Preliminary Observations on the Market Crash of October 1987

GAO discussed the October 1987 market crash, focusing on ways in which to: (1) protect the rest of the economy; (2) ensure that markets can function; and (3) ensure that individual investors receive fair treatment. GAO noted that the Federal Reserve System: (1) effectively met its responsibility during the market crash as money supply manager, last-resort lender, and overseer of the nation's financial system; and (2) may have difficulty meeting its responsibilities in future crises if Congress relaxes the Banking Act's restrictions. GAO also noted that, to ensure effective functioning, the markets must: (1) develop an integrated regulatory structure for linked markets within the United States; (2) develop ways of harmonizing regulation across national boundaries; (3) carefully examine and seek to improve automated trading systems and the market making process; and (4) more aggressively enforce risk disclosure and suitability requirements to protect individual investors.