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Could The Plunge Have Been Prevented? Probably

Top of the News: Commentary


With the dollar plummeting, Americans in Paris are more likely to be found swarming bureaux de change than visiting the Eiffel Tower. But the panic abroad has hardly disturbed Washington's August slumber. Half the governors of the Federal Reserve Board have joined the city's late-summer exodus, as has the Fed's chief international economist. Treasury Secretary Nicholas F. Brady is out of sight as well.

Low may be the best profile for Washington to keep. To a large degree, the dollar is an innocent victim of European interest-rate struggles (page 26). A half-baked plan to pump up the greenback through massive government dollar-buying wouldn't succeed for long and would only draw more attention to a currency crisis during the final 10 weeks of the Presidential campaign. The one effective step the U.S. could take--a rate hike by the Fed--is out of the question with the economy so weak. "The Fed's not prepared to trash the U.S. economy to stabilize the dollar," says Bank of Montreal Chief Economist Lloyd C. Atkinson. So the capital's watchword for now: Don't just do something, stand there.

BLOWUP. But that's not to say that Brady and his boss, President Bush, should be held blameless for the dollar's frightening plunge. There's plenty they could have done over the past three years to prevent or mitigate the dollar's fall and the resulting downdraft on the stock and bond markets. "George Bush gambled he could skate through four years without dealing with what the Japanese call `the American problem,' " says C. Fred Bergsten, director of the Institute for Inter-national Economics. "Now, that bet seems to be blowing up in his face."

At the heart of the problem lies the massively unbalanced federal budget. While it's hardly news that neither Congress nor the White House has done much to reduce the deficit, the past few weeks brought two disheartening signals that Treasury's appetite for borrowing won't shrink soon. First, the Congressional Budget Office forecast that the deficit will shoot up to $514 billion by 2002, from $314 billion now. Then, candidate Bush, in Houston, pledged to cut taxes. For foreigners who finance the Treasury's debts, "what all this projects is an image of no one in charge," says Deutsche Bank economist Mieczyslaw Karczmar.

The deficit was out of control in the late 1980s, too. But then, Treasury worked to shield the dollar by coordinating economic and currency policy with the Group of Seven major industrial nations. Brady, while bragging that the dollar has stayed close to the ranges set by the 1987 Louvre Accord, has let the machinery needed to defend those ranges rust. Instead of building cooperation, Brady has campaigned publicly for Germany to cut interest rates, ignoring the costs of unification and the inflation that the Bundesbank is struggling to contain.

JAWBONING. Now, Brady's policy has come back to haunt him. Europeans, including many Germans, agree that it's time for the Bundesbank to ease. But Brady's jawboning would make it look as if the Bundesbank is suddenly bowing to foreign pressures. The best anyone can thus hope for would be a grudging signal that the Germans want to nudge market rates down.

That alone may be enough to put a floor under the dollar. But if it isn't, Bush will face "a preelection financial crisis worse than Carter's," warns Bergsten, an Assistant Treasury Secretary under President Jimmy Carter. With the dollar in uncharted territory, there's no natural point at which central banks can halt its fall. Stock traders have already shown their sensitivity to currency turmoil. And a new dollar plunge could boost long bond rates further, wiping out hopes for cheaper financing for big-ticket buys.

The dollar is at risk because Bush and Brady for 3 1/2 years have sounded just one theme: growth at any cost. A falling dollar could only help, they reasoned, because a weak currency boosts America's export earnings. But now, Bush's Presidency is at stake, because he's gotten little of the growth--and all of the risks--of letting the dollar perform without a net.Mike McNamee and William Glasgall

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