For the moment, Big Al may have regained some oomph on the Street. But with the air going out of the tech-stock bubble, many market observers wonder whether he will be able to contain the selloff if it persists. The danger now, key players fear, is a runaway “wealth effect in reverse.” In other words, the same people who were feeling rich thanks to the market boom–and who fueled a record-long economic expansion–may suddenly swear off that new DVD and laptop. In moderation, this impulse to save could cool down the economy just the right amount; in excess, it could lead to recession. Many eyes are on the May and June meetings of the Federal Open Market Committee. If stocks stay down, the Fed is unlikely to do more than another quarter-percent rate hike, and the Fed chief may signal the long period of rises is over.
But given Greenspan’s dubious record of reining in exuberance–at least until now–why feel confident that he can contain pessimism either? His isn’t the only big Washington rep on the line. For Bill Clinton and Al Gore, a market slide could jeopardize what seemed an unbeatable economy–the centerpiece of both the president’s legacy and the veep’s election chances. It was Clinton who recently preened over the nation’s record expansion, saying, “I have a lot of sympathy with [the GOP]. I mean, it’s hard for them to figure out what to run on.”
If the economy takes a hit, George W. Bush won’t have any trouble finding an issue. Still, the administration continued to display a defiant pride in the U.S. economy after Friday’s drop. The president was said to have barely raised an eyebrow when he learned of the selloff about 3 p.m. Friday. Clinton, who was in Atlanta celebrating the 60th birthday of Rep. John Lewis, asked for an update about 5:30 p.m.–in the middle of talking with Yasir Arafat about Mideast peace and Attorney General Janet Reno about Elian Gonzalez. Treasury Secretary Lawrence Summers and chief economic adviser Gene Sperling reassured him that blue-chip stocks in April were still up 4.5 percent for the year and that there were no problems filling orders or supplying liquidity in the markets. More important, they said, except for the tiny uptick in inflation the economy is rock-solid. “Unemployment has been at 4.1 percent the last four years. It’s still 4.1 percent,” Sperling told NEWSWEEK. “The real test,” added Summers, “is what happens to the real economy.”
But what happens in the inscrutable mind of Alan Greenspan is still a factor. The Fed chief has been criticized for sending mixed signals by talking up the “new” high-tech economy while talking down the market. In truth, a mixed signal has almost certainly been his strategy. While he has touted technology, he has also said since January that stocks can’t rise faster than Americans’ income over the long run. For the attentive, his message was clear: stocks had been doing just that for four or five years.
Indeed, it may well be Greenspan wants a broader selloff. The Clintonites can only hope he doesn’t. They think a limited market drop might even turn out well for Gore if it prevents more rate increases before November. But everyone in the White House also remembers the last time Greenspan got really tough on the U.S. economy. In 1991, he refused to back off from high interest rates and probably helped cost George W. Bush’s father the election. This week Gore is bravely going to campaign in California, where he may find Silicon Valley’s wealthy supporters a lot less wealthy–and not so generous. Ultimately, who they blame could help tilt the election.
