The Asian Crisis Is Now Officially American Too

The U.S. economy entered a new phase last week, one in which its leading officials stopped insisting that the world is getting better and talked instead about preventing it from getting worse.

“Restraining effects of recent developments [in Asia] on the U.S. economy are likely to intensify,” is how Alan Greenspan, chairman of the Federal Reserve Board, described the worsening outlook. Business investment, which has been an engine of U.S. economic expansion since 1992, will slow down, leading economists predict. Recession is possible.

“With 1% to 1.5% growth next year, it wouldn’t take much to throw the economy into negative territory,” says Sung Won Sohn, chief economist of Norwest Bank in Minneapolis.

Yet within this darkening picture, there are glimmerings unmistakably nearer dawn than midnight. Many significant U.S. companies are looking through the current turmoil to growing business in the years ahead.

It is a critical time. The world economy now seems poised between long-term prospects of revival and short-term dangers of systemic breakdown.

Even as Greenspan was testifying to the Senate Budget Committee last week, the head of the New York Federal Reserve Bank was assisting the top executives of Merrill Lynch, J.P. Morgan, Goldman Sachs and Travelers Group in organizing a rescue of a hedge fund that had wagered more than $80 billion in high-risk international transactions, and lost. The fear was that if Long-Term Capital Management of Greenwich, Conn., went under, it would cause a global whirlpool of defaults and losses.

So at the Fed’s urging, the big institutions lent the hedge fund $3.5 billion to postpone its day of reckoning. It was the kind of arrangement that U.S. officials have long criticized Japanese and other Asian banks for engaging in. But the rot is in America now.

And in Europe too. “European banks have very large exposure to developing-country loans,” reports economist Stephen Roach of the Morgan Stanley investment house. The danger is that with so much money tied up in uncollectable loans and investmentsgone wrong, credit will tend to dry up worldwide, crippling businesses and causing bankruptcies.

So Greenspan and the Fed and Congress will have to turn their efforts to accident prevention. The Fed is expected to lower interest rates to ease strains on world economies when it meets on Tuesday. Congress will have to vote emergency funds for the International Monetary Fund to tide over ailing economies.

The imperative is to keep credit flowing so that companies engaged in the “real” economy of producing goods and services don’t stall out.

That real economy is limping in the U.S. Farmers’ incomes are sliding as commodity prices hit new lows in a world no longer able to buy as much in U.S. farm exports. Global companies are seeing reduced business overseas. 3M Corp., the maker of Post-it Notes and Scotch tape, is laying off 4,000 employees, almost 5% of its work force, because of downturns in Asian business.

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But there is underlying strength in the economy too. Companies small and large are coping with the present and preparing for the future. Hutchinson Technology of Hutchinson, Minn., is the world’s leading maker of specialized springs that go into computer disk drives. Its sales this year will be down more than 40% because computer markets weren’t growing overseas. Yet Hutchinson, a company founded by two entrepreneurs in 1965, is stepping up to the challenges. This year it will invest $125 million, double its normal spending, to create manufacturing capacity for new, higher-precision disk drive components that will work in computers designed for the Internet.

If the world economy goes into long-term recession, medium-sized Hutchinson, with $300 million in sales, is toast. But if the world economy can be brought through this crisis, Hutchinson will participate in an expanding global market for Internet-related equipment. That’s why it’s critical that efforts are made to ease the financial crisis.

As if to back Hutchinson’s judgment, Cisco Systems, the leading provider of computer-networking linkages, announced last week that it is expanding in Asia to be ready when economies there recover.

Confidence is not restricted to high-tech companies. Wal-Mart is opening six stores in China, tripling its presence in that country. The Bentonville, Ark.-based innovative giant of retailing is also expanding in Germany, South Korea, Brazil, Argentina, Mexico and Canada. “Our excitement about expanding in Asia has never been stronger,” Bob Martin, head of Wal-Mart’s international division, said recently.

Small companies, too, are taking big moves. International Video Conversions of Burbank opened a $12-million high-definition post-production facility last week. IVC’s business is converting major movies from film to videotape for showing on television sets worldwide. The new facility is a big bet for the company, which has roughly $12 million in annual revenue. But Ken Holland, IVC’s president and founder, says, “We’re working 24 hours a day, seven days a week now, and there’s no downturn in our business in sight.”

What the confidence of companies as varied as Hutchinson, Wal-Mart, Cisco, IVC and others indicates is that the world’s economies, even troubled ones in Southeast Asia, still offer the potential of rising living standards and expanding markets. It is still dawn in the new global economy.

But the crisis is in finance. Hurt by losses in the last year, lenders and investors worldwide are nervous. Bank loans for business are not as available as they were a year ago; investment for entrepreneurs is becoming scarce.

Money is retreating from America too. Because it is needed to settle accounts in Europe and Asia, or because of doubts about the strength of U.S. stock markets and the dollar, funds are being repatriated to German mark and Japanese yen securities. And that means a further reduction in the once-abundant pools of investment capital that have financed the expansion of the ‘90s.

With profits declining for many U.S. firms, the outlook is that high levels of business investment will be reduced, “and that will be the end of the expansion,” predicts Charles Clough, investment strategist for Merrill Lynch.

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The need worldwide is for money to somehow keep flowing. “The U.S. economy’s recession next year will be either mild or severe depending on how generous we are in helping countries in distress,” says veteran economist Albert M. Wojnilower of Clipper Group, a New York investment firm. “Congress will have to approve money for the IMF . . . because it’s in the U.S.’ interest,” just as helping the Long-Term Capital hedge fund was in the investment bankers’ interest, Wojnilower says.

In short, the U.S. and the world economies are at a turning point. Which way will they go?

For a surprising indicator, look to U.S. stock markets. Despite violent ups and downs, stock prices are not fading away as in a bear market. The markets are still in what professional investors call a “correction.”

Longer-term, Greenspan and other world financial regulators will have to devise controls on hedge funds and other short-term investment mechanisms that have so disrupted world economies. Now that they’re facing up to the crisis, they may get serious about such reforms. The beginning of recovery, they say, is when you admit you’re sick.

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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.