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Washington policymakers try to reassure investors

The Clinton administration sought Monday to reassure investors after the stock market's plunge but shied away from addressing the challenges that economic policymakers will face if the market decline continues.

And just as he did a decade ago on Oct. 19, 1987 _ the day the Dow Jones Industrial Average fell 508 points _ Alan Greenspan, the chairman of the Federal Reserve and the official in Washington with the greatest potential influence on the markets, remained silent.

But attention immediately turned to whether Greenspan, who had been hinting recently that interest rates might have to rise to help contain any threat of higher inflation, instead might be driven to reduce rates to reassure investors.

A spokesman for the central bank said Greenspan, who is scheduled to testify before Congress on Wednesday, had been monitoring the situation, but declined to provide any details.

"Clearly, he no longer has to worry about "irrational exuberance,'

" said Ed Yardeni, an economist at Deutsche Morgan Grenfell, citing Greenspan's comment last year about the possibility that the stock market had become overheated. "Now he needs to calm some irrational hysteria. I think he will do just that by suggesting that the Fed may lower interest rates if necessary."

The market plunge Monday, of 7.18 percent in the Dow Jones Industrial Average, was far more moderate than in 1987, when the Dow fell 22.6 percent on a single day. But Greenspan, analysts said, will face a major challenge if the market continues to fall today.

Further sharp declines in stock prices would create increasing pressure on the Federal Reserve to repeat its statement the morning after the crash in 1987, when it reassured the markets by promising to inject money into the financial system to avert the risks of cascading defaults among brokerage houses and banks.

Any move to loosen monetary policy would push interest rates down at a time when the central bank has been worried about a potential outbreak of inflation and has been leaning, instead, toward raising short-term rates. A crucial indicator that may provide a clue to inflationary pressures, the employment cost index, is to be released today.

Whatever the indicator shows, analysts said, Greenspan would have to balance the short-term need to stabilize markets against the potential long-term risk of over-stimulating the economy.

Meanwhile, Treasury Secretary Robert Rubin sought to reassure the public. He said the nation's fundamental economic situation remained strong, and he and others said there appeared to have been no big problems on Wall Street that set off alarms about the financial system's basic ability to handle a decline.

"The payment and settlement systems and other market mechanisms are working effectively," Rubin said.

Another part of the calculation facing officials Monday night was whether to revisit their arms-length approach to the financial crisis in Southeast Asia, where the run on the markets began.

When the International Monetary Fund bailed out Thailand this summer with a $17.2-billion aid package, the United States was part of the discussions but not a contributor of cash.

The thinking in the administration at the time was that the financial crisis was a regional problem that should be first addressed by Japan and others in Asia, just as the United States took the lead when Mexico collapsed.

But Clinton administration officials have gradually been rethinking that strategy as the crisis has deepened and resonated around the world. Over the weekend Rubin suggested that the United States might take a more activist role, through the IMF and other international institutions.

Others in the administration have argued internally that the United States needed to make a significant contribution to the Asian bailouts to reassure investors in the region.

Now all those decisions must be made in a different context: Stopping the cycle of sell-offs that began in Asia and then circled the globe. But it is unclear whether the problems now can be as easily contained as they might have been a few weeks ago.

Greenspan and other policymakers in Washington have long been concerned with the possibility of a plunge in the market and its possible effects on the economy in the United States and in other markets around the world. Greenspan issued his latest warning about the sustainability of the bull market less than three weeks ago.

Moreover, Greenspan's view of the Fed's role in a financial crisis was forged during the 1987 market crash. Greenspan had then been leading the Fed for just 10 weeks, and won wide praise for his public commitment to providing whatever liquidity the financial system might need.

Greenspan has also been a keen student of the relationship between what happens in financial markets and in the economy generally. While he noted in one speech that there was not any lasting disruption to the economy after the market fell in 1987, he has also made clear that no one can be sure in the current circumstances just how much consumers and businesses might alter their behavior in the event of a sustained market downturn.