Wall Street Seeks Someone To Blame

Analysis by Farhan Haq

When times are going good -- such as the period until July 17, when the key Dow Jones industrial average hit a peak of nearly 9338 points -- the shenanigans of world leaders and top institutions are ignored or excused.

However, after the Dow fell 512 points at the end of August, landing at 7,539 points -- its lowest finish since last November -- investors were worried about losing their money, and angry and disillusioned that a market they thought would always be rising was now plummeting.

Wall Street analysts began speaking of a "palpable fear" among investors, and they urged the Federal Reserve Bank to cut its 5.5-percent target for the rate on overnight inter- bank loans, called the Federal funds rate.

"Scenarios from the 1930s, in which country after country devalues its currency, seeking trade advantages but in fact impoverishing the world, seemed outlandish only a few months ago," The New York Times said in today's editorial. "Now, they seem less implausible."

"The United States can insulate itself from the outside world somewhat, and it's quite possible that the stock market can recover and rally again," said Doug Henwood, economic analyst and author of Wall Street. But, he cautioned, "the bull market is probably dead."

Much of the blame fell on Russia, at a time when the ailing Yeltsin was barely hanging on to power following the Russian Duma's rejection of his choice for prime minister, Viktor Chernomyrdin. With the ruble falling and Russia unable to repay debts to investors, the Yeltsin government has become a lightning rod for investor fears.

Some experts believed the blame was at least partly misplaced. David Kotz, economics professor at the University of Massachusetts at Amherst, argued recently that the IMF has hurt Russia's economy by making the government cut spending, raise taxes and tighten up on credit.

"Russia has followed the IMF more closely than anyone could have expected," Kotz said. "The result is that people have been impoverished... While Russia has just defaulted on creditors, they've been defaulting on their debt to their workers for years -- 35 to 40 percent are not being paid at all, and another 30 percent are paid late."

In 1990, Russia was in recession but able to survive on domestic production, noted Doug Hellinger, executive director of the Washington-based Development Gap; now, he added, it depends on imports and is less able to rely on its local economy.

"The IMF is going around the world destroying local economies... We are creating national economies and a global economy which is hollow," Hellinger argued. "It's time for responsible leaders to stand up and say, 'Enough.'"

Nor is the IMF the only target of criticism. Hellinger pointed to Treasury Secretary Robert Rubin, arguing that U.S. officials have been "looking out just for U.S. financial interests" even as economies across East Asia, and now Russia -- and increasingly Latin America -- falter.

Rubin used almost the same words to calm Wall Street last year -- and they still seem soothing to many U.S. investors, who helped mount a slight rally today. But even the treasury secretary conceded that "the world is currently working its way through a difficult period", and U.S. officials were less sanguine now than last year that the problems of other economies will not hit U.S. shores.

There are several reasons why this year's crisis could be different. First, Washington has invested considerable political capital behind Yeltsin -- and, as this week's summit between Clinton and Yeltsin shows, he is still the man Wall Street relies on for comfort that Russia will follow the pro-capitalist and monetarist policies dear to their hearts.

Second, experts last year believed that Asian economies would rally from the currency plummets that hit hardest at Indonesia, South Korea, Malaysia and Thailand. Since then, the Thai, South Korean and Indonesian governments have been replaced, but all of East Asia remains mired in what is likely to be a major economic slowdown.

As Henwood noted, the sour economic picture worldwide has dampened the "enthusiasm over the apparent political triumph of capitalism, especially in the past few years" which was a vital "political component to the bull market."

Crucially, the psychological security invested in Wall Street's success helped bring more U.S. citizens to become investors -- so that some 40 percent of all U.S. households invested in the stock market last year, Henwood said.

Those newcomers felt like winners until recently, and the good feelings spread to Clinton, who bragged last May that "the stock market has gone from 3,200 to 9,000 since I've been president, and there's no precedent for that in history."

Suddenly, no one is immune to criticism -- even politicians like Clinton, who has been coasting along high approval ratings even despite his admission of an "improper relationship" and attempts to hide facts in the Monica Lewinsky sex scandal. One Republican pollster, Frank Luntz, estimated that 54 percent of likely voters for this November's Congressional elections own stocks or mutual funds -- and may feel anxious by recent developments.

Clinton, of course, has Kenneth Starr -- the dogged prosecutor in the Lewinsky scandal -- to blame for his own political weakness in recent months. Yeltsin blamed short-lived former Prime Minister Sergey Kiriyenko for the ruble devaluation, and the Duma blames Yeltsin. But if the stock plummet leads to recession, here and abroad, there will be more than enough blame to go around.