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The Policy Reaction After the largest one day drop in the market in history, the Federal Reserve took immediate steps to increase the supply of liquidity in the market. The goal was to prevent bankruptcies, which would eventually hurt the real economy, by making loans to the investors than were in danger of running out of money. The strategy appeared to have worked, and the Fed certainly earned it’s title of “lender of last resort”. Policy makers themselves were also quick to respond. Alan Greenspan in a statement said that “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.” President Reagan said “…I think everyone is everyone is a little puzzled because… All the business indices are up. There is nothing wrong with the economy.” Still Learning As the 1987 crash demonstrated, we are still learning. Since the crash, a number of regulatory changes have been made to try to prevent another severe “panic” drop in the market. Trading curbs and “circuit breakers” to prevent mass sell-offs by computer traders have been instituted with this goal in mind. So far, there has not been a crash of close to the same magnitude as the 1987 or 1929 crashes – but only time will tell if they will continue to prevent panics in the market. The Policy Reaction After the largest one day drop in the market in history, the Federal Reserve took immediate steps to increase the supply of liquidity in the market. The goal was to prevent bankruptcies, which would eventually hurt the real economy, by making loans to the investors than were in danger of running out of money. The strategy appeared to have worked, and the Fed certainly earned it’s title of “lender of last resort”. Policy makers themselves were also quick to respond. Alan Greenspan in a statement said that “The Federal Reserve, consi…

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