THE CONTRIBUTION of the new report on last October's stock market crash is not so much in the hazy solutions it proposes as in its piercing description of the problem. The market has changed, and the regulatory mechanisms have not kept up. The report by the presidential task force, chaired by investment banker and former U.S. senator Nicholas Brady, says among other things that the stock and futures markets have become so intertwined that they need to be jointly regulated; that the regulator should be the Federal Reserve; that the markets must be put on comparable footings in such areas as margin requirements; and, most dramatically, that there need to be better, albeit undefined, "circuit breakers" to halt trading when the markets threaten to be swamped by selling pressure.
There are good reasons to be uneasy about at least two of these ideas. The quasi-independent Fed already has more than enough on its plate, and the whole idea of a liquid stock market is that there should not be protective constraints on price movements. But as the Brady report makes clear, this would not be the only idea about the stock market to prove outmoded. The combination of technology and the futures markets, in the form of computerized hedging by institutional investors, has transformed stock trading. In the long run it may still be true that a stock's price will reflect a company's assets and prospects. But in the short run that price is just as likely to be wildly computer-driven according to a set of relationships that the average investor cannot begin to fathom. You can have all the disclosure rules and other appurtenances of rectitude that you want. There is still no protection in this kind of crap-shoot.
It's important to remain aware of the limits in this kind of argument. No one proposes to drain investment of risk. It can't be done and would smother the economy to try. It also seems true that in October the market was higher than the fundamentals warranted; it deserved to come down. And finally, one major reason it deserved to come down has to do not with the market mechanism but with the risks that stem from national policy. The administration would like you to think otherwise, but the Brady report is clear that the budget and trade deficits helped precipitate the crash. You can reform the markets all day long and not touch this part of the problem. The country is living beyond its means and is helplessly dependent on foreign investment. The slightest bit of further bad news can -- and did -- bring down the whole house of cards.
But if policy were sane there would still be a problem, though a lesser one. The old image of the stock market as a place where the average American can confidently shop for a piece of the rock doesn't hold up anymore. Not with these computerized high rollers free to play the games they do. If the business and investment and political communities want to preserve the stock market as a useful economic and social institution, they've got to find a better line than now exists between investment and manipulation.