Fear of American economic weakness is spreading to many of the world's other major economies, making it less likely that they--and the U.S.--can dodge a substantial slowdown or recession.
Worries about global growth made a speedy, round-the-world trip in financial markets Wednesday, starting with warnings about a new round of Japanese bank trouble.
The domino-like events reminded many of the frightening financial contagions of the late 1990s and put Washington policymakers on high alert.
"We're very concerned that millions of Americans have lost money here, and we're monitoring the situation closely," said Lawrence B. Lindsey, President Bush's chief economic advisor.
American investors' most immediate worry: that Japan's decade-long banking debacle may soon come to a head. That would send destructive ripples sloshing across Asia and all the way back to U.S. shores.
A new Japanese law requires that the nation's already-fragile banks begin valuing their substantial stock holdings at depressed current market prices rather than at high purchase prices beginning April 1, a computation that could push many of the institutions into insolvency.
Analysts warned that the triple whammy of a stalling U.S. economy, a tumbling American stock market and a Japanese financial crisis could be more than the world can take.
"In the last few days we've seen a big bear market here and the return of trouble in Japan," said Allen Sinai, chief global economist with Decision Economics Inc. in New York. "That means the two biggest economies in the world are down, which spells a rising risk of global recession."
To be sure, the U.S. economy is sending mixed signals, with many sectors still showing strength. It isn't clear yet whether the meltdown in financial markets will translate to an economic recession with rising unemployment and falling output.
Bush administration officials sought to play down the Japanese banking crisis and argued that the latest fall in the U.S. stock market was one more reason for backing the president's $1.6-trillion tax-cut proposal. But economists and even some prominent Republicans scoffed at the White House logic.
Bush, during a campaign-like swing through New Jersey, also expressed concern about investors' losses, but was upbeat about both the economy and his tax-cut proposal.
"I've got great faith in our economy," the president said. "And I believe the [tax-cut] plans we're putting in place . . . are going to serve as a second wind for economic growth."
But Republican Sen. Pete V. Domenici of New Mexico, chairman of the Senate Budget Committee, said the proposed tax cut would not have much immediate effect on the economy. "It's not big enough to have, by itself, much impact," he told reporters.
Wednesday's stock tumble boosted pressure on the Federal Reserve to slash interest rates again to try to keep the economy from recession. Fed officials have already cut rates a full percentage point in two steps this year, and they have indicated they may be ready to cut another half point when the central bank's policymaking Federal Open Market Committee meets Tuesday.
Analysts said American economic and financial troubles have begun taking a toll outside the United States. They have pushed weak economies, such as Japan's, back toward recession, and have caused technology-stock boomlets, like Europe's, to begin bursting.
"Nobody expected the Japanese to be a tower of strength" in a time of trouble, said Edwin M. Truman, a former assistant treasury secretary for international affairs. "But a global slowdown and a sell-off in the U.S. stock market is going to make it much more difficult for the Japanese to get their economy going again."
As for Europe, Truman said, its technology sector "had some of the same kind of bubble economy that we've had, and we're seeing some of the same kind of sell-off."
Only in recent days have investors and some economists begun worrying that the economic weakness that the United States is exporting may bounce from other countries back to the United States, aggravating economic conditions here in a kind of vicious cycle. Until recently, the United States and much of the rest of the world were strong enough that Japan's problems did not affect them, said Jeffrey E. Garten, international economist and dean of the Yale School of Management.
"The global economy was firing on four out of five of its pistons, so Japan didn't loom very large even as it stagnated for almost 10 years," he said.
Japan is the biggest net owner of foreign financial assets in the world, according to Kermit Schoenholtz, chief economist of Salomon Smith Barney and Citibank. Investors fear that in a crisis, the Japanese would begin selling off their foreign holdings, which could sink financial markets around the world.
Tokyo certainly attracted unwanted attention Wednesday when Fitch, the international credit-rating agency, said it had placed 19 large Japanese banks on review for possible downgrading.
Japanese banks have huge holdings in the Japanese stock market--shares acquired mainly as collateral for business loans. As the nation's bellwether stock index, the Nikkei 225, has plunged to its lowest level since 1985, the value of this collateral has withered. The combination of the stock tumble and the new law requiring banks to mark down the value of shares to current levels has provoked deep apprehension.
The risk of a Japanese bank crisis spreading to other countries is "no longer trivial," said Daniel Tarullo, economist and professor at Georgetown University Law Center.
Tarullo said a fast-spreading financial contagion in Asia would probably be more destructive today than four years ago, when stock and currency markets throughout the Pacific Basin were gripped by crisis.
"As concerned as we were in 1997 when the dominoes began to fall, the strength of the U.S. economy allowed us to take up the slack and provide for a reasonably quick recovery," he said.
Staff writer Janet Hook in Washington contributed to this report.