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In Wake of Wall St. Decline, Rubin Reassures Investors

By Jonathan Peterson and Robert A. Rosenblatt
Los Angeles Times
WASHINGTON

In an extraordinary personal appeal to nerve-racked investors, Treasury Secretary Robert E. Rubin walked out onto the steps of the Treasury Building Monday and declared that "the fundamentals of the U.S. economy are strong."

Rubin's remarks, coming more than an hour after the free-falling stock market had to be shut down, reflected a reality that the White House was in no mood to state explicitly: The government does not have a simple antidote to painful declines on Wall Street, such as Monday's dizzying drop of more than seven percent of the Dow Jones' value.

President Clinton was conspicuously silent on the subject, leaving his spokesman to make only terse comments about the "fundamental soundness" of the U.S. economy. Federal Reserve Chairman Alan Greenspan, whose personal stature was greatly enhanced by his handling of a 1987 market plunge, also refrained from making public remarks.

If a market plunge were to continue, Greenspan could face pressure to ease interest rates - the approach he took in 1987 - if for no other reason than to rescue cash-starved financial institutions. Such a course would be in opposition to the Fed's current anti-inflation policy.

"Obviously, the chairman (Greenspan) has been busy today," said a Fed spokesman, adding, "We don't have any comment."

Throughout the wild day, officials at the White House, Treasury, Securities and Exchange Commission, Council of Economic Advisers and other departments kept in touch, but more to exchange information than to formulate any dramatic response.

In particular, the White House feared that official comments about Wall Street's gyrations could backfire and fuel investor anxieties or would be misunderstood in the heated emotions of the day. By late afternoon, however, after the stock market's furious retreat had triggered its early closing, the administration decided a reassuring statement from the Treasury secretary was needed.

"It is important to remember that the fundamentals of the United States economy are strong and have been for the past several years," said Rubin. "The prospects for continued growth - with low inflation and low unemployment - are strong," he added.

After the brief statement he abruptly wheeled around and returned to his office, refusing questions from reporters.

Although Rubin served as the administration's point man Monday, Greenspan may ultimately play a more important role. Only the Fed has the power to pour billions of dollars into the financial system to prop up cash-starved investment companies, banks and other financial institutions.

It was almost exactly 10 years ago that Greenspan, then new to his job, earned much of the credit for reviving the markets after the crash of 1987 by reducing interest rates and promising to inject cash into the nation's financial system.

Experts believe the Fed once again stands ready to take similar steps to keep the financial system viable.

Greenspan had warned last December that the markets suffered from "irrational exuberance" but traders and investors shrugged off his warning and drove stock prices up to record-high levels.

On Monday, administration officials appealed for calm: "This is a market that has performed amazingly well So let's just be calm and reasonable," urged White House spokesman Mike McCurry. He termed the plunge "a bare fraction of major breathtaking drops in the past" and no reason for panic.

"We want everyone to just take a deep breath and think about where we are," he said.

The stock market was plummeting even as Clinton was delivering a speech extolling the performance of the U.S. economy and the dramatic decline in the federal budget deficit to $22.6 billion in the last fiscal year - its lowest level in more than two decades. In addition, the size of the deficit in relation to the nation's economy - 0.3 percent of total economic output - represents a level lower than that of any other major industrialized country.

Speaking to the Democratic Leadership Council, Clinton said that since he took office in 1993, the deficit has fallen by "more than 90 percent, even before the balanced-budget law saves one red cent."

After the speech, aides informed the president that the "automatic circuit breaker" that had been designed to slow downward market spirals had been triggered for the first time since its introduction following the 1987 crash.