Dear 1987 Black Monday
Black Monday occurred on the 19th day of October 1987, and it greatly affected the stock market. It came to an end on Tuesday 20th with the government’s intervention. Before opening the financial market the Federal Reserve issued a short statement that said it would intervene to control the liquidity to support the financial and economic systems (Greenspan, 136). This statement greatly supported the market sentiments. This restored some hope in the stock market though it did not help much as the trading continued to be impaired. The SME clearing house collected the margins that covered the losses that were incurred on the previous day.
There were several trading halts on the NYSE and the possibility of the exchange closure (Murray, 1). This closure delinked the between the future cash market and the stock on the NYSE started to rebound. This was also attributed to the removal of billboards sent a message that the cash market is expected to decline. Later in the afternoon, there was an announcement of the stock buyback to support their stock demand (Bernanke, 41). This program that had been tried since Monday became successful on Tuesday putting the stock market on track.
What tools worked to help stop it
The several factors that are believed to have contributed to the market crash are: margin calls on market liquidity and market operations, program trading strategies, and difficulty in obtaining reliable information. The Federal Reserve used various tools that were relevant to respond to the crash. The first was high-profile public action to support the market for example the statement issued on Tuesday morning. This helped push the federal fund rate down from 7.7 percent to 7 percent. The Federal Reserve also followed the reduction of the interest borrowing rate reducing the cost of the borrower(Shiller, Chapter13). This enabled the members to continuously meet the necessary margin payments.
The third tool used was open market operation and lowering the federal funds rate to support liquidity. The government in particular the US treasury is often used in lending and trading securities in matters relating to market securities. This is achieved through imposing rules that govern the lending of the security. The amount of loan as well as the requirement not to facilitate short sale (Saunders and Cornet, 41). Through the response of the Federal Reserve use of these tools improved the market condition.
What did the governing body do to help prevent it from happening again?
Bearing in mind margin calls, program trading and inadequate information factors caused or contributed to the market crash (Shiller, Chapter 23). It is the role of the government to put various measures to prevent such an impact shortly. The US government has put various measures which are:
Controlling margin calls hence it will be in a position to reduce the large market changes. This will help reduce market liquidity. The government should put measures to ease short-term credit conditions by conducting more expansive market control and liberalizing the rules of governing the lending of the treasury securities. This support is important since helps improve market confidence (Saunders and Cornet, 50). This can be encouraged through the use of banks that are encouraged to extend credit to support the financial market participants.
Ensuring strong market systems is another measure that the government needs to take. This avoids interference with the market prices. It was noted that insurer that exerted pressure on the market creating cash market. Therefore the government should ensure that relevant measures should be taken to regulate the institutions that are involved in the security market.
The government should also avail adequate information to the stock market dealers this is to ensure that they are well informed and the performance of the stock market. This improves the market confidence, the availability of information will help reduce confusion and the investors are certain hence are encouraged to continue trading (Shiller, Chapter 23). These efforts are important to the improvement of, market functioning.
Bernanke, Ben. Clearing and Settlement during the Crash. Review of Financial, Studies, 3.1:1990.
GreenSpan, Allan. Statement and comments of Alan Greenspan, Chairman of the Federal Reserve, in”Black Monday” The Stock Market Crash of 1987. U.S. Congress. Senate. Committee on Banking, Housing, and Urban Affairs. Hearing, 100 Congress 1 Session, Washington: Government Printing Office 1988.
Murray, Alan. Fed’s New Chairman Wins a Lot of Praise on Handling the Crash. Wall Street Journal. 1987.
Saunders, Anthony and Marcus, Cornett. Financial Markets and Institutions. New York: McGraw-Hill Irwin, 2007. Print.
Shiller Robert. Investor Behavior in the 1987 Stock Market Crash: Survey Evidence. In Market Volatility. Boston: Massachusetts Institute of Technology, 1989. Print.