NEWSMAKER: ALICE RIVLIN
October 29, 1997
Federal Reserve Chairman Alan Greenspan testified before Congress that Monday's stock market plunge may benefit the economy in the long-term. Margaret Warner discusses the chairman's comments and the state of the U.S. economy with the Federal Reserve's vice chair, Alice Rivlin.
MARGARET WARNER: And with us now is the vice chairman of the Federal Reserve, Alice Rivlin. Welcome.
A RealAudio version of this segment is available.
October 28, 1997
Paul Solman reports on the Dow's 337 point rebound.
October 28, 1997
The NewsHour explores the turbulent world of the Asian stock markets.
October 27, 1997
The U.S. stock market continued to slide with its largest single-day loss.
October 23, 1997
A 10 percent drop in the Hong Kong stock market makes investors uneasy.
October 20, 1997
Phil Ponce talks with Michael Zielenziger of the San Jose Mercury News about the dynamics of Southeast Asian economies.
August 15, 1997:
Economists explain the day's stock market plunge.
March 31, 1997:
Paul Solman looks at what makes the stock market move.
Browse the NewsHour's coverage of business, economy and Asia.
Stock Exchange of Hong Kong
New York Stock Exchange
EduStock: an educational site that explains how the stock market works.
ALICE RIVLIN: Good to be here.
MARGARET WARNER: After Chairman Greenspan gave his testimony, the markets just calmed right down. Why?
ALICE RIVLIN: Well, actually, the markets had turned around and were headed up earlier I think because people realize that the basic situation in the U.S. economy is very positive, and nothing terrible has happened since last week. What has happened is some people lost some money in the stock market and maybe the downturn in the markets has taken a little bit of pressure off the U.S. economy, but nothing fundamental has changed.
Could the turbulent stock market actually help the U.S. economy?
MARGARET WARNER: Now, he said that actually this turmoil might well have a salutary effect. Explain to every American how turmoil in the financial markets can actually be good for the U.S. economy.
ALICE RIVLIN: Well, I think there are lots of senses in which it might be good. One thing is we've had a very long run of--in stock market values, in equity prices, such that a lot of people who were trading thought it could only go up. It couldn't go down. Now, maybe it's a good lesson that those of us who are older knew it could go down, but some people might not have thought that it could go down. Perhaps more importantly, the main problem that most of us have seen in looking at the U.S. economy was not that it would run out of steam but that it might overheat, and the fact that equity values have come down a little bit makes it a little less probable that it is overheating. People may have been spending more because they thought the had bigger profits in the stock market. That effect would abate now a little bit if their values are down a bit.
MARGARET WARNER: So traders and other people in the business community were all getting out front today and saying they interpreted this to mean that the Fed didn't see a terrible risk of inflation immediately and this would mean no interest rate rise. Is that a reasonable interpretation?
ALICE RIVLIN: Oh, I don't--I wouldn't think that they should over-interpret it. What the chairman was saying, I believe, is what I believe as well, is the economy is doing very well. It has had a tendency or the risk has been for quite some time that we might have inflation down the road. What's happened in the last few days, both in the United States and in Asia, has reduced that risk a little bit.
Labor and wages in a "new economy."
MARGARET WARNER: Now, he did say three weeks ago, and he said again today that we didn't run it, that at the same time that he felt the labor market was getting very, very tight, and though we may have a "new economy," that the laws of supply and demand have not been repealed when it comes to labor and the relationship between labor and wages. Now what is he saying today, or what does the Fed believe now in terms of how close we are to that, to that point at which wage demands are going to rise?
ALICE RIVLIN: Well, there's been something of a good mystery in the U.S. economy now for some time. We've had very low unemployment rates. We've had growth that's higher than most economists thought was sustainable, and yet we had very little inflation. The risk has been that this doesn't continue because essentially we've run out of workers. We've been drawing into the labor market people who weren't even unemployed but--in the sense that they were actively looking for jobs--but who have come into jobs because jobs were available, but there isn't an infinite supply of such people. So we were essentially running on an unsustainable track, and a little bit of abatement is probably a good thing.
MARGARET WARNER: Now, he also said today that if it hadn't been the turmoil in the Southeast Asian markets, it would have been something else, because, as you mentioned earlier, I mean, investors were perhaps looking for a reason to sell or have a sell-off. Do you think that atmosphere has now evaporated, that we're going to see a sort of steady market? Or do you expect more turmoil?
ALICE RIVLIN: I don't think we know. It's very hard to guess the stock market and how investors will react. The values that we were at a few days ago were clearly reflecting very optimistic projections about earnings. To justify those values you had to really believe that earnings were going to--of companies were going to keep on going up very rapidly. We will see as earnings come in what values really are justified.
MARGARET WARNER: Because the market is only say now at 7500; it's not that much less than it was at its peak.
ALICE RIVLIN: No, it isn't.
MARGARET WARNER: No.
ALICE RIVLIN: And people have made money this year. If you were investing in an average range of stocks starting in January, you're still ahead.
Turning the South East Asian Economy around.
MARGARET WARNER: Now, finally on Southeast Asia, help us understand a little more about what impact--he said he thought the impact of the Southeast Asian economies and their problems on the U.S. economy was, I think he said, modest but not negligible, something like that.
ALICE RIVLIN: Something like that.
MARGARET WARNER: What's the line between those two? What does that really mean? When does it exceed being modest?
ALICE RIVLIN: Well, again, there's no absolute line but Southeast Asia is important, it is important to the world, and to us, but it doesn't affect our economy very directly. Now, we export to Southeast Asia, but they aren't a huge set of trading partners. Europe and Canada, for example, are more important, so if those economies are slowing and we're exporting a little less, that means that that will be a little less export and a little less income for the United States, but it isn't huge.
MARGARET WARNER: And are the Asian economies, or the Asian governments, doing what they have to do? Again, Chairman Greenspan talked about the international community has to help them kind of--he didn't use this phrase--but sort of learn and follow the rules of the road of international finance, banking, and so on. What do you see overseas in Asia about the willingness for these governments to do that?
ALICE RIVLIN: Well, they are--many of them--in a tight spot. It's not a spot that's peculiar to them. We've been there at various times when we had a run up in asset prices of various sorts, including property. They've had a very rapid inflow of foreign capital into most of their economies, often more than they could absorb. They have weak banking systems in some cases. They are going to have to take some quite serious steps to get back to normal operating procedures, but those are basically strong economies with good prospects for growth.
MARGARET WARNER: When Chairman Greenspan said that he thought perhaps the IMF and even the international community would have to do more--
ALICE RIVLIN: And they are doing so. The IMF--when it met in Hong Kong and decided on a set of measures that would make it easier to step in, in these kinds of situations and, in fact, are negotiating with several of these governments now in two sense, so that the governments are doing the things they need to do to get their houses in order, but some international help is available.
MARGARET WARNER: All right. Well thanks, Ms. Rivlin, very much.
ALICE RIVLIN: Thank you.