mass.), chairman of the subcommittee, and several other members lambasted the U.S. regulators for their report, which was released on Monday.
“The working group’s recommendations amount to a prescription of two aspirin and a respirator following the market’s October heart attack,” Markey said.
House Energy and Commerce Committee Chairman John Dingell (D-Mich.) predicted that investors would tar and feather the top U.S. financial regulators in the event of another crash.
Markey faulted the regulators for failing to endorse a recommendation by the President’s private sector Brady Commission that one U.S. agency be given authority over financial market issues and for proposing that trading be halted only if the Dow Jones industrial index fell 250 points in one day.
“It (the trading halt proposal) is tantamount to parking an ambulance at the bottom of a cliff,” Markey said. “If it is ever needed, it’s too late for the patient.”
The Dow index of 30 blue chip stocks has fallen as much as 250 points on only one day--Oct. 19.
Markey said the inability of U.S. officials to curb wide price swings has driven individual investors from the market.
But Treasury Undersecretary George Gould, who headed the working group, said regulators could not be expected to quell price volatility.
“If you can give me a world without a trade deficit, without a domestic (budget) deficit, with non-inflationary growth, with low interest rates and throw in for good measure peace in the Mideast, I would suggest to you there would be less volatility in the markets,” he said. “I cannot cure all of those things for the small investor.”
In a statement, Gould said that with the exception of the period between October, 1987, and January, 1988, there was no evidence of an increase in daily volatility. Since February, price movements have returned to ordinary levels, he said.
“An investor shouldn’t be so damn worried about volatility because he’s got his eyes set out there for two or three years,” Gould said.
Greenspan said improvements in telecommunications and the concentration of pension contributions in huge funds had reshaped the U.S. financial landscape.
“I don’t like the volatility that has occurred. I would much prefer to resurrect a more tranquil period of 30, 40, 60 years ago,” the head of the U.S. central bank said.
“But I’m afraid we don’t have that as a choice without very significantly undercutting the major financial event of the post-World War II period, which is the emergence of the pension fund system for the average American,” he said.
Greenspan and Gould predicted that small investors would return to the stock market as soon as prices headed up again.
“Individuals come into markets, and they go out of markets. I think they come into markets when they feel confident, not that the volatility is less, but that the market is going up,” Greenspan said.
But Securities and Exchange Commission Chairman David S. Ruder, dissenting from the working group, said legislation was needed to raise investor confidence.
Ruder said the SEC should be given authority over stock index futures and that margin requirements, or good-faith deposits, on those instruments should be raised.
But Greenspan, in a reference to criticism of stock index futures trading strategies, said it was a mistake to single out a segment of the marketplace as the “culprit” for large and rapid price movements.