Alan Greenspan had been on the job only a few weeks when he was put to his first test. The crash of 1987 came as a shock to world stock markets and to Greenspan, too. The man had run an economic forecasting business—notoriously badly. If economic forecasting were driving an automobile, you would not have wanted to climb into the front seat with the maestro.2 He drove blind and head‐on—into financial potholes, stock crashes, bubbles, busts, and recessions.
On Monday, October 19, 1987, the Dow Jones Industrial Average fell 22.6 percent. A similar drop today would take off about 3,000 points, but back then, the drop began from a much lower level. The Dow was nearly 2,200 on Black Monday, when the crash took the stuffing out of the market and reduced stockholder wealth by about half a trillion dollars in a single day.
Markets all over the world skidded, too—even those without program trading or portfolio insurance. Australia dropped 41.8 percent. Hong Kong went down 45.8 percent by the end of the month. Some people became completely unhinged; at least one client came into his stockbroker's office and started shooting. Markets closed early, and surviving brokers locked their doors.
Alan Greenspan reacted quickly, nipping a couple of basis points off the federal funds rate. In retrospect, it was unnecessary. When the crash was over and the dust had settled, investors quickly recovered their nerve. Within five weeks, stock prices were in a new bull market, ...