ON THE REBOUND September 1, 1998 The NewsHour with Jim Lehrer Transcript

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After a volatile start, the Dow Jones Industrial Average rebounded from yesterday's near-record drop, climbing nearly 300 points. What does this financial roller coaster ride mean? Four analysts discuss the state of the stock market and economy after the market's recent fluctuations.

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A RealAudio version of this segment is available. NEWSHOUR LINKS: August 31, 1998: The Dow Jones Industrial Average falls 512 points. August 27, 1998: The Dow Jones Industrial Average drops 357 points. 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

JIM LEHRER: The connections between Wall Street and the economy as seen by Lawrence Lindsey, former Federal Reserve governor, now with the American Enterprise Institute; Anirvan Banerji, co-director of the Economic Cycle Research Institute in New York; Ron Blackwell, an economist and director for corporate affairs of the AFL-CIO, and Michael Boskin, former chairman of the Council of Economic Advisers under President Bush, now with the Hoover Institution. Mr. Lindsey, so the markets were up today, what does that mean?

LAWRENCE LINDSEY, Former Federal Reserve Governor: Well, I suppose in a way it's better than being down. But after the dramatic fall of the last few days, I think one would expect some kind of rebound. I don't think we could read too much into it. This is really a worldwide problem. There's a lot of unwinding in markets around the world, a lot of people who maybe borrow too much, have to sell some things to pay back their debt, and I think that process is going to continue for a while.

JIM LEHRER: Mr. Banerji, do you agree, that not too much should be read into this today?

ANIRVAN BANERJI, Economic Cycle Research Institute: No. I think we have to wait and see. It's way too premature to conclude anything. The more important issue really is where the fundamentals of the U.S. economy are and where the U.S. economy and the global economy are headed.

What does the recent stock market upheaval say about the economy?

JIM LEHRER: Mr. Boskin, how do you see the connection between what's happening, the volatility, down 513 points yesterday, back up today nearly 300, what is—is there a connection between that and the U.S. economy?

MICHAEL BOSKIN, Hoover Institution: Well, there certainly is. There's a risk premium that is built into all of this, and as people become more uncertain, businessmen, workers, savers, investors become more uncertain, you're going to see this kind of volatility. And you'll see some erosion of stock prices, as we've seen from the highs, down substantially from the highs earlier this year. I do believe that unless there was a considerable additional fall in the stock market, it's unlikely to seriously dampen consumption in the United States, which is a good thing. We're likely to continue to grow, albeit quite a bit more slowly than late last year and early this year, when the economy was quite robust. But I think Larry Lindsey is right, that there's a lot of unwinding to do, particularly in other parts of the world and in banking systems, primarily of other countries, but to a lesser extent our own.

JIM LEHRER: Mr. Blackwell, how do you see the connection between what's happening on Wall Street and the basics of the U.S. economy?

RON BLACKWELL, AFL-CIO: Well, I think the relationship is quite complex in both directions. I agree with the other guests that the day-to-day movements don't mean very much, but it's the trend over time. And there is some signs of increasing volatility. I think the impact of what's going on now, even if it does indicate the early stages of a bear market financially don't necessarily carry direct implications for us in the real economy.

JIM LEHRER: Bear market means that the market is going down.

RON BLACKWELL: If the market continues to go down in a trend sort of way—and it can, because it influences the way that people spend money in the real economy and the way businesses spend money as well--

JIM LEHRER: Make the connection. From say just the last two days, how could that connect to how people spend money?

RON BLACKWELL: Well, as I said, I don't think the movements of the last two days matter that much. I think over time, though, if there is increasing volatility and especially if there's some trend downward in securities prices, then, of course, people feel like they're less wealthy than they were before. And, as consumers, they're less likely to go out and buy the yacht than they otherwise might have been, if they're very wealthy, and businesses, recognizing that there is that kind of force at work, particularly in a decelerating economic environment anyway, are going to take back their investment plans.

JIM LEHRER: You're nodding, Mr. Lindsey. You agree?

LAWRENCE LINDSEY: I agree. I think it's important to put into perspective. The last two weeks knocked about $2 ½ trillion off of household wealth. That's real money, no matter how you count it even here in Washington.

JIM LEHRER: But it was unrealized wealth, wasn't it, for the most part?

People are feeling less wealthy these days.

LAWRENCE LINDSEY: It was, but, you know, people looking at the stock market pages still felt poorer this morning than they felt two weeks ago. A rule of thumb economists use—and there are lots of those out there—is that probably one to three percent of that is going to show up in lower spending. So we're talking about $25 billion to $75 billion less consumer spending over the next year. That's a fraction of a percent of GDP, so I don't think that we're going to have a recession because of what we've seen so far. I do think we're going to see somewhat slower growth.

JIM LEHRER: So just to continue the train for those of us who are not economists, what that means, if people spend less money, that means there are less refrigerators sold and means less refrigerators made, and less people working to make refrigerators, and it does have that kind of chain reaction.

