Please. Remain. Calm.
THE REMARKABLE THING about last week’s harrowing stock market plunge was how remarkable it was. And that’s because for all the talk of the dangers of a post-9/11 world vulnerable to terrorism, oil shocks, warfare and rising anti-Americanism, the last few years have been unusually prosperous and stable for the global economy. Indeed, before Tuesday, when the Dow Jones industrial average fell 3.3%, the index was enjoying its longest run since 1954 without a 2% single-day decline.
Around the world, economic stability has made investors somewhat cavalier about risk. Lower-risk premiums required for everything from sovereign nations’ bonds to margin stock trading in China and sub-prime mortgage lending in the United States have made this a time of plentiful, cheap capital. Last week’s sell-off, triggered by the Shanghai exchange’s 9% drop Tuesday, reintroduced investors to the concept of risk -- fear even -- and the dangers of getting overextended.
The U.S. economy remains solid, but a “soft landing” is still a landing. Former Federal Reserve Chairman Alan Greenspan pointed out last week that the slowdown in corporate profits is a sign that “we are in the later stages of a cycle.”
Last week was also a reminder of the growing interdependence of global markets. Unfortunately, the days when President Clinton and Treasury Secretary Robert E. Rubin could quickly reassure markets as an overseas financial crises loomed, and reaffirm the desirability of stronger links between the U.S. and other economies, are long gone. In a far more protectionist climate that is wary of the outside world, there is a danger that both Republican and Democratic members of Congress will unleash a political backlash to relatively minor financial hiccups, which could trigger a financial panic or even a recession.
It would be a disaster, for instance, if Congress allowed the president’s trade promotion authority -- under which he can negotiate trade deals that Congress must put to an up-or-down vote -- to lapse, or if it persists in erecting new roadblocks to foreign investment in this country.
And then there is the incessant temptation to vilify China. Sen. Hillary Rodham Clinton (D-N.Y.), who should know better given the example set by her husband, used the Shanghai sell-off to issue a statement expressing concern about the amount of U.S. public debt owned by China and the ensuing “erosion of U.S. economic sovereignty.” The fact that foreigners, including China’s central bank, are eager to invest in the U.S. economy has been a huge benefit to American living standards and a win-win for the global economy. Pressed on CNBC whether she would propose limiting the amount of Treasury bills foreigners could purchase, Clinton said “not at this time.”
Even assuming she was merely pandering to xenophobic voices in her party, it’s not encouraging. If enough politicians follow her lead, modest financial corrections could turn into greater trouble for the U.S. economy.
