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It's No Blip

October 28, 1987

Washington is talking, but Wall Street seems to be listening to London and Toyko or fixating on its own erratic pulse. After the second consecutive Black Monday, one expert said that the Dow Jones could swing anywhere from 1,700 to 3,500 as it seeks its proper level. The publisher of a newsletter dealing with corporate takeovers threw up his hands and canceled the week's edition, saying: "Frankly, we yet are unable to make much sense of the still-evolving situation and prefer not to issue premature conclusions or half-baked comments to our readers."

When President Reagan sought to reassure Wall Street last week, the market stayed dead even. When the President was bullish on America on Monday, the Dow Jones plunged 156 points. And on Tuesday the President turned absolutely bearish for the first time, saying that anyone who had not detected serious economic clouds on the horizon should have been set straight by the calamity of the past two weeks. The market went up 52 points.

As the White House and congressional leaders actually sat down to negotiate deficit reductions, one Wall Streeter demanded that Washington react immediately or "it will get awful."

But it may take some time for Washington to take corrective action--and probably it should. The economic clouds in fact are towering thunderheads in every direction. Solutions will be complicated, long in taking hold and no doubt somewhat painful for the American public. The first step is a universal understanding that the crash is not simply some overnight blip that can be waved away.

The budget deficit is just one slice of the problem. The nation needs to deal with a massive trade deficit--$156 billion last year--that may be the most complicated and intractable piece of the puzzle. There is the threat of protectionist trade legislation, and the awful lurking problem of Third World debt.

Wall Street, Congress and the Administration also must act on internal market problems that have brought about considerable wretched excess and threatened to send Wall Street totally out of control.

New York Stock Exchange Chairman John J. Phelan Jr. has highlighted the problem of using credit to buy stocks that must be dumped in a falling market when the stocks lose equity and loans are called, thus making the plunge even worse. Margin debt has doubled since 1984 to $44 billion. Certainly worthy of exploration is the potential conflict of interest of brokers who lend clients money to finance the purchase of stock arranged by the same brokers. The same is true of the roles of professional traders, junk bonds and leveraged corporate takeovers.

The crisis demands determination, rationality and unity from Washington, but not overreaction. From Wall Street, for now, a little rationality would do.

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