Twenty years after black Monday: is the world better or worse prepared to handle financial crises? TIE asked the three key former U.S. officials who managed the 1987 stock market crash--E. Gerald Corrigan, David Ruder, and Manuel Johnson.

• Position: A SYMPOSIUM OF VIEWS

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E. Gerald Corrigan Managing Director, Goldman, Sachs & Co., and President, New York Federal Reserve, 1985-93

As we near the twentieth anniversary of the stock market crash of 1987, there are times when my reflections on the events of late October 1987 seem to be a distant memory while at other times those events seem to have occurred only yesterday. To a considerable extent, this contrast in reflections arises from the fact that even twenty years after the fact it is not easy to capture the sense of fear and panic that gripped the financial markets in the late morning of October 20, 1987, when the stock market was in a state of near paralysis following the 23 percent fall in the Dow on Monday, the 19th. Indeed, even today-or perhaps I should say especially today--it is difficult to appreciate how quickly markets recovered and how well the economy weathered the storm. Quite naturally, all of this raises the question of whether we could, in the future, witness another event having similar traits and characteristics to those witnessed in 1987 and whether the resulting damage can be as well contained as it was in 1987.

Before answering those questions, a few brief points of perspective might be helpful. Specifically:

* It is important to recognize that even now there is little or no consensus as to the specific timing and triggers that unleashed the events of October 19 just as there is little or no consensus as to the triggers that sparked the turnaround in share prices early in the afternoon of October 20.

* For analytical purposes it is useful to draw a distinction between (1) "financial disturbances" which occur with some frequency, but are typically self-correcting and have limited contagion effects, and (2) "financial shocks" which are infrequent, but typically entail the potential for inflicting serious damage on the financial system and/or the economy. In other words, "financial shocks" entail potential or actual systemic risk considerations.

* While there have been a number of close calls, in my judgment we have experienced three episodes over the past two and one-half decades that crossed the threshold into the red zone of systemic risk. They were the LDC debt crisis of the 1980s, the Russia-LTCM crisis of 1998, and certainly the 1987 market crash. (The jury is obviously still out as to the current financial market disruptions.)

* While it is certainly true that, over time, the financial system has become more resilient and while it is equally true that policymakers and practitioners alike have learned a great deal from earlier financial disturbances and financial shocks, we sometimes forget that financial market behavior ultimately reflects human behavior. Because of that, it is inevitable that, from time to time, financial markets will overshoot in both directions. To put it differently, when markets are on an upward thrust, there is a natural human aversion against being the "last one in" or the "first one out."

With these points of perspective in mind, the question remains; namely, will the future witness financial shocks with potential systemic consequences? The short answer to that question is "yes" but that answer begs for explanation and elaboration which, for these purposes, can be reduced to four basic points.

First: I believe that the already low statistical probabilities of financial shocks have, over time, declined further but are still well short of zero;

Second: I also believe that even if the probabilities are lower, the potential damage caused by financial shocks is likely to be greater because of substantially increased speed, complexity, and ever tighter linkages across financial markets and across national borders;

Third: Unfortunately, our collective capacity to anticipate the specific timing and triggers of financial shocks is very low if not essentially nil;

Fourth: Given that we will experience future financial shocks and 1) since we are unable to anticipate their timing and triggers and 2) since the potential damage that may be caused by future financial shocks is greater, we are faced with one of the great challenges for public policy and private...