Wednesday, October 29, 1997
Professors remember crash of '87
By BRIAN BETHEL / Abilene Reporter-News
As the Dow bounced back to a much healthier level Tuesday,
two Abilenians remembered the last time the market spiraled downward.
Now professors at local universities, Jimmie Monhollon, former
vice president of the Federal Reserve Bank of Richmond, and Gary
Thompson, former head of the Texas Teacher Retirement System,
remember Oct. 19, 1987, well.
"I was new at the Teacher Retirement System, and got to
see several hundred million dollars lost," he said. "Of
course, they weren't really lost, but it certainly made the beginning
of that job change interesting."
But then, as now, a rebound was inevitable, said Thompson,
who currently teaches political science at Abilene Christian University.
"We ended up reclaiming those lost assets and then some,"
he said. "A pension system, by its very nature, is a long-term
investment. Losses like those in 1987 and those a few days ago
may look dramatic, but over decades they are really not all that
significant."
At the time, the drop looked extremely significant to legislators,
who often -- in Thompson's opinion -- lack the patience to invest
properly in a volatile market.
"They tend to question certain kinds of investments,"
he said. "That happened to some extent with the stocks in
teacher retirement, and to a greater extent in the real estate
market downturn that came a little bit later."
When it comes to directly comparing 1987 to 1997, the differences
are probably greater than the similarities, Monhollon said.
"You have to understand that was 22 percentage points
in one day, and that's pretty significant," he said. "This
was a much smaller drop percentage-wise."
The Dow dropped 7.18 percent during Monday's "correction."
Things were pretty good at the Federal Reserve Bank just before
the 1987 crash, Monhollon said.
"We'd made great progress in fighting inflation and were
beginning to think about putting the brakes on the economy a bit,"
he said. "Then there was the major change in the market and
our strategy had to change."
Spillover effects threatened much of what the Fed had worked
hard to build, so the Reserve Bank acted quickly.
More cash was put into circulation to increase liquidity, ensuring
the decline in stock prices wouldn't put too much strain on the
overall economic structure.
Although he didn't see any need for similar measures today,
if the Dow had dropped eight more points things could have been
different, Monhollon said.
"I'd say the changes we've seen, in light of what's been
going on in Hong Kong, is the correction some have been expecting
for some time,' he said. "That's really all it appears to
be. If it had been any greater, though, there may have been some
action taken" by the Fed.
Thompson agreed with Monhollon's assessment, calling the correction
inevitable.
"Investors have been riding the crest of a bull market
for many years now," he said.
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Abilene Reporter-News / Texnews / E.W. Scripps Publications
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