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Reagan Offers Soothing Words : Stunned U.S. Officials Can't Explain Plunge

October 20, 1987|ROBERT A. ROSENBLATT and TOM REDBURN | Times Staff Writers

WASHINGTON — Government officials, as stunned as everyone else by Monday's astonishing collapse in the stock market, found themselves unable to explain what had happened and uncertain about what they should do in response.

Stalemate prevailed on the issues that received some of the blame for triggering the panic on Wall Street.

The Reagan Administration and Congress remained deadlocked over ways to bring down the still-yawning federal deficit. Meanwhile, the Administration cannot persuade West Germany and Japan to join the United States in stimulating lagging global economic growth.

But no single event triggered Monday's plunge in stocks, which extended to all the world's major financial centers: London, Frankfurt, Tokyo, Amsterdam and Hong Kong.

"It is a panic reaction," said Lyle Gramley, a former member of the Federal Reserve Board and now chief economist for the Mortgage Bankers Assn. "There is deep concern in the markets about what U.S. economic policy is. There is a lack of leadership."

President Reagan offered soothing words. "I don't think anyone should panic because all the economic indicators are solid," the President told reporters as he left the White House for Bethesda Naval Medical Center to visit his wife, Nancy.

"I think everyone is a little puzzled because--I don't know what meaning it might have--because all the business indices are up," Reagan said. "There is nothing wrong with the economy."

Analysts Agree With Reagan

Many analysts agreed with the President that the economy remains in fundamentally good health.

"Surely there are problems in the economy," said Robert Hormats, a partner at Goldman Sachs, a major investment firm. "But we don't have a 1929-like credit crunch, we don't have a buildup of excesses.

"Basically we now have nothing more than fear feeding on fear. It will certainly hurt consumer confidence and cause a pullback in spending, but I don't think it is enough to cause a collapse in the economy."

Fueling the fear is political deadlock over the unprecedented federal deficits of the past five years.

For years, many economists have warned that the government borrowing to finance the deficits would drain money from productive investments in the U.S. economy. But with the economy moving into its sixth straight year of expansion, with the unemployment rate down below 6%, government officials lacked the will to address the deficit.

The Democrats in Congress propose to raise taxes. President Reagan vows to veto any tax hikes and insists on further cuts in domestic spending.

A second economic danger sign--and one that many economists believe can be traced in part to the budget deficit--is the massive U.S. trade deficit.

Last week's report of a disappointingly high $15.6-billion trade deficit in August prompted speculation that the United States would be forced to let the dollar weaken further against foreign currencies.

"The Administration simply can't continue to defy the laws of gravity on the dollar," said C. Fred Bergsten, head of the Institute for International Economics here. "The markets are recognizing that the dollar is simply unsustainable at these levels and now we are beginning to reap the whirlwind."

Panic Could Result

A lower dollar would help U.S. products compete on world markets. But it would also increase the risk of inflation at home because foreign products would rise in price in the United States. And if the dollar, the basic currency in international trade, fell too far, that could set off a worldwide financial panic.

The United States wants West Germany and Japan to expand their own economies. If these countries would consume more of their own goods and more American products, that could ease the U.S. trade deficit.

West Germany, however, has recently raised its interest rates. The government's move, intended to stem inflationary pressures, also is likely to weaken German economic growth.

Treasury Secretary James A. Baker III, pressuring the Germans, suggested over the weekend that the United States would welcome a drop in the dollar against the German mark if Germany continued to push up its own interest rates.

U.S. and German officials attempted to calm the furor Monday. The German central bank announced that it had taken steps to reduce interest rates, and the Federal Reserve Bank in New York made a similar move.

Meanwhile, Baker met privately with German Finance Minister Gerhard Stoltenberg and Karl Otto Poehl, president of the West German central bank. They pledged economic cooperation.

Jerry Jordan, chief economist at First Interstate Bancorp in Los Angeles, said Germany and Japan are trying to force the United States to do something about its budget deficit.

"Baker's ticked off about it," Jordan said. "We want them to hook onto our locomotive, and they (Germany and Japan) want us to discipline ourselves on the fiscal side."

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