Greenspan remarks make global scope of economic crisis official Government no longer denies impact on U.S. of Asian downturn

September 06, 1998|By LOS ANGELES TIMES

SAN FRANCISCO -- The fast-spreading Asian economic crisis formally entered a new phase this weekend: It now has gone global -- officially.

When the crisis broke out -- with the collapse of Thailand's economy in July 1997 -- conventional wisdom held that the damage would be confined to a handful of small Asian economies.

For months, it seemed that the United States would be immune.

On Friday, however, Federal Reserve Board Chairman Alan Greenspan effectively conceded that the Asian crisis has proved to have had a much more significant reach than first anticipated.

In comments at the University of California, Berkeley, Greenspan's disclosure that the U.S. central bank is prepared to cut interest rates if necessary to help calm the turmoil in global markets marked the first concession by a top U.S. policy-maker that the crisis is jeopardizing the U.S. economic boom.

But the question remains whether the United States and the other major industrial nations can muster the wherewithal to prevent the current crisis from dragging the world into a recession -- or worse yet, a 1930s-style depression that could continue for years.

"We've entered a new stage of recognition that this is truly a global problem, and we're not going to escape it," says Charles H. Dallara, a former U.S. economic policy-maker who now heads the Institute of International Finance.

Now, Dallara says, it's time for the Group of Seven -- the finance ministers and central bankers of the United States and its six major economic allies -- "to wake up."

The world's financial markets, he said, "need to see leadership. There's a need for concerted action -- soon."

As the past two weeks' turmoil has demonstrated, a collapse in investor confidence can lead to huge swings in global financial markets that can quickly spread the damage to countries that ordinarily would not be targets for such attacks, plunging their economies into recession.

If the current pace continues, Latin America -- which began encountering serious troubles only a few weeks ago -- will soon join the sick list of regions that are heading into recession, heightening the threat to the United States, which depends heavily on exports to its southern neighbors.

Most analysts believe that if the United States begins to falter, hopes of staving off a global downturn would be dashed.

"It's an extremely dangerous situation," says David C. Mulford, a former U.S. economic policy-maker now with Credit Suisse First Boston Ltd., in London.

While Greenspan's announcement no doubt will be welcomed in many quarters, it seemed designed mainly to provide a short-term sedative for panicked global financial markets by holding out the promise of an interest rate cut.

But given that any cut by the Fed is likely to be small, most economists doubt such a move will do much to resuscitate Asia.

While Greenspan was making his comments, a development most economists viewed as ominous took place in nearby San Francisco that same day.

To the dismay of analysts, the meeting between Japanese Finance Minister Kiichi Miyazawa and U.S. Treasury Secretary zTC Robert E. Rubin lived up to its advance billing: There were no new initiatives and no indication that Japan is willing to take bold steps to fight its own recession.

Analysts say Tokyo simply does not understand the importance of Japan's recovery to stemming the Asian economic crisis and has begun to resent U.S. badgering on the issue. There is virtually no political support there for a large stimulus package.

Pub Date: 9/06/98

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