MICHAEL BOSKIN: That's certainly true, Jim, but I think it's important to point out that there are probably about $6 trillion in unrealized capital gains still, since we're back to about where we were at the beginning of the year, relative to 1994. So I think Larry is correct that this is a large correction from when we take the total decline, not just what's happened yet in the last couple of days. But it's unclear, the consumer's mark to market instantaneously. So how much of an effect this will have remains to be seen. When we had the big market crash in 1987, it had very little effect on the real economy. The Fed supplied liquidity, which was badly needed at the time. And we've had a similar episode in terms of the depressed commodity in oil prices in 1986, we skirted recession, although we did have one negative quarter. So I think that it's hard to see this having a big impact on consumers. But we also have a much wider ownership of corporate stock, which is an enormously healthy thing for American families in our society.

JIM LEHRER: About half the people in the United States have a--

MICHAEL BOSKIN: About half the people—the last few times—the things—when we compare historical episodes, we go back to periods when it was much less than that. So I think it's a little bit hard to be certain but Larry is roughly right on the orders of magnitude.

JIM LEHRER: One thing I also want to make clear, the term you said, "unrealized capital gains," what that means is that people have made money on the stock market, but they haven't sold their stock—

MICHAEL BOSKIN: That's right.

JIM LEHRER: So they may have made say 50 percent and they lost--now it's back down to 25 percent on their money. That's what you mean, right?

MICHAEL BOSKIN: Well, it's quite a bit more of a gain than that.

JIM LEHRER: Right.

MICHAEL BOSKIN: But relative to say 1994 it went up $8 trillion and then it came down about $2 trillion. So there's still about $6 trillion of gains.

RON BLACKWELL: But, as pointed out, that's money that's unrealized, is another way of putting it.

MICHAEL BOSKIN: That's right.

RON BLACKWELL: And depending on what happens to stock prices and what the expectations are of what happened to stock prices, a lot of that could disappear very rapidly, and I think that's a problem. AS Professor Boskin pointed out, we decelerated our rate of growth in the real economy, down about 1 ½ percent. And we have an increasing trade problem, because imports are surging and exports are declining. The government, because of fiscal policies, are now a contractionary force in the economy. I think—and consumers are loaded with debt. So I think there's a real serious—it's coming against a weakening of a very long but steady economic recovery and could have very serious implications if we don't treat it right. We've just, from the point of view of giving, sharing the benefits of this recovery, we've just begun to get the first signs of wage increases. Wage increases went up 2 ½ percent in real terms for the first time last year.

JIM LEHRER: And this could stop that?

RON BLACKWELL: Well, if there's a bleed-over of the financial problems into the real economy, then, of course, there would be a slowdown in the rate of growth of wages.

JIM LEHRER: Mr. Banerji, talk about the bleed-over from your perspective. What do you see bleeding over, if anything in this?

ANIRVAN BANERJI: You know, what we see right now, is a very vulnerable economy. In fact, our long range gauge, which looks ahead about a year, has been indicating fairly healthy growth for sometime now, and I agree with the other guests, that we are likely to see more moderate but healthy growth going into early next year. But the big but is our long-range gauge suggests that it's contingent to an unusual degree right now on consumer and investor confidence being maintained. And if it is not maintained, then the economy is quite likely to go into a recession next year. This is not always the case, but right now the U.S. economy is very vulnerable. Now this is happening at a very unfortunate time really, because our European long range indicators are now suggesting that although growth so far in Europe has been quite good, in the recent past Europe is also headed for a slowdown. So you have a situation where you have all parts of the world, all major parts of the world economy, potentially headed in a concerted downturn next year if the U.S. consumer investor confidence is not fading--

Will consumer confidence fade? Should it?

JIM LEHRER: Excuse me. When you say consumer confidence, are you talking about a state of mind, or are you talking about a state of reality? I mean, should consumers, how should they decide whether they should have confidence in the economy?

ANIRVAN BANERJI: Of course, we are talking about the impact of consumer confidence. It is certainly a question of a state of mind but also what that state of mind translates to in terms of real actions like buying houses, like putting money in the stock market, you know, like buying appliances, like you mentioned, all of those actions that stem from that state of mind will have a real impact on the economy. And right now that is the one prop that is holding the economy up. It is a very vulnerable situation. The economy is very vulnerable right now. And that's what concerns me, although if the consumer confidence remains the way it is, things are still going to be all right. We're going to see healthy growth, though more moderate next year.

JIM LEHRER: Mr. Lindsey, your old stomping grounds, the Federal Reserve, everybody says now, at least not everybody—nobody ever—everybody never says the same thing on this issue, or any other issue, but at any rate, it's been widely speculated today that because of what happened yesterday, not what happened today, what happened yesterday, the Federal Reserve will now come in and lower interest rates. First of all, do you think they'll do it, and should they do it? Should they do it and will they do it?

LAWRENCE LINDSEY: Well, I think that it won't happen anytime soon. I think the Fed is going to take the prudent course, which would be to wait and see what happens to the consumer confidence that was just mentioned. Again, the U.S. economy is going very, very strongly. If consumer confidence stops, then the Fed may need to do something, but I don't think the Fed is going to act in advance of seeing consumer confidence decline.

