Academic

What Do You Say About A Market Break That Breaks Back?

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

After the insane one-day sell-off of 1987, two things, but not much else, happened.  First, the problem of portfolio insurance leading to a vicious cycle of selling was addressed, not just by dealing with the insurance itself, but by adding a few emergency brakes to the market mechanism, and read Glom guest Mike Guttentag on that.  Second, the President's Working Group, a multi-agency group of government potentates (sound familiar?) was created to address the problem.  The PWG did little to respond to the 1987 sell-off, but it hung around, was reinvigorated by Larry Summers, and has become the de facto template and ancestor of the systemic risk regulator we are likely to get once the financial reform bill is completed.

Would something similar have happened after today, if things hadn't quickly stabilized?  It is, of course, hard to judge, but one-day stock catastrophes, other than making Nicolas Taleb a rich man, are the kind of financial crises that don't result in the creation of the SEC or anything.  Here's DealBook, and here's Jim Cramer, talking the market back to sanity, if you can believe that.

Full post as published by Conglomerate on May 06, 2010 (boomark / email).