Remembering the crash.

• Author: Smick, David M.
• Position: FROM THE FOUNDER

As the United States approaches the 20th anniversary of the 1987 stock market crash, experts still debate tile factor, or set of factors, that led to this historic event. Perhaps the most conventional theory blames the crash on the role of portfolio insurance in worsening an initial market correction. But a lot of evidence also points to seemingly benign political developments thai, when piled together, seriously underlnined confidence which led to the perception of a sudden breakdown of the international financial order.

For example, a public dispute emerged between then-U.S. Treasury Secretary James Baker and his German counterpart. Gerhard Stoltenberg, over exchange rate policy' that created a sense of loss of certainty. Not Iong before the crash, the Reagan Administration had levied trade sanctions against Japan. A week before the crash, the House Ways and Means Committee announced plans to raise taxes on debt associated with corporate takeovers which many global market participants interpreted its highly bearish. Presidential candidate Richard Gephardt (D-MO) slaw the advancement of his amendment to slap tough sanctions on countries running "'excessive and unwarranted" trade surpluses against the United States.

In the end, a deadly combination of seemingly minor technical blunders and less-than prudent political posturing nearly sank world stock markets and the global economy. Stock price declines quickly fed on themselves, creating a financial horror show of historic proportions.

It is not difficult to draw parallels to today's global situation. Even though the 1987 equity market was far more "'expensive" relative to today's market, similarities exist. Troubling political developments seem to be popping up everywhere. Plus, the United States has never before experienced a sustained climate of $60-$70 oil and a current account imbalance exceeding 6 percent of GDR

Consider the current landscape. In recent energy legislation on Capitol Hill, a provision would allow Americans to sue OPEC. While the politics of such a proposal might offer populist appeal, the end result would likely be highly destabilizing to world capital flows, interest rates, and the dollar, not to mention the long-term supply of oil.

Similarly, New York Democratic Senator and presidential candidate Hillary Clinton, worried about the growth of foreign debt undermining America's economic sovereignty, recently proposed triggers if U.S. foreign-owned debt reaches 25...