Players Replay The Crash

Michael Mussa

Mussa served as Director of the Department of Research at the International Monetary Fund 1991-2001. He’s also taught at the Graduate School of Business of the University of Chicago, the University of Rochester, the Graduate Center of the City University of New York, the London School of Economics, and the Graduate Institute of International Studies in Geneva, Switzerland

He was a member of the US Council of Economic Advisers from August 1986 to September 1988, from where he monitored the crash. He is currently Senior Fellow at the Peterson Institute of International Economics

Where were you?

I was in the chairman’s office (Beryl W. Sprinkel). Since the Friday before when there was a big drop, we were intensely interested in what was happening in the stock market.”

At the CEA, we had a great deal of difficult getting contemporaneous information on how prices were doing in other markets.”

What's different today?

An ordinary individual with a BlackBerry today has better sources of information than what the U.S. government had at that time.

Are trading curbs an effective tool?

“The tape was well behind, so people didn’t know what was happening. So the argument for the curb is to let people catch up with what was happening. They're essentially innocuous."

Can it happen again?

There’s nothing that rules it out, but it probably less likely now then it was at that time. The authorities are more closely tuned in to what’s going on in the markets. Today the Fed would step in the day of not the next day, With a fall in the morning, the Fed would be there I the afternoon.”

William Silber

Silber, a professor at NYU’s Stern School of Business, has also worked on Wall Street (Odyssey Partners and Lehman Brothers) and in Washington (President's Council of Economic Advisors). He’s also traded options and futures and was in the crude oil pit of the New York Mercantile Exchange the day of the crash.

His latest book is “When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy”

Silber is currently Marcus Nadler Professor of Finance and Economics and Director, Glucksman Institute for Research in Securities Markets at NYU.

Where were you at the time and what was your first reaction?  

I was trading crude oil futures at the moment. You look at and ask 'Is what I am seeing for real?' What I was really thinking was what effect was this going to have on other markets. I thought gold would respond. I also though here's an event that changes people's perceptions about risk and that you have to expect things that you wouldn't expect.

Could it happen again?

The one thing that mitigates against it is that everyone expects it. It is probably not going to happen that way. 

What's different today?

I worry about the current problem because it is a credit crisis rather than a liquidity crisis. The balance sheet itself has a problem. The Fed knows how to deal with a liquidity crisis. The Fed can’t add liquidity to solve this problem without raising the issue of moral hazard – bailing out institutions for making bad decisions.

We've gotten dangerously close to a sense of real comfort that the Fed will  bail us out.

What about the trading curbs and halts put in place after the crash?

I’m not a fan of these trading halts. Halts are OK as long as they are very temporary.  The trading curbs are not useful or meaningful except to say let’s take a breather for a minute or two. Closing doesn’t eliminate the decline that would have occurred absent the curb. It allows the payment system time to catch up.

Robert Stovall

Stovall started his Wall Street career at E.F. Hutton in 1953. From 1985 to 1999 he was President of Stovall Twenty First Advisors. He’s also worked for Reynolds, Dean Witter and Prudential Financial. Over the decades, he’s been a columnist for financial magazines and a university professor and lecturer. He is currently Managing Director at Wood Asset Management.  Bob was born three years before the crash of 1929.  At the time, his father was an administrative partner in a small securities firm.

Where were you the day of the crash?

I remember it vividly because I was managing a portfolio of some size. It had a market neutral strategy -- half long half, short, that is – so we came through better than others. Also I was in the hospital at that time  -- Beth Israel – so my assistant was trading the portfolio. I saw it on the TV.

What were you telling your clients?

That we were in unprecedented times. We were short 50% . They were better off being short part of the portfolio. Investors are most consoled if you pay attention for them and are around for them. We didn’t change our strategy.

Did the crash have any lasting effect on investors?

Not too much, based on the 1990s and dot com stocks. You had a super-bull mentality emerging. I call it a crashette because it didn’t produce a long-standing bear market.

Can it happen again?
Probably not and certainly not to the degree of 1929.

We’re not as American-centric as we were then. There are more players, more markets, more liquidity, a lot more instruments, more diversification, more cushioning.

Eugene F.  Fama

Fama, who has taught at the University of Chicago Graduate School of Business for four decades, mad a name for himself with his dissertation “The Behavior of Stock Market Prices”. Thus, he is known as the father of the efficient market theory, which essentially states that prices on assets such as stocks reflect all known information.  He also a board member of Dimensional Fund Advisors, a California-based investment firm. He is currently Robert R. McCormick Distinguished Service Professor of Finance.

Where were you?

I was on an airplane and didn't find out until I was going to school the next day to teach a class and one my colleagues told me about it. I said 'the market is always down on Monday.' People laugh when I say this but it’s not a big deal. In the Great Depression, it was followed by further declines. This one didn’t last long. That’s particularly consistently with my theories.

Can it happen again?

Given that you’ve had two of them in 80 years, there’s always the probability you could have one again. People adjust to the recent past a little too much.

What's different about the market today?

There are a lot more different products.

Did the crash have any lasting impact?

Whatever it was, little has changed--since prices came back. It’s the crash that looks like a mistake on 20/20 hindsight.

© 2007 MSNBC Interactive

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