JIM LEHRER: Not just because of what happened on the stock market? Let's say the volatility continues. Let's say tomorrow it goes down, you know, 150 points, and then the next day it goes up 200, and then it—the swings continue. The Fed will not do anything?

LAWRENCE LINDSEY: Well, there's nothing the Fed can do about volatility in the market. Secondly, as far as the level of the stock market, you know, the Humphrey-Hawkins bill tells the Fed what to do. It's got 14 things in there what to do. Not one of the mentions the word "stock market." We would--

JIM LEHRER: The Humphrey-Hawkins bill is a full employment legislation that was passed several years ago.

LAWRENCE LINDSEY: Yes. Nor does the Federal Reserve act. I don't think we'd want to live in a country where the Federal Reserve was targeting the level of the stock market. Hong Kong tried that last week, much to their taxpayers' dismay. So I think the Fed is going to wait and see, see what happens to consumer confidence. They may want to be careful and make sure that in world markets there is enough money being supplied by banks and other lenders to make sure the markets function. But that is quite different than going out and cutting the Fed Fund's rate.

"Wait and see" policy from the Federal Reserve.

JIM LEHRER: Mr. Blackwell, you wanted to weigh in on this.

RON BLACKWELL: Well, I find it interesting that when we're talking about lowering interest rates, the Fed needs to wait and see, but when we were talking about the Fed raising interest rates, they were always looking down the road to find inflation that was nowhere apparent in the actual here and now. I think in both directions they need to look to the future, and I think there is some worry here that we may be at a point where the Fed needs to lower interest rates in order to foreclose the possibility of a deepening financial problem but also to help accelerate a clearly decelerating economy out there.

JIM LEHRER: How would that help? Explain to the lay folks how that would help.

RON BLACKWELL: Well, the Federal Reserve controls short-term interest rates, and Mr. Lindsey can explain this better than me, because he's been on the inside, but by lowering interest rates, he's making it easier to buy durable goods, or if you're a consumer, that you buy on credit, or for business to finance plans for expansion. Therefore, there's going to be more spending by consumers, more spending by investors, and that makes the economy move faster. But I think what we're seeing is—despite what's happening on Wall Street--a clear deceleration of economic growth. We have rattling financial markets. The Fed is going to be essential in sustaining this rate of economic growth and making sure that any disruption in the financial world doesn't lead over into this world, and they may still be fighting the battle of inflation when there's none to be--

JIM LEHRER: Let me ask Mr. Boskin about this. What do you think the Fed ought to do?

MICHAEL BOSKIN: Well, I think it ought to be—I think that's right—it ought to be looking forward, and the key is what information is there in what is going on in financial markets, in short-term interest rates being higher than long-term interest rates, and the decline in the markets, et cetera. There's some information, but it's not dispositive. The Dow has called ten of the last five recessions, but I think everybody who looks at these things would agree that there's some information there and, indeed, in testimony Chairman Greenspan said he looks at a variety of these indicators, including exchange rates, gold prices, the yield—the relationship of short-term and long-term interest rates, and so on. So if things are about where they are now, that's correct. I think the Fed will probably hold steady. But it needs to be ready if it looks like the problems in the financial market will lead to a serious problem for the American economy, for output, production, employment, and things like that, then the Fed needs to be ready to lower interest rates, as was mentioned. So I guess I'm somewhere in-between the last two speakers.

JIM LEHRER: Mr. Banerji, where are you? Listening to all of you, then why then was there all this speculation? In fact, the banner headline on the front page of The New York Times talking about yesterday's drop, it said the Fed is likely to now lower interest rates. Why? What's the connection then?

ANIRVAN BANERJI: I think it is important to understand the magnitude of the risks that face us today. I mentioned the possibility that if consumer confidence falls and investor confidence falls significantly, the U.S. economy can move into a recession next year. But given the vulnerability of all major regions of the globe right now, we could be headed into a global recession, and that's the kind of recession that tends to be long and severe, because there's no locomotive to pull any country out of that kind of recession. We haven't had the recession—that kind of recession in a number of years.

JIM LEHRER: And the Fed, including the Fed lowering interest rates, wouldn't stop that from happening?

ANIRVAN BANERJI: It could possibly head off some of the decline in consumer confidence. But this is a very delicate game, and it's not clear that this is what they need to do. However, given the state of underlying inflation pressures right now, the Fed clearly has room to move interest rates down, if it so chooses, but it is a delicate balancing act, because as long as consumer confidence remains where it is so, far, you still have a strong service sector, likely to remain strong, a boom in the construction industry likely to remain that way for the time being. It's only the manufacturing sector that has really slowed, so the Fed has to perform a very delicate balancing act, and that's why I think people are recommending more of a "wait and see" attitude.

JIM LEHRER: All right. We have to leave it there. Gentlemen, thank you all four very much.

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