WALL STREET WOES August 27, 1998 The NewsHour with Jim Lehrer Transcript

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The worsening economic situation in Russia triggered a massive sell-off on Wall Street today. The Dow Jones Industrial Average fell 357 points, its third largest point drop ever. Following a background report, Jim Lehrer and guests discuss the reasons behind the stock market's plunge.

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A RealAudio version of this segment is available. NEWSHOUR LINKS: August 26, 1998: Why is the Russian market collapsing? August 11, 1998: One World, One Market: Is globalization good or bad for America? August 5, 1998: The U.S. stock market continues its roller-coaster ride. July 31, 1998: How is Asia's economic crisis affecting the United States. May 28, 1998: The Russian government tries to maintain the value of the ruble. April 3, 1998: The U.S. economy soars as Japan continues to fall. February 3, 1998: The rippling effect the Asian economic crisis. Browse the NewsHour's coverage of economic issues and Asia. OUTSIDE LINKS The Treasury Department . New York Stock Exchange Nasdaq

SPENCER MICHELS: Wall street took a big dive today, with the Dow Jones Industrial Average dropping 357 points at the close and losing more than 4 percent of its value. And at the frenzied Chicago Board of Trade, where investors deal in bonds and stock futures, grain and soybean futures, as well as wheat, fell to new lows. Traders feared that foreign buyers will not be able to pay for U.S. products. Once again, investors were looking to worsening economic conditions overseas, especially in Russia.

Russia's economic and political crisis.

Today, amid speculation over President Boris Yeltsin's political future, the Russian stock market lost 17 percent of its value and hit an all-time low. And for the second day in a row, the Russian Central Bank suspended trading of the ruble as Russians continued to try—mostly unsuccessfully--to buy dollars at their banks and local exchanges--not knowing what the ruble would be worth at the end of the day. In a week the ruble has gone from 6.4 to the dollar to just under 10. Asian markets, which open early, were the first to react today to Russia's economic crisis. In Tokyo, the NIKKEI tumbled more than 3 per cent.

Then came the European markets. In Frankfurt, the name stock index for Germany fell 4.5 percent. Switzerland's market lost 5 percent of its value. The French saw their market slide more than 4 percent, and Britain's market lost nearly 3 percent of its value. The Eastern European markets took much harder hits. Hungary's market plunged a whopping 14 percent, Poland lost 6 percent, and Czechoslovakia ended losing 7 percent of its value. German President Helmut Kohl stressed the need for major reform in the Russian economy.

HELMUT KOHL: (speaking through interpreter) I'm worried because without reasonable reforms nothing is going to change in Russia. It won't be possible to mobilize any more international money without reforms to the Russian economy, not even German money.

SPENCER MICHELS: At the Kremlin, acting Prime Minister Victor Chernomyrdin issued a statement saying the situation is difficult but absolutely manageable. And in Washington, American National Security Adviser Samuel Berger urged Chernomyrdin to quickly put together a government.

SAMUEL BERGER: It's very important for him to organize his government as quickly as possible, for them to take the measures that are going to be necessary to deal with the economic problems, fiscal measures, the banking measures, that will stabilize a situation. Only when and as Russia takes the steps that will rebuild confidence in the market, confidence of the markets, will the situation stabilize and we can begin to see some reversal.

SPENCER MICHELS: Berger said despite the financial crisis, the meeting between Presidents Clinton and Yeltsin should go ahead next week as scheduled.

JIM LEHRER: More now from Kathleen Stephanson, senior economist with the Wall Street firm Donaldson, Lufkin & Jenrette, and Jeff Shafer, vice chairman of Salomon Smith Barney International, he was Undersecretary of the Treasury for International Affairs during the first Clinton term. Ms. Stephanson, how would you describe what happened today in the U.S. markets?

A shift from stocks to bonds.

KATHLEEN STEPHANSON, Donaldson, Lufkin & Jenrette: Well, there was a great deal of nervousness, obviously, and we've seen here a sharp decline in stock prices. It clearly showed this shift of investment portfolios into bonds and out of stocks. Most of the sell-off was from institutional investors, that is, the large players in the markets.

JIM LEHRER: And they're getting out of the stock market and going somewhere else?

