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Greenspan accents positive

Federal Reserve Chairman Alan Greenspan broke his silence Wednesday over the turmoil in the stock market and proclaimed it not such a bad thing after all.

Speaking to a congressional committee _ and to investors around the world who were hanging on his every phrase _ Greenspan said the plunge in markets, even though apparently short-lived, could diminish the risks of an outbreak in inflation by venting some steam from an economy that has been threatening to overheat.

The stock market rallied sharply on his statements but fell back later in the day. The Dow Jones Industrial Average closed with a gain of 8.35 points, at 7,506.67.

Greenspan suggested that the harrowing 7.2 percent fall and 4.7 percent rebound in stock prices on Monday and Tuesday could provide consumers with a needed reality check.

Consumers have been driving the economy's strong growth by spending freely and amassing considerable new debt, partly because the market's breathtaking rise over the past few years had left them feeling well off even if they were not actually cashing in their investment gains.

Moreover, Greenspan said the economy also would be slowed slightly by the economic problems plaguing Asia, where the market turmoil originated. Exports to that region could decline, he said, and imports from Asia would cost less. That would help restrain inflation in the United States because the plunging value of Asian currencies has made goods from that part of the world less expensive if purchased in dollars.

As the policymaker most able to influence markets in the United States and abroad, Greenspan clearly intended to help calm investors' frazzled nerves by providing an upbeat assessment of the wild swings of the past few days.

Although he had dropped a broad hint in congressional testimony three weeks ago that the current combination of strong growth and low unemployment soon could begin pushing wages and prices higher and could require the Federal Reserve to raise interest rates, he avoided any suggestion Wednesday that he saw imminent danger from inflation.

Greenspan has in many ways been the stock market's pre-eminent bear since he asked last December whether investors were suffering from "irrational exuberance." So it was perhaps not surprising that he would emphasize the positive Wednesday, two days after the Dow average tumbled 554 points and markets around the world trembled.

He even drew a parallel to the aftermath of the 1987 market crash, which is now widely viewed as having done little economic damage and providing a marvelous stock-buying opportunity for investors.

"Even after the sharp rebound around the world in the past 24 hours, declines in markets in the United States and elsewhere have left investors less wealthy than they were a week ago and businesses facing higher equity cost of capital," Greenspan said. "Yet, provided the decline in financial markets does not cumulate, it is quite conceivable that a few years hence, we will look back at this episode, as we now look back at the 1987 crash, as a salutary event in terms of its implications for the economy."

The strong economy has been pushing unemployment steadily lower, increasing the odds that wages will begin rising in a way that could push up inflation, he said. The strong demand for goods and services, he said, is caused partly by a "substantial wealth effect," a reference to a belief among consumers that they can spend more because their investments are doing so well.

"The market's net retrenchment of recent days will tend to damp that impetus, a development that should help to prolong our 6{-year business expansion," Greenspan said.

Asked whether stocks were now priced more realistically, Greenspan, who had said several times this year that investors seemed to have a very optimistic view of future corporate earnings, replied that valuations were now "less out of line" than they had been.

Greenspan, in two hours of testimony before Congress' Joint Economic Committee, said the economy's performance in recent months had been "impressive."

"Growth appears to have remained robust and inflation low, and even falling, despite an ever-tightening labor market," he said.

He attributed the stock market's problems to the troubles afflicting the Asian economies and markets, and on the likelihood that profits of American companies operating in that region would be hurt. But he said that if the Asian markets had not caused American investors to begin reassessing how long the remarkable bull market could last, something else would have.

Greenspan reiterated his belief that productivity growth was picking up, giving the economy greater capacity to expand without inflation. But he stressed that gains in productivity _ output of a worker in an hour _ were not sufficient to erase his concerns that continued declines in unemployment from the current 4.9 percent rate eventually would create inflationary increases in wages and prices.

Short-term interest rates set by the central bank are high by historical standards when adjusted for inflation, he said. But these relatively high rates have shown no signs of restricting activity in rate-sensitive economic sectors like housing and therefore should not be considered terribly tight, he added.

On problems overseas, Greenspan said it was in the national interest to provide temporary financial assistance to nations like those in Asia that are struggling economically. His statement appeared intended to buttress a growing consensus within the Clinton administration that the United States should provide more support to Asia to help settle the financial markets.