Rubin Leads Administration Effort to Reassure Investors

In an extraordinary personal appeal to nerve-racked investors, Treasury Secretary Robert E. Rubin walked out onto the steps of the Treasury Building on Monday and declared that “the fundamentals of the U.S. economy are strong.”

Rubin’s remarks, coming more than an hour after the free-falling stock market had to be shut down, reflected a reality that the White House was in no mood to state explicitly: The government does not have a simple antidote to painful declines on Wall Street, such as Monday’s dizzying drop of more than 7% of the Dow Jones’ value.

The president was conspicuously silent on the subject, leaving his spokesman to make only terse comments about the “fundamental soundness” of the U.S. economy. Federal Reserve Chairman Alan Greenspan, whose stature was greatly enhanced by his handling of the 1987 market plunge, also refrained from making public remarks.

If a market plunge were to continue, Greenspan could face pressure to ease interest rates--the approach he took in 1987--if for no other reason than to rescue cash-starved financial institutions. Such a course would be in opposition to the Federal Reserve’s anti-inflation policy.

“Obviously, the chairman [Greenspan] has been busy today,” said a Fed spokesman, adding: “We don’t have any comment.”

Throughout the wild day, officials at the White House, Treasury, Securities and Exchange Commission, Council of Economic Advisers and other agencies kept in touch, but more to exchange information than to formulate any dramatic response.

In particular, the White House feared that official comments about Wall Street’s gyrations could backfire and fuel investor anxieties or that they would be misunderstood in the heated emotions of the day. By late afternoon, however, after the stock market’s furious retreat had triggered its early closing, the administration decided that a reassuring statement from the Treasury secretary was needed.

“It is important to remember that the fundamentals of the United States economy are strong and have been for the past several years,” said Rubin, who left a senior job with the Goldman, Sachs & Co. investment firm to join the Clinton administration. “The prospects for continued growth--with low inflation and low unemployment--are strong,” he added.

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After the brief statement he abruptly wheeled around and returned to his office, refusing questions from reporters.

Although Rubin served as the administration’s point man Monday, Greenspan ultimately may play a more important role. Only the Fed has the power to pour billions of dollars into the financial system to prop up cash-starved investment firms, banks and other financial institutions.

It was almost exactly 10 years ago that Greenspan, then new to his job, earned much of the credit for reviving the markets after the crash of 1987 by reducing interest rates and promising to inject cash into the nation’s financial system.

Experts believe that the Fed once again stands ready to take similar steps to keep the financial system viable.

Greenspan warned in December 1996 that the markets suffered from “irrational exuberance,” but traders and investors shrugged off his warning and drove stock prices to record-high levels.

Pressures to rescue a troubled stock market and measures to prevent inflation may seem to be at odds: Monetary easing is a prescription for bailing out troubled financial institutions in a troubled market. Monetary tightening, in the form of higher interest rates, is the Fed’s normal approach to quelling inflation in a robust economy.

On Monday, administration officials--aware of the enormous complexities that a continued market fall could pose for policy-makers--appealed for calm: “This is a market that has performed amazingly well. . . . So let’s just be calm and reasonable,” urged White House spokesman Mike McCurry. He termed the plunge “a bare fraction of major breathtaking drops in the past” and no reason for panic.

“We want everyone to just take a deep breath and think about where we are,” he said.

The stock market was plummeting even as President Clinton was delivering a speech extolling the performance of the U.S. economy and the dramatic decline in the federal budget deficit to $22.6 billion in the last fiscal year--its lowest level in more than two decades. In addition, the size of the deficit in relation to the nation’s economy--0.3% of total economic output--represents a level lower than that of any other major industrial country.

Speaking to the Democratic Leadership Council, Clinton said that since he took office in 1993, the deficit has fallen by “more than 90%, even before the balanced-budget law saves one red cent.”

After the speech, aides informed the president that the “automatic circuit breaker” that was designed to slow downward market spirals was triggered for the first time since its introduction after the 1987 crash.

Clinton “wanted to learn more about it” and talked with Rubin by telephone after he returned to the White House, McCurry said. He also told reporters that Rubin and other officials were monitoring developments but declined to speculate on what steps were being considered if the market continued to plunge.

“The president is mindful of the fact that the fundamentals in this economy are strong and that’s what matters most,” McCurry said.

The consultations among administration officials followed a pattern prescribed after the chaos of “Black Monday” in October 1987 when the market lost 22.6% of its value. At that time, post-crash analyses concluded, coordination was fragmented.

Now, there are complex crisis-management systems, including hotline telephones linking the key financial regulatory agencies. And the officials have regular meetings to discuss potential crisis scenarios.

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The President’s Working Group on Financial Markets includes the Department of the Treasury, the Securities and Exchange Commission, the Federal Reserve and the Commodity Futures Trading Commission.

Since last week, the group has been in frequent contact--beyond their regularly scheduled meetings. To some extent, today’s events were what the group was preparing for.

The next few days will test the adequacy of these systems in averting a full-fledged bear market panic.

For example, the market’s continued drop of an extra 200 points or so Monday, after a 30-minute shutdown earlier in the afternoon, left some officials questioning whether the circuit-breaker strategy worked--or whether shutting down the market only created new pressures that are likely to pour out later.

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Times staff writer Alissa J. Rubin contributed to this story.