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New Policies, Not Arguments : Stock Plunge May Force Action by U.S. and Allies

October 26, 1987|TOM REDBURN and OSWALD JOHNSTON | Times Staff Writers

WASHINGTON — For all the fortunes lost during Monday's day of reckoning on Wall Street, the collapse of the stock market may at long last force the United States and its allies to recognize that disaster for one will inevitably mean disaster for all.

And that realization, analysts say, could open the door for this country and its major trading partners to stop their incessant jockeying for national advantage and revamp the economic policies that helped to precipitate last week's crisis in the first place.

"The silver lining to the clouds on Wall Street is that the crash may have pulled Washington, Tokyo and Bonn away from the collision course they were on," said Alan Stoga, an economic analyst at Kissinger Associates in New York. "It looked like nobody was in control of the policy levers. Now, at least, there is some real hope for cooperative action rather than squabbling inaction."

It is only a hope, analysts emphasize. Deep divisions remain over economic policy, and many remain skeptical that even the shock of last week's market earthquake--followed quickly by collapses in Tokyo, London and other overseas securities markets--will be powerful enough to break the current impasse.

"It still seems to be business as usual in Washington," said John Makin, senior economist at the American Enterprise Institute here. "They are still arguing as though nothing has happened." David Wyss of Data Resources Inc. in Lexington, Mass., echoed that complaint: "Fear does wonderful things for uniting people, but whether it will last after the current stampede is over is questionable."

Certainly inaction is the pattern that has prevailed for years. Global trade imbalances continued to worsen during the 1980s even as the dollar first soared and then plummeted against foreign currencies.

Two years ago, the major industrialized nations agreed to manage an orderly decline in the value of the dollar, and they did make periodic efforts to work together. But as crisis after crisis flared, the allies frequently resorted to their favorite tactic--blaming each other.

The United States demanded that West Germany and Japan, where domestic economic growth has been anemic, expand their economies and begin consuming a greater share of the world's products.

The trading partners insisted that the United States first reduce its massive budget deficit, which they called the major cause of its dependence on foreign capital. The United States replied that in an otherwise weak global economy, a retrenchment of that sort could trigger a worldwide recession.

May Be Persuaded

Neither side was willing to move. But last week's worldwide financial meltdown may finally persuade all sides to act.

Japan already had begun haltingly to stimulate its economy last summer. Last week the Germans gave up--at least for now--their efforts to squeeze the last drops of inflation out of their increasingly sluggish economy.

And, most importantly, the Reagan Administration is finally talking about abandoning its confrontational approach to Congress on how to reduce the budget deficit.

"Don't miss the significance of the President saying he is willing to consider taxes as part of a budget settlement," one senior Administration official said. "He is listening now."

The moves must occur in tandem, most experts agree.

"The U.S. budget deficit will require correction, but this must be a careful, gradual process or we may well bring about a recession in the U.S. and around the world," Lord Harold Lever, a key British economic adviser, wrote in the International Economy magazine.

International Consequences

"The present dangerous situation emphasizes the need for countries to take the international consequences of their domestic policies more into account than is their autarchic and insular habit."

Economists fear that the stock market crash means that time is running out.

"The force of the markets is now pushing governments to move in the right direction," said Stephen Marris, a British analyst at the Institute for International Economics here. "But it's a race between economic reality and political immobility in both the United States and Germany."

No one really knows what touched off the panic on Wall Street. It is clear, though, that the crash was not exclusively made in the United States. One of the triggers was a series of recent interest rate increases in West Germany, which were exacerbated by the West German government's proposal to impose withholding taxes on bondholders.

Warning From Baker

That threatened to retard growth in West Germany just when the United States and other European nations had hoped that it would finally begin to expand. So Treasury Secretary James A. Baker III went public on the Thursday before the crash with a warning that the United States would welcome a decline in the dollar relative to the mark--a step that threatened to depress West German exports--if West Germany tightened any further.

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