Greenspan Sees Stock Plunge Helping Economy in the Long Run

By Hill, Patrice | The Washington Times (Washington, DC), October 30, 1997 | Go to article overview

Greenspan Sees Stock Plunge Helping Economy in the Long Run


Hill, Patrice, The Washington Times (Washington, DC)


Federal Reserve Chairman Alan Greenspan soothed Wall Street yesterday, saying the recent collapse of stock prices could actually help prolong the economic expansion that began in 1991.

Comparing the worldwide stock drops this week to the 1987 stock market crash, Mr. Greenspan said in both cases too much optimism had pushed stock prices too high, creating a flow of wealth that was fueling robust spending by consumers and businesses and overheating the economy.

"Declines in stock markets in the United States and elsewhere have left investors less wealthy than they were a week ago," he said on Capitol Hill in testimony before the Joint Economic Committee.

"[But] it is quite conceivable that a few years hence we will look back at this episode, as we now look back at the 1987 crash, as a salutary event in terms of its impact on the macroeconomy."

Mr. Greenspan's words had the apparently intended effect of subduing the stock markets, which ended the day nearly flat after posting record losses on Monday and record gains on Tuesday in frantic trading.

The markets also took solace because Mr. Greenspan - in other recent public appearances - had been warning of a possible interest-rate increase aimed at knocking down the markets and cooling economic growth.

Fed watchers said yesterday's remarks signaled that the central bank now is less likely to raise interest rates, since Mr. Greenspan said the drop in stock prices and currency values around the world will drag down growth without any action by the Fed.

Mr. Greenspan also sought to reassure the markets by emphasizing that Hong Kong's financial crisis and the spreading weakness in Southeast Asian economies pose little threat to the U.S. economy.

He said the overseas markets overreacted to the potential for declines in exports and earnings by American companies that do business with the region.

"We need to assess these developments against the backdrop of a continuing impressive performance of the American economy," he said. …

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