The Crash: Panic Grips The Globe

A crisis spotlights Washington's failures

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Moreover, even if prices stabilize -- a gargantuan if, given the extreme jumpiness of the markets -- the bust that has already occurred darkens prospects for business. Even in an economy the size of the U.S.'s, the nearly $385 billion in asset values that vanished last week alone is a sum large enough to have a strong impact. Not all those losses are theoretical; for many people who sold on Monday, the damage is painfully real. And investors who sat tight and saw the value of their stocks recover a bit at midweek have had an unforgettable demonstration that they cannot count on eventually being as rich in reality as they once looked on paper.

To be sure, hardly anyone expects a rerun of the Great Depression that followed the 1929 Crash. Main reasons: the economy has developed many safeguards, and the Government, if it cannot yet be trusted to resolve the nation's fundamental financial problems, at least knows enough to avoid making the situation drastically worse. The banking system collapsed in the wake of the 1929 debacle, but it is much sounder today, shored up by federal deposit insurance, among other things. Says James Wilcox, an economist at the University of California, Berkeley: "In the 1930s when things looked bad, people ran from the banks out of fear. In 1987 people run to the banks to put their money in, because this time the banks are among the safest things around."

The Federal Reserve Board, in hindsight, is widely considered to have played a role in converting the 1929 Crash into the 1930s Depression by allowing the U.S. supply of money and credit to shrink substantially at the worst possible time. Last week the Fed took exactly the opposite tack. Chairman Alan Greenspan on Monday was denounced by some critics for having inadvertently helped trigger the stock-market break by pushing up interest rates in early September. But on Tuesday morning he became something of an instant hero by reversing policy: just before the markets opened, he announced that the Federal Reserve, "consistent with its responsibilities as a central bank," would make as much money available as might be needed -- for example, to banks that might be hurt by suddenly uncollectible loans to stockbrokers. Greenspan seemed to be as good as his word; by week's end the Fed was apparently pumping enough money into banks to bring interest rates down again slightly. Led by Citicorp, the major U.S. banks dropped the benchmark prime rate that they charge corporate customers from 9.25% to 9%. The move came only two weeks after the banks had boosted the prime from 8.75% to 9.25%.

But if no depression is in the cards, the market crack could cause a recession all by itself. Economists last week were quoting odds like so many Las Vegas bookies. Some guessed the chances of a recession had gone from 1 in 4 to 1 in 2, others from 15% to 35%, but few doubted that the odds had increased. If a recession does not come, most agreed, the economy probably is in for at least a slowdown that might knock a percentage point or two off its growth rate.

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