Greenspan and his Fed have saved markets before

Key players: President Bush and Europe's chief central banker are among others who can help avert a financial breakdown.

September 16, 2001|By William Patalon III | William Patalon III,SUN STAFF

With the stock market crash in 1987, and then the double-whammy of the Asian financial crisis and collapse of the Long-Term Capital Management hedge fund in 1998, investors looked to Federal Reserve Chairman Alan Greenspan to calm fears and keep order in the financial markets.

However, after last week's terrorist attacks on the Pentagon and New York's World Trade Center - which laid waste to so much of the Wall Street financial district and forced the stock market to close - investors will be looking to a broader cast to inspire confidence and avert breakdowns in the financial system.

In addition to Fed Chairman Greenspan, those who will need to provide the leadership needed to maintain order in the stock, bond and currency markets include President Bush, Treasury Secretary Paul H. O'Neill, Secretary of State Colin L. Powell and even European Central Bank President Wim Duisenberg.

"It's ... a coalition, really," said Robert Mewshaw, a partner in Van Sant & Mewshaw, a local money-management firm.

Quantifiable factors such as corporate profits, interest rates, economic growth and international trade help make sure that stocks, bonds and currencies are properly priced in the long run. In the short term, however, the emotions spawned by catastrophic events can take over, sparking wild price swings, disorder and even market crashes, experts say.

"Fifty percent of it is psychology," said Phil Dyer, a senior manager for Wealth Management Services, an investment advisory firm in Towson.

Experts said that those playing the key political, financial and economic roles in the aftermath of the terrorist attacks appeared to understand this and used the time provided by the hiatus in stock trading to do what they could to calm markets.

"The capital markets' biggest enemy is fear and uncertainty," said David L. Berman of Berman Financial Group LLC in Timonium and president of the Financial Planning Association of Maryland.

Greenspan has already stepped forth, as he has in previous crises.

In October 1987, two months into his first term as head of the U.S. central bank, Greenspan got off an airplane in Dallas and was told the stock market had dropped more than 500 points. He returned immediately to Washington, and had the Fed pump billions into the financial system, a move that experts said averted a near-certain recession.

Three years ago, the "Asian contagion" in combination with Long-Term Capital Management's failure appeared poised to halt the long-running U.S. economic expansion in its tracks. Stocks were sinking while talk of a recession was rising. Greenspan's Fed cut interest rates three times during a short stretch, stocks bounced off their lows and headed for record highs and U.S. prosperity continued.

This year, Greenspan's luster appeared to have dimmed somewhat as the economy and stock market continued to sag despite the Fed's string of interest-rate cuts.

But after Tuesday's catastrophic events, investors looked immediately to Greenspan for leadership. When the attack occurred, Greenspan was in a plane on his way back from a meeting in Switzerland. When that flight was diverted, the Fed was repeatedly asked when the central bank chief would return. When Greenspan did return on a military flight, his arrival made the news.

And while the Fed chairman has been maintaining a low profile, his actions have been evident.

Just hours after the suicide attacks, the Federal Reserve said it stood ready to meet all the cash needs of U.S. banks - a move that was both psychological and substantive.

"Some people want to be close to their cash, so they can hold it, and touch it," said Jim Chessen, chief economist for the American Bankers Association in Washington. With the boost of confidence by the Fed, as well as the many contingency plans banks are required to have for emergencies, "the system worked fine" last week, according to Chessen.

The Fed didn't stop there. After injecting $38 billion into the U.S. financial system earlier in the week, the U.S. central bank on Thursday made another $50 billion available to European banks to cope with any potential fallout from Tuesday's tragic events.

Greenspan and the Fed "have an important role in [preserving] investor confidence - that's a very real role," said John P. Hussman, who operates the Hussman Strategic Growth mutual fund based in Ellicott City. "They also play a real role when there's a lack of liquidity, when people want to pull their money out of banks. During periods of crisis, when demands for cash increase ... the Federal Reserve is indispensable."

As if those maneuvers weren't enough, expectations of another interest-rate cut - before the central bank's next scheduled policymaking meeting - are rising, financial indicators show.

Like the Fed, the European Central Bank has given a confidence-boosting performance. It added $63 billion to the European financial system last week, but opted to hold rates steady.

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