Greenspan, Though Still Green,
Took the Market Crash in Stride

By DAVID WESSEL
Staff Reporter of THE WALL STREET JOURNAL

WASHINGTON -- The great bull market of the past decade doesn't yet have a catchy name. How about Alan's Excellent Adventure?

Alan as in Alan Greenspan, chairman of the Federal Reserve and the most powerful economist on earth.

Mr. Greenspan took office Aug. 11, 1987, just about the time the last bull market was making its last hurrah. Two months later, he was confronted with the most frightening stock-market crash since 1929. And since then, despite an occasional burst of Greenspanian public fretting about "irrational exuberance," he has seen the stock market bust one record after another -- and sometimes even gets credit for the economic environment that made the bull market possible.

Mr. Greenspan was no stranger to Washington or Wall Street back in 1987, but it is hard to say that anyone was really prepared when the crash came on Monday, Oct. 19. The market had fallen sharply the Friday before, but Mr. Greenspan nevertheless decided to keep a date to speak to the American Bankers Association in Dallas.

As reported in The Wall Street Journal at the time, Mr. Greenspan arrived in Dallas at 5:45 p.m. that fateful Monday, asking the official meeting him at the airport, "How did the market close?"

"Down five-oh-eight," came the reply. For a moment, Mr. Greenspan was relieved. The Dow Jones Industrial Average had been off a staggering 200 points when he had left Washington four hours earlier. But it had rallied, he thought, to end down just 5.08 points.

The relief was fleeting. Mr. Greenspan had misplaced the decimal point. The market had dropped 508 points in a day.

The first issue Mr. Greenspan confronted was fairly simple. The Fed had to open the credit spigots until the panic passed. The scholarship on the Great Depression left one indelible lesson on central bankers: Squeezing credit out of the economy when the stock market is plunging is a colossal mistake. Before the markets opened Tuesday, the Fed issued a statement, "The Federal Reserve ... affirmed today its readiness to serve as a source of liquidity to support the economic and financial system."

The markets got the message.

The second issue was tougher, and in retrospect far more scary. As a presidential commission put it subsequently, "The financial system came close to gridlock." For all its sophistication, the financial system depends on Bankers Trust Co. believing at 10 a.m. that J.P. Morgan & Co. is going to be solvent at 4 p.m. With the stock market off 23%, no one could be certain anyone would be solvent at 4 p.m. Mr. Greenspan and his lieutenants labored to make sure that Wall Street firms and banks kept lending to each other.

When Fed officials look back on what might have gone wrong, it is the financial gridlock that frightens them most. Another bad memory is the talk of shutting the New York Stock Exchange on Black Monday. Once you close the stock market, the Fed believes, it is hard to open it again.

Mr. Greenspan spent most of Monday evening in his hotel room on the telephone. He later remembered that he got to bed fairly late, but took pride in the fact that he actually managed to sleep. He was up at 6 a.m. the next morning, and was whisked back to Washington on an Air Force jet. In the days, and years, following, Mr. Greenspan's handling of that crisis was cited as evidence that he was, after all, the right man for the job, a worthy heir to Paul Volcker.