KATHLEEN STEPHANSON: Yes. And they are going—usually what you see is a shift into the government bond markets, and this was a phenomenon not just in the U.S. but also in Europe. What you saw is a general selling of stock market and rally in the government bond markets, considered as a safe haven whenever there is an anxiety about either political development or an economic development. They have both.

JIM LEHRER: The idea being they'll put their money over there and wait and see what happens with the stock market and then may come back in later if it doesn't continue to fall, is that right?

KATHLEEN STEPHANSON: Precisely, instead of just sitting in cash, the investors tend to go into the government bond, which is a very liquid market, and, in fact, what you saw is really more of a rally or an increase in prices of shorter-term maturity, such as a two-year note, such as the five-year note, which really does suggest that this is "parking" of monies and until we see a better picture.

JIM LEHRER: Mr. Shafer, would it be correct to describe the mood today as one of crisis?

Mr. Shafer: "It is really not a crisis outside of Russia."

JEFF SHAFER, Salomon Smith Barney International: It is really not a crisis outside of Russia. Certainly Russia is in a full-blown crisis that's been gathering for some time. In the other markets, I think it's—whereas Kathleen has characterized it as people moving to the sidelines—evaluating the situation—and then seeing where it goes from there.

JIM LEHRER: Were all kinds of stocks affected by this sell-off today, or were there particular kinds that were hurt the worst, or particular kinds that did not lose in value?

JEFF SHAFER: It was very broad. Large numbers of stocks hit 52-week lows. Obviously, there are always differences and exceptions. But across the world and across the markets there has been a general liquidation.

JIM LEHRER: How much, Mr. Shafer, do you believe this can be—how much of this can be attributed to the Russia situation?

JEFF SHAFER: I think Russia was a trigger, but it's a trigger which put price against the background of a number of earnings reports in the U.S. that have been a bit disappointing recently, of its being August and not that many people being at their desks. And then what Russia did is it alerted people to the fact that this Goldilocks economy that we have been in is operating in a world which is much scarier. The three bears are out there.

JIM LEHRER: You're going to have to define Goldilocks economy for me.

Explaining a "Goldilocks" economy.

JEFF SHAFER: Well, the Goldilocks economy is the term that economists have begun to use for an economy that's not too hot, not too cold, but just right. And that continues to characterize the U.S. economy and I would say the economies of western Europe as well. It's seen on quite a stable path. Things become quite complacent. The stock markets have run up in both places, and then you see a country that's historically as important as Russia and this kind of crisis, it comes as a big shock to people.

JIM LEHRER: But, Ms. Stephanson, 357 points, this is the third largest drop in the history of the U.S. Stock Market. I mean, there's more involved here than Russia, is there not?

KATHLEEN STEPHANSON: Well, yes. One has to remember that this is another casualty. I mean, what has happened is that investors suddenly realized that we've gone through an Asian crisis; we've gone through a weakening of the yen; and continued anxiety as to whether China will devalue or not; and finally we are now seeing what everybody feared, even without the devaluation of the Chinese currency, namely that there is a contagion effect that is not just contained to the Asian region. So what we see here is—if I may say so—a "spillover effect" into Russia, even though there the situation or circumstances were different, very, very different from Asia, but, nevertheless, it is the continuation of a year-long type of crisis in the emerging market arena. And I think that that is what is spooking investors, because the next step is how is that going to—what would be the ripple effect, the contagion effect to other emerging market regions such as, of course, the first thing that comes into mind, Eastern Europe and Latin America? And Latin America, that's where people realize it's close to home and where U.S. banks might have a larger exposure than say with Russia.

JIM LEHRER: Mr. Shafer, would it be correct to read today's reaction on Wall Street as an indication that those people who were playing with their money today, at least, the big institutional investors, do not see this getting better anytime soon, in other words, they expect it to get worse before it gets better?

JEFF SHAFER: Well, I think they're preparing for that eventuality, that they can move in and out very quickly. We've seen them move to the sidelines several times earlier in the last year and the market has picked up and they picked up with it. I think that it's important that investors will be recognizing over coming days to see that Russia really is very different from other areas of the world where there are problems, but nothing like the lack of direction and the lack of policy and the lack of political commitment that has led Russia to this disaster.

