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Technology Stocks : WDC/Sandisk Corporation
WDC 179.56+0.7%Dec 24 12:59 PM EST
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To: Art Bechhoefer who wrote (19075)2/12/2001 12:53:12 PM
From: Robert Douglas  Read Replies (1) of 60323
 
The catastrophe of October, 1987 was precipitated
by the Federal Reserve raising interest rates at a point where the dollar was already
overvalued in relation to the yen and other currencies. The result was immediate and
breathtaking. Investors immediately switched out of stocks into bonds, and the stock
markets, which were not yet limited by trading curbs and circuit breakers, plummeted.
This is a clear instance of a government agency (the central bank) making a humongous
mistake.

Your timeline is off. The Fed began raising rates in 1986 for very real reasons. The economy was brisk and inflation was picking up. The dollar had already corrected most of its overvaluation, down about 35% from its peak in early 1985. It continued down more than 10% during the next year as the Fed continued its modest tightening.

This tightening began a year before the "crash of 87." During the first 10 months of 87 the bond market was in a horrible bear market and the switch from stocks to bonds occurred at a low that bonds have not seen since.

History has clearly born out that the Fed's tightening of that period was warranted. Indeed, after the stock decline of 1987 made little change in the rate of growth and the rise of inflation, the Fed resumed their tightening until the Fed funds rate hit about 10% and precipitated the recession of 90,91. The Fed action during this period was right on the money and is hardly an example of irresponsibility like you suggest.
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