The financial safety net is stretched but working. The Federal Reserve Board, regulatory authorities, and exchanges joined in efforts yesterday to keep the stock market from repeating Monday's record sell-off.
Foreign central banks appeared united in their efforts to stabilize the value of the dollar on the world's foreign-exchange markets.
The New York Stock Exchange asked large investors not to use computerized trading programs, which accelerated Monday's 508-point plunge in the Dow Jones industrial average.
Federal Reserve chairman Alan Greenspan pledged to provide the cash to protect the financial system. (Why the banking system is not in danger, Page 32.)
Mr. Greenspan put his words into action as the nation's central banker kept supplying the money markets with sufficient funds to lower key interest rates.
This flurry of statements and actions helped buoy Wall Street yesterday in another day of record volume. After yo-yo-ing through the day, the Dow Jones industrial average closed at 1841.01 - 102.27 points higher for the day, but more than 400 points short of where it stood Friday. The gain, however, was mostly confined to blue-chip stocks as declining stocks outnumbered advancing ones.
The Fed's actions were applauded as appropriate. ``That's the role of the Fed - lower the tension level, tell everybody the world is not ending tomorrow, and say they'll take care of all the casualties,'' said Robert Dederick, chief economist at Northern Trust Company in Chicago.
Lester Thurow, an economics professor at the Massachusetts Institute of Technology, also believes the Fed made the right choice. ``To throw the economy into a recession is more disastrous than letting the dollar fall,'' he said.
The White House, for its part, tried to appear unruffled. Spokesman Marlin Fitzwater told reporters, ``The feeling here is that the right course of action at this point is to remain calm, to not take any precipitous moves, to monitor the stock market's reactions.'' Treasury Secretary James Baker III cut short a European trip, taking the Concorde back to Washington.
Most observers were confidant that the plunge of 1987 is not about to lead to the Great Depression of 1988. Administration officials insisted there was no resemblance between today's economic situation and that of the 1920s.
``All these parallels are terribly, terribly misplaced,'' said James Miller III, director of the Office of Management and Budget, in a breakfast meeting with reporters. After the 1929 crash, the federal government curtailed spending. The Federal Reserve actually tightened the money supply, which choked off growth. ``We will not allow that to happen again,'' Mr. Miller said.
Still, economists believe the market's free fall will have some effect on the US economy.
``There will be some houses for sale in the Hamptons,'' says Harvard economist John Kenneth Galbraith, referring to the wealthy resort area on Long Island. He expects that sales of big-ticket items, such as housing and automobiles, may turn sluggish.
To determine the direction of the economy, economists will be watching consumer confidence polls. ``Psychologically it has an impact on everybody,'' says John Phelan, chairman of the New York Stock Exchange. ``Whether that follows through into something else, we certainly hope not.''
With two-thirds of the economy consumer-related, the mood of the American public is critical. A sag could quickly become a general slump. ``If consumers think we are heading toward a recession, it could become a self-fulfilling prophesy,'' says Mark Zandi, an economist with Wharton/Chase Econometrics.
One of the first areas businessmen will be watching is Christmas sales, when many retailers do the bulk of their business. ``If there are signs the consumer is retrenching, I would expect the Fed to provide lots of liquidity to the market to be sure there is not a credit crunch,'' Mr. Zandi says.
Such action may be necessary, since even small investors felt the crunch. James Keegan, a New York City doorman, recounts how he lost a major part of a $1,500 investment in IBM because of the fall. ``I saved for that stock,'' Mr. Keegan said. ``It makes me skittish about the economy.''
Businessmen who are often sensitive to the stock market may also respond quickly to the falling averages. Thus, economists will also be watching new orders for plant and equipment.
To some economists, weakness in the US economy would be welcome. This might reduce the US trade deficit, which has been running at record levels. Demand for foreign goods could sputter. This would reduce pressure on the US dollar, easing inflation worries for the Fed. ``This could be beneficial,'' says Geoffrey Bell, who has his own Wall Street economic consulting company.
If the market stays down, it could also result in losses for some pensioners. According to Michael Clowes, editor of Pensions & Investments magazine, before the market fall US pension funds had about $300 billion more in assets than they needed. Mr. Clowes estimates most of that overfunding was wiped out in the market collapse.
If the market recovers, this will not affect individuals with long-term retirement plans.
But for those people who work for companies that set aside a fixed amount of money in a pool, it could result in less money if they plan to retire soon. ``You would get about 30 percent less than you would have in August when the market was high,'' Clowes says.
The falling market will also hurt companies that had plans to raise new equity in the stock market. And even if the market stabilizes at current levels, investors may be gun-shy about purchasing new securities. For example, Bethlehem Steel sold $186 million in stock last week at 16 per share. Yesterday, it was selling at 11. With investors nervous, it is expected the takeover binge may slow down as well. Takeover artists will be loath to hold stocks with the prospect of seeing them fall unexpectedly. In addition, Congress is considering some tax changes to raise revenues to close the federal budget deficit.