Strange as it may appear, the plunge of the Dow Jones industrial index on Monday came as a relief but it still helped that there was a partial recovery on Tuesday. Everyone knew the Dow was heading for what is euphemistically called a "correction" after roaring ahead for seven years. But just when it would happen no one knew, not even the wise Chairman of the Federal Reserve, Mr Alan Greenspan.
He set off a minor panic in July when he warned of "irrational exuberance" reflected in the over-valuation of US stocks and the public mood that the good days would never end. But so sound were the underlying "fundamentals" of the US economy that Wall Street quickly recovered from the Greenspan finger-wagging and continued on its merry bullish way.
Last Monday, the Greenspan warning belatedly set in but only after the turmoil in the Asian markets triggered the "correction" that was badly needed. And "Grey Monday" was so unlike the mayhem of "Black Monday" 10 years before that there has been a spate of selfcongratulation in New York and Washington on how well the financial system can now handle this kind of situation.
For President Clinton the Dow freefall on Monday came as he was about to announce proudly that the budget deficit was a mere $22.6 billion (£15.16 billion) the lowest since the early 1970s. He was also getting ready for the controversial visit of President Jiang Zemin of China. It escaped nobody that the plunge was triggered by the collapse on the Hong Kong stock exchange months after the former British colony was returned to China.
Treasury Secretary, Mr Robert Rubin, an experienced former Wall Street analyst with Goldman Sachs, huddled with Mr Greenspan for much of the day and strongly advised President Clinton and the White House to say nothing which could send wrong signals to Wall Street as well as markets around the world now anxiously watching the US. The President let it be known through his press secretary, Mr Mike McCurry, that it was time for a "deep breath" and to focus on the underlying strength of the US economy rather than to make panic calls to the stockbroker.
The "steady-as-she-goes" formula worked as the Dow rebounded, not as a "dead-cat bounce", the next day. Small investors clapped themselves for not selling and went looking for bargains. It helped that IBM announced that it was going to buy back millions of dollars of its own stock.
The big sellers on Monday were the mutual fund managers anxious to lock in record profits in their portfolios and enhance their own bonuses. And to put the selling in perspective, the 7 per cent fall was only one-third of that on Black Monday.
Mr Greenspan went up on the Hill on Wednesday and had the world as well as the Congress members hanging on every word. It was recognised as a masterly performance.
It was likely that in time we would look back on this week as a "salutary event" just as Black Monday is now seen to have had its upside. In a delightful circumlocution the Fed chairman said that "investors are probably revisiting expectations of domestic earnings growth".
The upside of the adjustment of overpriced stocks is that is now less likelihood that the Fed will have to intervene with an interest rate rise to dampen down the threat of inflation in an economy with virtually nil unemployment.
But the troubles in the south-east Asian economies must now be factored into the prospects for the US economy and stock markets. In Greenspan-speak, "the direct impact of these developments on the American economy has been modest but it can be expected not to be negligible".
Some believe that the impact of the woes of the south-east Asian "tiger" economies on the US is exaggerated. Along with China, they account for only 18 per cent of US exports.
However, there is also criticism of Mr Robert Rubin and the US administration for their "hands-off" approach towards the financial problems in the region unlike the massive US operation to "bail out" Mexico two years ago. The US did not contribute to the recent $17.2 billion IMF aid package for Thailand, for example. This aloofness has been shaken by this week's events. The US is now going to get more involved in the IMF aid packages.
The big fear on Wall Street is a collapse of the banking system in Japan or even South Korea. That is when globalisation would really hurt but at the same time no country is probably better positioned now to withstand foreign upheavals than the US.
