Greenspan's shadow, Warsh's test

Kim Sung-jae The author is a business administration professor at Furman University and author of "The Story of Tariffs" (2025). On Monday, Oct. 19, 1987, the S&P 500 plunged 22 percent in a single day. It was "Black Monday," the steepest one-day fall in history. The shock was all the greater because the index had risen more than 120 percent over the previous three years. At the time, the U.S. economy in then-President Ronald Reagan's second term was enjoying solid growth. It was expanding at around the mid-3 percent range, and productivity gains in information technology and finance were striking. Intel's 386 CPU, Microsoft's MS-DOS and IBM's modular PCs combined to send the computer market surging. IBM's share price soared, making it a bellwether of the stock market. At the time, IBM accounted for roughly 10 percent of the Dow Jones Industrial Average. The financial market was also undergoing a seismic shift. Investment banker Michael Milken aggressively invested in the junk bond market, the market for high-risk corporate debt, while leveraged buyouts, or LBOs, funded by junk bonds became all the rage. Computer-based program trading was also spreading rapidly. That August, Alan Greenspan took office as chair of the Federal Reserve. Although he held a doctorate in economics, he had made his career in consulting, without experience in academia or at a central bank, and markets were uncertain about him. Conscious of that skepticism, Greenspan raised the discount rate — the Fed's benchmark lending rate — by 0.5 percentage points. It was the first tightening in nearly three years, and the stock market tumbled in response. Shaken by the shock, Greenspan issued a powerful message the day after Black Monday, saying the Fed would serve as a source of liquidity to protect the system. The market quickly stabilized and resumed its upward rally. Greenspan is also a role model for Kevin Warsh, who is soon expected to take office as the new Fed chair. Coincidentally, today's AI revolution and digital financial innovation recall the period when Greenspan took the helm. It is hardly surprising that Warsh — a Wall Street figure and son-in-law of a billionaire family, chosen by U.S. President Donald Trump as he pressures the Fed to cut interest rates — is facing intense scrutiny. Warsh, too, is likely to face challenges similar to those Greenspan confronted when he takes office. With stock prices having risen for a long period and economic growth remaining solid, inflationary pressures are still strong, while hawkish voices inside the Fed that favor tightening are more powerful than ever. It would not be surprising if Warsh were to play the tightening card to defend the Fed's independence and assert his presence. If Warsh, a traditional fiscal conservative, moves to shrink the Fed's balance sheet through quantitative tightening, long-term interest rates could surge. The sharp rise in long-term rates was one of the main causes of Black Monday in 1987. Greenspan made a mistake, but he moved immediately the next day to contain the damage. Warsh will need the same agility. Trust that dispels chairmanship risk is not proven in an inaugural address, but during the first crisis. This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.