The Crash: Panic Grips The Globe

A crisis spotlights Washington's failures

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Ironically, Baker in a sense won his campaign. Flying to Europe for a scheduled visit Monday, he persuaded the West Germans to roll back the interest-rate increase he had assailed, and they together specifically reaffirmed the Louvre agreement. But it was much too late to calm the unrest Baker's previous statements had intensified. Well before he patched things up with the Germans, selling on the world's stock exchanges had accelerated into an all-out crash.

One factor behind the speed of the market's descent was the almost complete computerization of the New York exchange and other markets. There is immense dispute, even days after the fact, as to what part computers that make trades semiautomatically played in touching off the gigantic volume of sell orders. Taking no chances, however, the Big Board after the Monday debacle instituted restrictions on so-called program trades of large portfolios of stock carried out by computer, in order to damp down price swings.

In a broader sense, computers unquestionably had an all-important role. They enable the exchanges to execute trades swiftly, in volume that would have been inconceivable a few years ago. So at times of market excitement, the volume that would once have been stretched over a week or so gets squeezed into a day. When the orders are predominantly on one side, prices run up or down violently.

But never so violently as on Black Monday. Tickers and news reports flashed the story of huge price declines on heavy volume. With each sale, more investors became convinced that a collapse had begun and they had better get out while they still could. Mutual-fund managers tried to hold on but could not; they had to dump stock to get cash to pay off investors who clamored to redeem their fund shares. Margin calls to investors who had bought stock on credit aggravated the frenzy. Some could not put up additional collateral and were sold out.

Why, then, did the rout give way to a rally? Traditionally, that happens after every so-called selling climax (even in 1929), because most investors who were thinking of selling have been cleaned out in one grand sweep and buyers start looking for newly cheap shares. The rally in the middle of last week was given particularly powerful support by some 200 major corporations that started buying up their own stock at bargain prices, in part to keep it out of the hands of would-be raiders. The crash put at least a temporary damper on mergers and acquisitions anyway. Several deals fell through because the bids made for the target companies suddenly looked unrealistically high after the general decline in stock prices.

But it is anyone's guess whether the small degree of stability so painfully achieved on Friday -- volume dwindled as the Dow average stood almost still -- will hold even for days or hours. Alan Meltzer, professor of political economy at Pittsburgh's Carnegie-Mellon University, thinks the "markets will remain volatile because there are still too many unanswered questions."

The most fundamental questions, economists agree with the closest approach to unanimity they ever achieve, are: How long will the U.S. try to live it up on borrowed money? And can it summon the will to start the painful readjustment necessary to kick the habit -- a readjustment that grows more painful the longer it is put off?

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