|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?
Leslie Carlson of Pierre, SD asks:I was interested in your comments regarding technology and the market. You seemed to indicate that the very basis of the market helped cause the crash of 1987. Do you think that new technologies, like NASDAQ on the Internet and other projects could outpace the basic structure of the markets again?
Dr. Robert Glauber responds:That's always the danger. We hope the new technologies can be used to strengthen the markets, and the ones you mention - NASDAQ and the Internet - do, I think. In 1987 one of the problems was that market makers ran out of capital and should work better together to provide liquidity for investors who want to sell. Again, in '87 communications broke down between investors and their brokers; investors panicked and added fuel to the sell-off. With the Internet and the other communications improvements (the NYSE says it can do a 2 billion share day without a glitch - [yesterday] the NYSE did 700 million shares without breathing very hard), there will be less panic to feed the market break.
But technology is often a two-edged sword, as you suggest. With more telephone lines into mutual funds, investors can redeem shares faster if they want, which means more selling by the mutual funds to get the cash they need. On balance, however, my bet is that technology will make the market stronger, not more vulnerable.