The Corner

1987 and All That

Jay, like you, I remember 1987 all too well. One of the things about that crash was that it seemed to come almost out of nowhere. There were some currency issues, and valuations were high and it was probably made worse than it “needed” to be by program trading, but the economy itself was in decent shape. The stock market on that occasion proved to be a poor predictor of subsequent economic performance, thus (in part) the strong snapback that followed. The difficulty this time round is that there is undeniably a very real problem in the credit markets, a problem that is already affecting the nation’s economic performance, and will continue to do so. The only question is by how much. In trying to weigh what the government’s response should be, it’s necessary to ask (a) what can be done to stop the economic effects of these difficulties being made worse than they need to be by panic; (b) what can be done to ameliorate the underlying problem; and (c) how much of this should be left solely to the operation of market forces.

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