Sunday, October 21, 2012

My letter to the NY Times re: the real lesson from the 1987 stock market crash

Re: A Lesson From 1987,Unlearned by Wall St.

Dear Sirs:
Mr. Norris' discussion of the role played by the then novice use of high speed computer trading in the 1987 stock market crash is merely a side show to the real unlearned lesson. The real unlearned lesson of the 1987 crash was the role played by the Greenspan Fed, which pumped massive amounts of liquidity into the market, short circuiting the cleansing process, and reigniting the inflationary bubble. This became the template of central bank policy everywhere--whenever the stock market gets jittery, lower the interest rate by any means possible to prevent stock prices from falling. The result has been ever shorter and more extreme boom/bust cycles, with higher and higher injections of fiat money producing less and less result. The U.S. and most of the world has built an unsustainable capital structure that is completely out of tune with the wishes of those who provide the financing--the savers. It is this mismatch of savings with investment that eventually will cause a collapse that no amount of fiat monetary injections can stop.

1 comment:

  1. Inflation is just time value of money, nothing more nothing less. The porblem we've had since 1945 centers on attempting to halt it's effects by using so called safe investments. Up until about 1970 that was gold, for while not tied to the circulation nonetheless was the investment of refuge. Then Faisal in SA thgether with OPEC doubled the price of oil and halved the production which meant any cash call by any of the oil supplying nations woul overnight empth all the west's reserves. Gold is mobile you see. For eight year until about 1981/2 there was a degree of chaos in the markets while the whole system rejigged itself. Then, Land&property became the focus of safe investment. the measure as it were. But while all this was going on a lunatic version of political economy which reverted to some notional Free Market in a Suffolk field was being sold to all and sundry as the saving of the financial markets and the economy.