JIM LEHRER: So what happens? I mean, in other words, what is it that say when the bell rings in the morning and all the folks on Wall Street, both the big ones and the little ones, who are paying attention, in other words, people who have money involved in the stock market, what will be the signs in the morning to look for as to whether or not this thing is going to continue to get worse, or whether something has been done to maybe stop the bleeding?

Looking to the small investors.

JEFF SHAFER: I think in the very short run in the stock market, we'll look again to see what the smaller investors do. Eleven months ago after the October decline when institutional investors were sellers, it was the small investors who came back and said I'm going to go bargain hunting. We may see that again, it may take a bit more.

JIM LEHRER: What do you mean? What did they do? What do you mean bargain hunting?

JEFF SHAFER: When they came in, the decline was on a Friday, they thought about it over the weekend, and came in on Monday and small investors were buyers, and they're the ones who began the upward trend in the market again. And the institutional investors, in fact, followed them.

JIM LEHRER: Ms. Stephanson, do you see that happening again?

KATHLEEN STEPHANSON: Well, I think that there is that possibility, particularly because at this point, in fact, we have seen relatively small redemptions of mutual funds, so I think that there is that possibility.

JIM LEHRER: In other words—

KATHLEEN STEPHANSON: However—

JIM LEHRER: Excuse me—the small investor, the average investor seem to have more faith in this—in this not—that it's not going to collapse than the big boys do?

KATHLEEN STEPHANSON: Well, it seems that the smaller investor is definitely here for the longer run if you look at, for instance, the reasons why you invest in the stock market for retirement funds and so on, that clearly is not for making profit in the next three weeks or next three months, unlike the larger investor, where there is a bottom line to answer to. So I think that, you know, you do have that major difference here. Now, looking into the very near term, obviously, coming in tomorrow, I think that the market, the big players, for sure, will have to look at what happened in overnight trading in Asia, and then, of course, in Europe. And probably there will be some feeding on the decline that we see here today in America. So I think that in the near term that we still have to brace ourselves for quite a bit of volatility before people, investors, market players realize that it's been oversold, because one thing that one has to realize is that we're still looking in the U.S. at the economy that is robust, an economy that has low inflation, and low interest rates.

JIM LEHRER: But, Mr. Shafer, eventually, a bad—a bad spell on the stock market does have its effect on the U.S. economy, does it not?

JEFF SHAFER: The stock market does have effects on spending, but so far we're still at very high valuations, and—

JIM LEHRER: And that means what? What does that mean?

JEFF SHAFER: It means the stock market has retraced only a small part of its gain even over the last two years, let alone over the last decade, that people are still sitting on large amounts of gains that they've had in the stock market, and I don't think they're going to have their spending much affected by an adjustment of this size, even if it should go a little further. I think most important is what happens to control the spillover to those economies that are still vulnerable. What happens, is there going to be support there for Latin America? In that connection, it's important that the U.S. Congress pass the IMF funding legislation. It's important that the IMF, which still does have resources left, and the G-7 concentrate their efforts at supporting those countries who are still working to implement good policies, who have undertaken economic reform. The economies of Latin America are very different than they were 15 years ago. But they are still being battered by these winds in the markets.

JIM LEHRER: Isn't it also possible too, Mr. Shafer, that panic could lead to some bad policies as well, just in the short-term?

JEFF SHAFER: Well, I think that could be—that certainly happened in Russia, where they made a terrible mistake in letting go of the ruble peg at a terrible time, turned a bad situation into a complete disaster. But so far the economic policies that one sees in countries like Mexico and Brazil and Argentina are really quite solid, and they're very calm, cool policy makers who have seen hard times before.

JIM LEHRER: Ms. Stephanson, finally, what would be your advice to the average investor tonight?

No signs of an imminent recession.

KATHLEEN STEPHANSON: Well, I think that one has to continue to focus on the economic fundamentals and again, as I mentioned earlier, they remain robust. Certainly, we see an unemployment rate that is at a 30-year low. This is—even if there is some slack here—even if there is some deceleration in economic growth—we see no signs of major macroeconomic imbalance that would suggest that we have an imminent recession in front of us.

JIM LEHRER: So don't panic?

KATHLEEN STEPHANSON: Correct.

JIM LEHRER: Thank you both very much.

KATHLEEN STEPHANSON: Thank you.

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