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After the stock market dropped 247 points in the Dow Jones Idustrial Average, two chief economists explain why the sudden drop.

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ELIZABETH FARNSWORTH: Now, the stock market and what's behind today's 247 point drop in the Dow Jones Industrial Average. Charles Krause has that story.

CHARLES KRAUSE: There were a variety of explanations for today's 3.1 percent drop in the Dow Jones Average. To help explain what happened we're joined by two chief economists from Wall Street: Mickey Levy, chief economist of NationsBanc Capital Markets, and David Blitzer of Standard & Poor's. Gentlemen, welcome. Mr. Blitzer, put this in perspective for us. With the market at these levels, how serious is a 250 point drop?

DAVID BLITZER, Standard and Poor's: (New York) I don't think it's that serious. I think first of all because it's gone up so much in the last couple of years we have to speak in percentage terms, not really in points on anybody's index. We dropped a bit more than 3 percent today. Last week between Thursday and Friday put together we dropped actually a tiny bit more than that.

And I think in the grand sweep of time, as we look back at the end of this year and certainly next year, we're going to see this as the moment of nervousness but not a moment of panic, not a moment of lasting concern. I think in the coming weeks we will recover as we look at the economy. As we look at what the Fed is likely to do at its policy meeting next week, and we not raise interest rates, I think we'll see that we are in fundamentally good shape, and we can resume the kind of gain we've seen recently.

CHARLES KRAUSE: Mr. Levy, not a moment of lasting concern?

MICKEY LEVY, NationsBanc, Capital Markets: (New York) No, that's right. I think what we have to do is look at the fundamentals that brought the stock market up so high; that is, we have sustained economic expansion, with no signs of recession on the horizon. We have very strong earnings growth, and we have very low inflation. And with those fundamentals, the stock market's on sound grounds.

Today it was a host of technical and psychological negative impacts from the falling dollar to just plain profit-taking to the fact that it was two options were expiring today. I think I believe the fundamentals will stay very, very sound, so if the fundamentals stay sound, there's no reason to be concerned. And the stock market's on sound footing.

CHARLES KRAUSE: Mr. Blitzer, do you agree that this is more of a technical problem than a fundamental problem?

DAVID BLITZER: I think it is in part technical and part psychological. We had a drop in the German mark and in the last week increasing concerns about European monetary union, Germany monetary policy, and a whole raft of issues that we know have helped the inflation picture stay good in this country, but we really haven't worried about it for the last several months. We had options expire.

We've had a very volatile rough several days. Since Thursday of last week it's been more down than up. It's been very volatile. I think it's given some people some pause. And with options expiring and a couple of slow weeks in August coming up, I think a lot of people have said, I don't know if I want to carry all this stuff over the weekend, I'd rather square my books right now, sell, go home, and not worry about it. And I think that's what a lot of them have done.

For the individual investor I think the thing to do is look at a little bit in the longer term. We've been telling you that if you're in stock, there are volatile moments. This is one of them, but we've also been telling you--and I think rightly so--that if you're in stocks over the long haul you'll profit. The last 15 years were exceptionally good, but I think they certainly proved that in the long haul they're a profit.

CHARLES KRAUSE: All right. Let me ask Mr. Levy--both of you have cited the dollar--concerns about the dollar--and also this exploration of options. I wonder--without getting too technical--could you explain why--what options are, first of all, and why their exploration today might have affected the markets?

SEN. CARL LEVIN: Well, I think the simplest point to make about options--today we had the monthly expiration of index options and stocks. And when that tends to occur, various large institutions use options for different purposes, but in order just to square their books when you have options expirations that double up or triple up on the same day, it tends to accentuate the short-term trend, has nothing to do in the long-term.

Vis-a-vis the dollar there is a lot going on in Europe, and just the uncertainty has led to a pick-up in the D-mark relative to the dollar. I think that is also just a short-term technical decline in the dollar. My feeling is if you look at the underlying fundamentals supporting the U.S. economy and where it's heading relative to the uncertainty in Europe and the fundamentals in Europe, which are ify at best, there will be continued demand for dollar-denominated assets, and the dollar will trend up. So by and--

CHARLES KRAUSE: Let me--one thing some of our viewers may not quite understand is why--if the Deutsche mark gets a little bit stronger in Europe--does that mean there's going to be a 250 point drop on Wall Street.

MICKEY LEVY: Great question. I don't know. I mean, quite simply, people said, oh, if the dollar is going to continue to fall, people are selling dollar-denominated assets, so they're selling stocks. But my feeling is the stock market fell due to short-term psychological and technical reasons and then as it falls, people scramble to make up reasons for it. Forget about all the short-term psychological impact. You look at the fundamentals, and they're still unambiguously positive.

CHARLES KRAUSE: Good enough. Sorry. Let me go to Mr. Blitzer for a second. Do you agree that this is--there's a kind of psychology here now that's kind of feeding on itself?

DAVID BLITZER: I think there is definitely psychology and I think it is feeding on itself, and it has for the past week. If one looks at--and I sort of hesitate to mention as a comparison--but 1987, when the market crumbled, the week before the crash we saw much, much more volatility than there is. But what we clearly saw was nervousness that rose and rose and rose.

And all the studies done at that time and very much at that time showed that people got themselves into really a panic. I think since then what we've learned out of ‘87, out of a dip in ‘1989 that was about one and three times bigger than this one on a Friday afternoon, and some other dips since then, is that panic is a mistake. What is reasonable is to look, as both of us have said, at what the economy is doing. And the economy in 1987 was much, much worse than it is now. And in that I don't think there's any comparison or any parallel.

CHARLES KRAUSE: Do you agree then with Mr. Levy that really nobody really knows why this happened today or this week?

DAVID BLITZER: In a sense nobody does really know why this happened. There is an element of mob psychology in any market. And starting at about 3 o'clock this afternoon, and between 3 and 4 was almost half the drop, I think that just got the ball rolling. And everybody sees somebody selling. Nobody wants to be the last fellow who didn't sell on this afternoon. So they all rush in. On Monday morning, by then I think they will have had a chance to look around, and most of them have decided it's not so bad and they should sit tight. And I think a few of them will decide it's gotten so low they should be back in there buying. And hopefully, that should get us off to a better start next week.

CHARLES KRAUSE: So you're expecting the market to rise next week?

DAVID BLITZER: I'm expecting the market to rise a little bit. I think it's going to be another volatile week. It takes a little time to digest 3 percent in a day or about 1 percent in an hour.

CHARLES KRAUSE: Quickly, Mr. Levy, do you agree that probably the market may end up going up next week?

MICKEY LEVY: Well, it's always hard to say, and it's a guessing game. One point I would like to get back to, and that is this is nothing like October 1987. Then you had the Federal Reserve raising rates. You had fears of inflation. You had a fragile economy. Now you have--the Fed's all but licked inflation. The Fed is not raising rates. The economy is unambiguously on sound foundations, and with that, it's not--it's only--it's silly to draw comparisons.

CHARLES KRAUSE: And I'm afraid on that note we will have to leave it for now. Thank you, Mr. Levy and Mr. Blitzer for joining us. Thank you.

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