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VIEWPOINTS : Does the Stock Market Need an Overhaul? : Wall Street Experts Point Out Flaws After Wild Week

October 25, 1987

L ast week, Wall Street went haywire. The stock market swung wildly, setting records for losses, gains and trading volume. Times staff writer Keith Bradsher interviewed a number of experts for their assessment of what, if anything, is wrong with the way the stock market works and what should be done about it. Excerpts from the interviews follow.

Gregg A. Jarrell, former chief economist for the Securities and Exchange Commission and now senior vice president and director of research at Alcar Group, a Skokie, Ill.-based financial analysis firm.

"I think it's going to be very difficult to escape the conclusion that there's an awful lot of this volatility that can be directly attributed to portfolio insurance and other kinds of program trading. Free-market economists, including myself, had argued, 'Leave the market alone, it's self-correcting.' Anything that causes the market to go up or down, where anyone can guarantee almost that it's going to go the other way the next day, that's a money tree, and that will be arbitraged out of existence, just give the market a little time.

"I believe that in the long run; in the medium run, that will also be true for this particular kind of new age that we're in. But when you get a 500-point swing in one day, and then you get a 300-point correction in the next two days, well, it's like in the medium term, we're all dead. I think it's time for the regulators to think seriously.

"But I don't want the SEC to go out there all by themselves and figure out what to do. People in the industry and people in academia ought to just stop saying, 'What problem?' and admit it, and try to come up with something that's sensible. Because if they don't, people with law degrees are going to take the regulatory ball and run with it, and that's not cool. . . .

"Regulators don't get paid to take risks, they'd much rather choke off all innovation if it keeps them from looking real stupid on any given day, and they looked real stupid (in the past week). The SEC's going to come back strong. Not even the Republicans are going to stand in their way because this made the Republicans look stupid, too. You lose about 600 points off the Dow and there goes (Vice President) George Bush's shot at the presidency. It's 'Katie bar the door' in terms of regulatory response."

John Brooks, a New Yorker magazine staff writer and author of half a dozen books on the stock market, including "The Go Go Years" and "The Takeover Game."

"The machines have taken over and they operate--they're supposed to be totally rational but they operate in a more irrational way than people do. . . . It's the first stock market crash of the computer age and it's totally different. The terms are all different. And I must say that I think it will take a little while to understand it. . . .

"The thing is that the workers aren't even angry now, because it's indirect. If it affects them at all, it will affect them through their pensions or funds that they hold indirectly. The little investor doesn't exist anymore. There aren't little investors in the market or at least there aren't enough to have any significant effect on it. So it's all different from 1929 and even 1969.

"In most cases, the corporation--not the (pension) fund--is responsible for meeting the pension promises and so the workers, presumably, barring the bankruptcy of the corporation, the workers will not be damned. Responsibility lies with the corporation. . . . It's quite possible, yes, that some corporations will find that they have been far too free in taking money out of the pension fund."

Muriel F. Siebert, chairwoman and president of Muriel Siebert & Co., a Manhattan brokerage, and former New York state superintendent of banks.

"The general stock market does not need an overhaul. I think some of the new financial products that have come out in the last two or three years need to be studied or perhaps regulated or perhaps eliminated. I'm referring to program trading primarily. I think that if you look at the reason that we have a market, it is to raise capital, it is to be a conduit to raise capital for corporations so that they can do research, expand, hire people, produce products. And we have had the best capital-raising system in the entire world. Other countries have been very, very jealous of us over the years. . . .

"(Program trading) has created a volatility which distorts the intrinsic value of stocks or the perception of the intrinsic value of stocks. . . . How can we as a country encourage people to buy a share of America when you saw that IBM in two days went from $150 to $100? This is a company that is not going out of business. This is IBM."

Robert Lekachman, professor of economics at City University in New York City and member of the Times Board of Economists.

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