Fed Chairman Alan Greenspan's unusual statement last fall that the monetary authorities are now looking at stock price fluctuations to foreshadow economic trends was a major philosophical change.

In years past, stock market activity, while important to investors, was not considered an economic bellwether. Indeed, the Nobel laureate economist Paul Samuelson once said that the stock market "has accurately predicted nine of the past five recessions."

Even the Great Depression, which many blame on the stock market's collapse, has been shown to have been rooted more in maldistribution of income - and the Federal Reserve's mistaken effort to tighten credit as a means of protecting our gold stock - than in stock price declines.

But after Mr. Greenspan's warning, it seems wise for bankers to examine specifically how they might be harmed by swings in stock values.

For instance, consumer spending on homes, luxury cars, and other high-cost items is at record levels thanks in part to gains in the stock market. The question is, how much of your borrowers' income is directly or indirectly a byproduct of the market boom? It's something banks need to keep in mind because falling stock prices could reduce demand for consumer loans and credit card borrowing.

The popular perception is that people borrow more when interest rates fall and less when they rise. Yet studies show the opposite is true: People are influenced not by interest rate levels but by their own optimism. Confidence is high now, partly because of the stock market boom, but if people feel their fortunes will soon falter and that it will be harder to repay loans, they will borrow less, even if rates fall.

Banks counting on heavy consumer loan demand to remain prosperous must remember this when the stock market declines, though the Fed may ease credit to help offset the economic downturn that is likely to be associated with a falling market.

There's a unique aspect about today's stock market that could very well cause it to affect the economy more than it has in the past: Many investors and investment professionals have never experienced a severe down market.

Some brokerage firms report that three-quarters of their employees were not working in the market at the time of the last sharp decline, in 1987. It apparently doesn't occur to them that the market's good times might not last forever.

Some observers say today's record-setting price-to-earnings ratios are justified because the new economy is so efficient.

But eventually, these companies' share prices will have to better match their profits. Sure, multiples can stay in the stratosphere - if buyers of stocks can find others willing to take them off their hands at even higher prices under what is called "the greater fool" theory.

The investors who get out first are the ones who will not get burned. And bankers must make sure they have not placed bets on the borrowers who get torched when the stock market's hot streak ends. Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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