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Greenspan alert, Act II
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July 22, 1998: 4:17 p.m. ET
In second day of testimony, Fed chief sees 'significant' market correction
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NEW YORK (CNNfn) - History tells us that a "significant" market correction is inevitable, but when the crash may come is anyone's guess, Federal Reserve Chairman Alan Greenspan warned Wednesday as he resumed testimony in his Humphrey-Hawkins report to Congress.
Sounding a cautionary note similar to the one he struck Tuesday before a Senate panel, Greenspan applied Newtonian logic to the upwardly mobile stock market in reminding members of the House Banking Committee that what goes up must, alas, come down. (280K WAV) or (280K AIFF).
Nonetheless, Greenspan suggested that Americans who have pumped money into retirement accounts at record rates would not necessarily pull out at the first sign of a market downturn.
"I think that the market is ultimately driven by real forces," Greenspan said. "Once you get a decline started, it's not clear whether people use that as a reason to sell or buy."
In the second part of his Humphrey-Hawkins testimony, Greenspan told members of the House Banking Committee that low inflation is a key component of long-term sustainable growth. Asked to forecast the most likely path of the American economy in the months ahead, Greenspan charted a course of moderate growth with relative price stability.
"The most probable outcome is that we are going to get a continuation of what is really quite a remarkable and benign economic environment," the veteran data-watcher observed.
Greenspan's remarks followed formal testimony before committee members in which he repeated his concerns, expressed to their Senate colleagues Tuesday, that rising inflation, rather than an Asia-induced recession, may prove to be the real bogeyman stalking the American economy in the future.
Wide-eyed admiration and wariness
The tenor of Greenspan's remarks toggled between wide-eyed admiration at the relentless machinery of economic growth and a go-slow wariness over the ability to sustain that growth indefinitely. While the Federal Reserve Board would like to see a slowdown in growth, Greenspan nonetheless hinted in the earlier testimony that the board is unlikely to raise interest rates anytime soon.
On Wednesday, the Fed chief struck a dour note on Asia, saying he detected few signs the economic turmoil that has roiled the region over the past year is about to subside.
"The evidence we have to date as of yet shows no evidence of stabilization," Greenspan said, responding to a question by Rep. Michael Castle of Delaware, the committee's Republican chairman.
"The recent data still exhibit deterioration," Greenspan added. "The question of most fundamental importance is how long will that continue and where will it spread, and where will the stampede of buffalo stamp all over us before we can stem this."
Greenspan described the situation in Asia as "an implosion of confidence in which pessimism feeds on pessimism … and the situation feeds on itself."
Traders seized upon Greenspan's correction comment, and weakness in earnings in the software sector, as an opportunity to unload shares. After tumbling more than 100 points by midday, the Dow regained some lost ground and closed down about 60 points.
On questions involving the U.S. role in bolstering Asian economies, committee members and Greenspan sparred openly over their clashing visions. Greenspan stressed that he couldn't think of any mechanism more effective than the International Monetary Fund in improving the outlook for Asia -- a policy stance that some Republicans on the committee reject.
"I think the IMF has done as much as it thought it understood it could do," Greenspan said. "I don't know what alternative policies could have been implemented which could have significantly altered the pattern that emerged once the vicious cycle began to accumulate to the degree that it did."
Another defense of IMF funding
The thrust of the remarks was not lost on the panelists. Earlier, the full House, amid bitter divisions among members, had decided to table until September a vote on whether to furnish $18 billion in additional U.S. funding to the IMF. The Senate has already approved the measure. On Tuesday, Greenspan defended the monetary injections to replenish IMF coffers that have dwindled to "rock-bottom" levels.
Greenspan stressed, however, that intervention by monetary authorities could have only a temporary effect, and that economic fundamentals ultimately dictate the prospects for a recovering economy.
"The very few times which we have intervened have occurred," Greenspan said, "when we believe the markets are unstable and that intervention might have an impact."
The Federal Reserve chief dismissed suggestions that now is the time to reassess the efficiency of the IMF model.
"I am not saying that at the end of the day we should not be looking at the whole structure of the international financial institutions," He said. "It's just that now is not the time to do that. We do not have the luxury not to have available an institution such as the IMF if it is necessary to fund the containment of the crisis."
Greenspan said it is "very difficult" to forecast when the Asian crisis will stabilize. He speculated it would depend on "the restoration of confidence, and the restoration of confidence will depend on the types of economic policies that these countries are involved with."
On Tuesday, Greenspan asserted that, given the current tightness in labor markets, "the potential for accelerating inflation is probably greater than the risk of protracted excessive weakness in the economy."
Alluding to that comment Wednesday, Greenspan told the House panel, "We ought to be more concerned with the emergence of inflation than with temporary economic weakness."
Greenspan took many panelists by surprise when he originally asserted that the Asian crisis had, in certain respects, helped the American economy by lowering inflation through a glut of cheap imports and by fostering stability. 
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