|CAN THE CRASH HAPPEN AGAIN?|
October 28, 1997
Questions answered in this forum:
What exactly were the reforms after the 1987 crash? How irrational is the market? How have reforms changed the way the market would crash? How big a deal was the 1987 crash? Will technology outpace the market again?
Sam Kelso of Providence, RI asks:The idea of these triggers seem to indicate that the crash of 1987 and other sudden drops like that are driven by irrational fears. Was that the goal when they were set up? To stop these panicky traders from making a bad thing worse?
Dr. Robert Glauber responds:The idea behind the circuit breaker is pretty much as you describe. At some point prices are being set by panicky traders rather than those making rational deicisions on information. That can happen when the market's operating mechanisms, what we called the "plumbing," breaks down as it did in 1987. When that happened, prices were being set by panicky investors, as you pointed out. At a time like that, it may be a good idea to give the market a rest, a time out for everyone to catch their breath.
Circuit breakers triggered [yesterday] and there will be a lots of debate whether they helped or hurt. I think they were triggered on too small a drop - the market was not in chaos and panicky investors were not ruling the market.