It's hard to overstate the impact of the 1987 Crash in the Stock Market.
It was a time, just like today.
And just like today, investors, regulators and the big banks were trying to decide what to do next.
For those of us who were traders, it was a time when it was difficult to keep our heads above water. We would spend the trading day trying to keep up with the onslaught of never-ending orders.
While we spent the evening matching orders and trying to make sense of it all. Remember this was before the internet, and before most brokerage companies were fully automated. And so orders were matched up manually, and often came back hours after they were executed.
For the back office, things were just as difficult as the margin departments tried to keep up with the incredible number of margin calls, as the stocks which were the underlying collateral for those margin calls, were dropping like a rock.
And the impact of the Crash was felt not just at the brokerage firms, it was also felt down in Washington. Where President Reagan created, by executive order, the Working Group on Markets, now known as the Plunge Protection Team, which would bring together all the major regulators, so that they could coordinate their response to a similar crisis.
But perhaps the largest impact of the 87 Crash was felt by the newly minted Chairman of the Federal Reserve, Alan Greenspan. Confirmed just months before the Crash, Greenspan had to weather the full impact.
Now Greenspan had entered public life as a disciple of Ayn Rand. A true free-market advocate if ever there was one.
But he came away from the Crash, a different kind of Chairman. From that time forward, Greenspan took it upon himself to fight any nascent financial crisis by providing liquidity for the financial markets to sail through the rough spots.
This was a seminal moment in our countries financial history. Never before had the Central Bank tried to influence the markets. The Fed had always behaved in a “hands-off” manner.
But Greenspan changed all that. And using these newly created powers of increasing liquidity and manipulating interest rates, Greenspan was able to guide the economy through such crisis as the Savings and Loan Crisis, the first Gulf War and Y2K. And after all, was said and done, Wall Street was so impressed they dubbed Greenspan, the Maestro.
But before we throw too many accolades his way, it would do us well to remember that Greenspan had a tremendous arsenal of weapons at his disposal. Interest rates were high, in fact at their peak under Greenspan, the Fed Funds Rate stood at nearly 10%. Giving lots of room to cut.
Then too overall leverage in the economy was low. Borrowing from the Federal Government, Corporations and the Fed themselves were far less than ½ current levels.
So it was relatively easy to provide easy money against a more normal financial environment.
In the years since Chairman Greenspan retired, every single Chairman of the Fed has taken on this role of Maestro of the Economy. The Grand Master, who provides just the loose money policy when the economy, and more particularly the financial market stumble.
So now, we are in the latest financial crisis. Markets have fallen farther and faster than ever before. In a little over a week, the market is close to bear territory. Sustaining a cumulative loss of $4.7 trillion dollars.
At the helm is Jerome Powell. And once again Wall Street turns to the Chairman, for one more bailout.
One more time in which the Fed provides just the right stimulus hits just the right button to bring us out of this quagmire.
But Powell doesn't have the weapons of his predecessor. Interest rates are less than 2% above zero, giving very little room to cut. The Fed's balance sheet already has $4 trillion dollars owed.
So it's doubtful that they can borrow much more. And as for corporations themselves, they've already over-drawn their credit card.
To be blunt, we're in a corner.
We've been on this path for 33 years now.
And perhaps now we see that the concept of a magical “PUT” doesn't always work.
That the maestro won't always pull the rabbit out of the hat.