Alan Greenspan's credit he came in August of 1987 and he had he'd had a series of conversations with Gerry Corrigan who was
the president New York fed before that. But Greenspan saw that one of the things he hadn't done before was manage a crisis.
Know what to do. And there were all kinds of contingencies. He was worried about. So in a couple months after he got there he
tasked the staff working with the New York Fed to put together a book of various alternative problems and crises that might
arise. One of those crises was a stock market crash. I think there was a run on SNL ISE and some other things in there also.
But I thought it was it was it was a good exercise for everybody to go through. And as I say a tribute to Alan Greenspan that he
saw preparation for something like this was good.
Let's dial back just a couple of days so the previous Friday equity prices had dropped quite substantially. I think about 5
percent on the S&P. So it was a pretty and that that culminated. That was at the end
of a run of other declines in equity prices. In addition Jim Baker had given some speeches in which markets were interpreting
the thing as there being tension between the US and some of its allies with regard to the value of the dollar. What were
happening to interest rates just in general. So you started with a day of declining stock prices on Friday in very heavy volume.
You had a lot of nervousness and conversation over the weekend. The newspapers featured
this Baker interview and what it might do to stock prices. And then as U.S. markets open they open down and then things began
to slide or slide away from from there. But at some point before long in the day there was a sort of
contingency group plan a contingency group assembled in what you and I know David as the special library the board members
library. And there everybody brought their books with contingency plans. I don't actually remember opening that book
but I remember I had it with me and people started talking about what might happen and what the Fed should do. Greenspan There
was a discussion. Should he go to Dallas. Shouldn't he go to Dallas. In the end the
decision was that if he didn't go it would send a signal that he was very very worried and might even unsettle unsettled markets
by even more. So there was this group headed by Manley Johnson who was the vice chair when when Alan Greenspan left and when it
got on the plane. And we were looking at various contingencies and what to do and keeping track of the equity markets. So that
was the kind of the scene that day as as markets markets dropped substantially.
I think when. When I went home rather late ish that night but no
later than usual but not out. It wasn't midnight or something that had nothing had been decided. And
there was discussion about issuing a statement as I read other things. And then
by the next morning early the next morning the head within consultation with Gerry Corrigan in New York and Alan Greenspan
down there in Dallas. The statement had been issued. I do not remember being in the
conference call at which this statement was fine tuned. So I've read these memoirs in which it says Mike Bradfield who was the
general counsel of the Federal Reserve Board came with a statement that had
was very legalistic was long reference to the Federal Reserve Act that cetera. And then Carr again apparently said no we need
to be simple to the point. We need to make it clear that we recognize our responsibility is to make sure that the system is
liquid and and and and supply the liquidity any extra liquidity that
might need under these unusual circumstances. So that was the statement that was issued. First thing the next morning.
Well I think my first piece of advice would be trying to prevent that as best you can.
Make sure the system is resilient. This is something that's happened to a considerable extent after Dodd-Frank with the
banking system and with the other with the reforms were put in place really all over the world after the 2008 crisis. The
stress tests on banks et cetera. So I think thinking back to 1987 the banks needed to be able to advance those funds. They
needed to have enough capital that when they advanced those funds people would still be advancing funds to them. So the
banks were resilient and it's so important to keep the banks resilient. But I think the real challenge for policymakers now
they ex ante challenge before the crisis trying to make the crisis trying to prevent crises is to build the resiliency of
the nonbank financial system which is much more important than it was in 1987. And that's hard because of the way regulation
and supervision of that system is scattered throughout agencies of the U.S. government the CFTC the S.E.C. etc. It's
hard because we don't have it's hard to run a stress test on some of
these systems. These really market based systems it's hard to know what they are. But I think that's an a lot of the action
that has followed March of 2020 has focused on the nonbank system because that's the nonbank financials system is what
really froze up in March of 2020. So I think that brings that that that that underlines that point.
Now what to do in a crisis. I think you I think we did the right thing in 87. I think we did the right thing in 2007 and 2008.
You just pour liquidity into the system. And and and the Jay Powell Fed did the right thing in March of 2020. You just make
sure that these demands for liquid these extra demands for liquidity what people called in March of 20 20 a dash for cash
that they were that they could be satisfied because if they're not then the system will indeed will indeed freeze up. So I
think supplying liquidity quickly in a crisis is the right thing to do. I do think there are moral hazard issues here. I worry
about them. But I think
when the system is in the process of freezing up the damage to the economy is so could be so vast and so many innocent
bystanders people just go into work and having jobs and buying and selling people own businesses. People with people working
could be hurt that it's up to the the central bank the Federal Reserve to make sure those markets to supply liquidity necessary
to make those markets work and then work after the fact as we are doing post March 2020 to figure out what went wrong. How can
how can we fix it. So I think the cure for the moral hazard of this intervention is imposing requirements and regulations on
pieces of the system that broke down in that in that time or ISE and make sure that's see how that those systems can be made to
work more smoothly and have capacity to deal with the stress. And that's what people are working on right now.