Tyrone Biggs, the heavyweight boxer, should have commented on the swings of the stock market. Just before the market began its recent fall, he fell to the championship swings of Mike Tyson. He might have offered this bit of fighter's wisdom from the deck: When one is blind-sided, and one's knees wobble, and the ring is twisting around, one must look for stable points of reference in order to regain balance.
Unfortunately, Biggs offered no guidance. And the recent market swings have left many people dizzy. So there may be some value in trying to help establish perspective with these 10 points.
1) This is not a repeat of 1929. With insurance of deposits, increased margin requirements, improved capacity of the Federal Reserve system, social insurance, etc., the chance of a ripple effect becoming an economic tidal wave is small. The very fact that these safeguards are widely recognized tends to put a floor under falling confidence. At the same time, the 1929 precedent is well enough in mind to force policy makers to take the market's warning seriously -- and prevent the fulfillment of dire forebodings.
2) The market is not always right. Economic fundamentals did not change on the weekend of Oct. 17-18. Yet on Monday the 19th, the market fell by more than half a trillion dollars. Clearly the market cannot have been right on both Monday and the preceding Friday. What changed was market psychology. That must be attended to; for the market is ordinarily a good indicator of future economic prospects. But the market should not be treated as infallible. If it were, it would be more stable.
3) The search for a single cause of the crash is bound to be unproductive. Single-cause theories abound. Each points to a different variable: the deficit; rising protectionism; the failure of Germany, Japan and the United States to implement the policy commitments of the Louvre agreement; the under-regulation of program trading in indexed options; rising interest rates; a breakdown in executive-legislative cooperation; a breakdown in U.S.-German cooperation; the prospect of a falling dollar; worries about the Persian Gulf; and boom-bust psychology. But single-cause theories are not persuasive. If there were one variable that alone could account for a sudden and massive shift in market value, it would likely be evident to most observers. But there is no such. The search for a definitive single cause of the 1929 crash has still not proved successful. In the end, the correct answer for the current case will probably be: "all of the above."
4) There can be no single cure. This follows directly from the previous point. To restore a stable basis for confidence, each of the many elements of the problem -- "all of the above" -- should be addressed.
5) The problem remains within manageable bounds. Responsible actions for each of its elements can easily be identified. The terms of a Gramm-Rudman-size deficit reduction compromise for 1988 are obvious and within reach. Options trading can be better regulated. Thirty-four senators can band together to protect against protectionism. Germany can stimulate without causing inflation. And the Group of Five finance ministers can speak with one voice. None of this is impossible. Achieving agreement on a larger, multi-year deficit reduction package is more ambitious and less tractable. But the fact that the parties are talking is a useful first step. Now what's needed is to arrange the political equivalent of an immaculate conception: a compromise that materializes without any politician having to take blame. This may seem absurd. But it was managed in the face of the Social Security crisis. And although it seems unlikely, it is not utterly unreasonable that it might be done again.
6) The "crash" could actually help. Up to last week, the political system was acting as if it were running for luck until the presidential election. The implicit logic of this approach has relied on bridge-financing U.S. deficits with recycled Japanese capital, while postponing domestic policy corrections until politically convenient. That is a gamble -- the risks of which should be reduced. If the market's gyrations were indeed to accelerate responsible action, the economy could continue to grow with lower chances of recession. Of course, if responsible action is not taken now, the risks will increase dramatically. But appreciation of that fact is an additional stimulus to prompt action.
7) There is more to be done than is on the current agenda. Deficit reduction will not eliminate the debt that has already accumulated. To service that debt and restore competitiveness, while increasing real per-capita income, productivity growth will have to improve. Beyond reducing the deficit, that will require increasing applied civilian R&D, continuing corporate restructuring and dramatically improving the American education system. So when the current problem seems to have been brought under control, attention will have to turn to these issues and the longer term.
8) The basic lessons are rather obvious. They are close to trite: don't accumulate excessive debt; advance a spirit of comity between the legislative and executive branches; protect against down-side risks; save; increase productivity; and so forth. They might all make Ben Franklin smile.
9) Though obvious, the lessons will be put aside after the sense of crisis passes. When the market has moved back up, attention will shift back to current consumption and the latest championship sports event. That seems to be human nature.
10) It's not the Red Sox' fault. While all this is unquestionably serious, it has its touches of humor. Accustomed to explaining sudden collapses, some Red Sox fans suggest that the market's crash resulted from an abrupt national recognition that the Sox had failed to return to the World Series. This notion has appeal. But like other single-cause theories, it is fallacious. The market was bound to send a warning signal sooner or later. If the Red Sox had made the Series, the crash might have been postponed -- but not beyond the sixth or seventh game.
The writer, former deputy secretary of the Treasury and assistant to President Reagan, is a managing director of Shearson Lehman Brothers.
"Now what's needed is to arrange the political equivalent of an immaculate conception: a compromise that materializes without any politician having to take blame."