Asian Crisis Officially Becomes a U.S. Threat

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. America would help but was unlikely to be affected. 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 UC 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. policymaker 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 policymaker who now heads the Institute of International Finance, which has been monitoring the Asian crisis closely.

Now, Dallara says, it’s time for the Group of 7--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 adds, “need to see leadership. . . . There’s a need for concerted action--soon.”

As the last 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 policymaker now with Credit Suisse First Boston Ltd. in London.

While Greenspan’s announcement no doubt will be welcomed in many quarters, it seemed mainly designed 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 economists viewed as ominous took place in San Francisco that same day. Japanese Finance Minister Kiichi Miyazawa signaled that Tokyo still was not prepared to act more boldly to spur Japan out of its recession, depriving the smaller Asian countries of the plasma they need to recover.

To the dismay of many, the meeting Friday between Miyazawa and U.S. Treasury Secretary Robert E. Rubin here lived up to its advance billing: There were no new initiatives and no indications that Japan is willing to speed up, and enlarge, its economic stimulus program.

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 concerning the issue. There is virtually no political support there for a large stimulus package.

So long as the Asian slump lingers, the danger looms that it will begin to weaken the U.S. economy as well. Until recently, not only was the United States largely immune to the Asian troubles, the country seemed, if anything, to benefit from them: Imports are cheaper and the rush of global investors into U.S. financial markets helped push up stock prices.

But the last month’s plunge in the stock market has some analysts worried that Americans may become spooked and consumers may begin to retrench--knocking out the underpinnings of the economic boom.

On Saturday, President Clinton continued his administration’s efforts to bolster public confidence in the economy. “Markets rise and fall. But our economy is the strongest it has been in a generation, and its fundamentals are sound,” Clinton said in his weekly radio address, recorded as he wrapped up his visit to Ireland.

The president acknowledged that Asia’s woes have “dampened exports, especially for our farmers, and caused losses for some financial institutions.”

But he stressed the good news from the Labor Department at week’s end--that unemployment remained at a low 4.5%--and said: “The bottom line is, for all the quicksilver volatility in the world’s financial markets, the American economy is on the right track. From autos to computers, from biotech to construction, our industries continue to lead the world.”

Still, while administration officials join many economists in arguing that, historically, a fall in stock prices does not hurt consumers very much, the entry of huge numbers of Americans into the market through mutual funds and 401(k) plans has altered that equation and made consumers far more sensitive to market swings.

With U.S. manufacturing now weakened as a result of the collapse of its markets in Asia, consumer spending has been the linchpin keeping the economy here going strongly, despite the slowdown in most other regions. Some fear such spending now could quickly slip.

As a result, many of these analysts say, the prospect of an interest rate cut broached by Greenspan should be only the first step. They want the Group of 7--prodded by the United States--to hammer out a series of coordinated measures to restore confidence in the markets. These actions should include, for openers, a global cut in interest rates, they say.

They also say the seven nations--which include Italy, France, Canada, Germany, Britain and Japan--should firmly warn the markets that the industrial countries no longer will stand for the wild gyrations that have become the rule of late. They also want the rich countries to overhaul the International Monetary Fund, to tailor its policies to today’s problems.

For the moment, however, even the impact of Greenspan’s announcement is a subject of uncertainty. As some analysts have noted, making such pronouncements on a Friday evening before a three-day holiday runs the risk that the effect will be vitiated by the time the markets open again.

“It certainly wasn’t timed for maximum impact,” one former policymaker says.