Looking The Other Way

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Surprisingly, the dollar's dip did not unduly upset Wall Street, where the wild swings of recent weeks moderated considerably. The stock market seemed relieved that the Government would not defend the dollar with higher interest rates. Indeed, the new accommodative posture of the Federal Reserve enabled major banks last week to reduce their prime lending rate by a quarter of a percentage point, to 8.75%, a full point lower than the pre-crash level at some institutions. While the Dow Jones industrial stock average fell 34.48 points during the week, to close at 1959.05, its newfound stability seemed to give reassurance to investors.

The currency markets, by contrast, were chaotic. The dollar plummeted as low as 134.4 yen during Tokyo trading Friday, the U.S. currency's lowest level of the postwar era. The dollar has now fallen more than 5% vs. the yen since mid-October and fully 48% from its peak in February 1985. Against the West German mark, the dollar reached a historic low of 1.67, a 46% fall during the past 2 1/2 years.

The plunge raised immediate, anxious questions: How far would the dollar drop? What forces would eventually stop its fall? While most economists believe the currency must decline at least a further 10% to help ease the trade deficit, they are concerned that the descent may be difficult to control. Said a former Treasury official: "Baker is playing high-stakes Texas poker." Says Economist Charles Schultze of the Brookings Institution: "We do not get a stable dollar by snapping our fingers. We are playing a very chancy game."

It may be the only game in town. Virtually everyone concurs that the Fed's pouring of liquidity into the marketplace is the best short-term tonic for preventing the stock-market crash from turning into a general economic slump. In fact, many economists blame Fed Chairman Alan Greenspan for helping set the stage for Black Monday by tightening up in the first place, when he led the board in a decision in September to raise the so-called discount rate, which the Fed charges on loans to financial institutions, from 5.5% to 6%. At the $ time, the Reserve Board was aiming to quash inflationary pressures that it sensed were creeping up.

Once the crash occurred, however, Greenspan promptly changed course. "He managed to turn on a dime," says Jerry Jasinowski, chief economist for the National Association of Manufacturers. Greenspan's switch in policy may have been even more wrenching than it appeared, because it represented an abrupt departure from a tighter-money direction endorsed in March by his revered predecessor as Fed chairman, Paul Volcker. Says Steven Roberts, former assistant to Volcker and now an economist for the accounting firm of Peat Marwick: "Comparing Greenspan to Volcker is natural but misguided. Volcker had spent most of his career as a central banker. Greenspan has to learn what it means to be a central banker, and he is doing quite well."