A 30-year lesson: Bold U.S. markets rely on people coping with crisis

Stock prices are at record highs. And, given long-term U.S. population, debt, and corporate-profit trends, they could get a lot higher, Janney Montgomery Scott stock research chief Dan Wantrobski told me last month. We were marking the 30th anniversary of the "Black Monday" stock price collapse that threatened the long bull market, a few years after it started, way back in the Reagan years.

Why worry? Even when it fails — as it did in 1987 and 2008 — the market always comes back, right?

Don't take that for granted: Our speedy markets are fragile; they aren't just machines, they depend on fast-thinking humans in times of fear, loss, and crisis, warns Diana B. Henriques, veteran Wall Street reporter and author most recently of A First-Class Catastrophe: The Road to Black Monday, The Worst Day in Wall Street History.

Henriques was back in town last week for the Philadelphia Fund Association's yearly gala, benefiting Crayons to Cradles, the homeless-kids charity. Before moving to New York, she served for a time on the Inquirer's Business News desk as it was growing to cover the Reagan market boom, back when the Philadelphia Stock Exchange was home to innovative derivatives traders and the unmerged Broad Street banks still set the price of American loans.

Wasn't finance always at the center of the U.S. economy? Not until the Reagan years, Henriques told me: "Compared to manufacturing, agriculture, and basic services, finance was a small fraction of what it is today. Middle-class people had a bank account. If they worked for a company they got a pension," but it was managed by professionals.

That changed with mass corporate layoffs, the surge in debt-financed mergers, pension freezes, and the spread of 401(k) plans, which left middle-class people to invest their own retirement savings — "mostly in the same 500 stocks" through Vanguard and other index funds, Henriques added. More people now depend directly on the stock market.

Stocks go up, down, up. But "a crash that damages the financial machinery of a country is far more serious. When a market falls, people lose money. When a market falls apart, people cannot rebuild the financial systems that allow them to make money," Henriques said. "That was the Great Depression. Banks closed their doors." Businesses lost credit and failed.

"I'm trying to tell people in 1987, we got frighteningly close, closer than people knew, to the market falling apart." Computers speeded transactions ahead of traders' and regulators' ability to understand price signals.

Her book tells the drama that began in Chicago, when the Options Clearing Corp. couldn't keep up with options-trading volume and had to be rescued by Continental Illinois Bank, whose leaders defied their own cautious market and federal regulators to bet cash on keeping the traders (and their clients) in business when prices plunged. Exchanges staggered but stayed open, prices firmed and rose again, because the emergency measures worked. That time.

It was worse the next time, in 2008. I asked Henriques whether former Philadelphia Federal Reserve chief Charles Plosser was right then when he argued that the Fed and the Treasury Department needed clear rules and strict standards for their urgent interventions, instead of rescuing GM, AIG, Fannie, Citi, and the rest on a case-by-case, as-needed, sometimes-arbitrary basis.

But case-by-case is how the system works, Henriques told me: "In the next financial crisis, today's rule book will be worse than useless; it may tie regulators' hands, and prevent them from taking exactly the kind of ad hoc, seat-of-the-pants regulatory steps that got us through 1987 and 2008." American capital markets and public prosperity depend on smart, bold, flexible market leaders, government, bankers, and traders.

"Of course, we need rules for how markets operate. We need intelligent oversight and monitoring. We don't need an itemized checklist," she said. "We have to have creative, cooperative, respectful regulators who can work together with industry to get us through."