Resisting a World Recession

With financial storms lapping at the gunwales of their economic ships, the leaders of the industrial world are manning the pumps.

Their goal is to dump out some of the turbulent and fearful waters threatening to sink their economies into recession.

"The current crisis now has systemic peril written all over it," maintains Stephen Roach, chief economist of Morgan Stanley, a New York investment bank. "And the risk is that the world's policymakers are not up to the task."

Some efforts, though, are being made to calm the riled financial sea. The Bank of Japan said Wednesday it would ease a key rock-bottom interest rate even lower, to 0.25 percent, to boost its ailing economy. The move, its first monetary policy change in three years, is aimed at expanding the nation's money supply and helping its troubled banks.

On Monday, the Group of Seven most-industrialized nations (G-7) meet in London to consider the governmental and economic crisis in Russia - the newest and most dangerous emergency in the world.

The conversation undoubtedly will stray into other topics, such as the troubles in East Asia.

In Moscow, the Duma, Russia's lower house of parliament, is expected to approve today a new prime minister, Foreign Minister Yevgeny Primakov, to serve under President Boris Yeltsin.

Mr. Yeltsin called German Chancellor Helmut Kohl to assure him that Mr. Primakov would stick to market reforms.

IN Russia, the ruble recovered some of its lost value. Nonetheless, there are uncertainties about what the G-7 will be able to do to help Russia. The G-7 has decided against giving any further money to Russia at this time.

Princeton University economist Peter Kenen was at a loss. "Forty years as a practicing economist has given me no solution," he says. "What do you know about the efficacy of prayer?"

Nonetheless, economists do have some suggestions for action.

"We need a coordinated monetary easing in the major economies - the United States, Western Europe, and Japan," says Harvard University economist Jeffrey Sachs. "There is a hunger for monetary ease."

Last Friday, Federal Reserve chairman Alan Greenspan was widely seen as hinting that a unilateral cut in interest rates in the US has become more likely.

"It is just not credible that the United States can remain an oasis of prosperity," he told a San Francisco audience.

Speaking in his usual cautious manner, Mr. Greenspan stopped short of saying the Fed would actually cut interest rates. But his words were seen as an effort to restore confidence that the Fed can ward off economic distress.

Investors in stock markets around the world exploded in joy, sending prices skyward on Monday and to a lesser extent Tuesday. When the stocks markets in New York reopened after the Labor Day holiday, prices soared in jubilation.

But those gains have since faded. A permanent upturn in stock prices will restore a small portion of lost wealth, a factor that might be especially helpful to shaky Japanese banks, with large holdings of deflated corporate stock.

The G-7 meeting was called by British Chancellor of the Exchequer Gordon Brown. It's a gathering of senior "finance and foreign ministry officials" from the US, Canada, Britain, France, Germany, Italy, and Japan.

The group will likely make some recommendations to the G-7 finance ministers and central bankers. They are to meet Oct. 4 in Washington at the time of the joint annual meeting of the International Monetary Fund and World Bank.

Greenspan indicated that Fed policymakers had moved their official monetary policy from leaning toward raising interest rates in the battle with inflation to a neutral stance that favors neither a rate rise nor a cut.

Fed policymakers will have their next scheduled opportunity to lower rates when they meet Sept. 29 in Washington. But most Fed-watchers do not expect action that fast.

Other proposals for helping restore world stability include:

Get Japan to step on the gas. Finance Minister Kiichi Miyazawa was again urged by Greenspan and Treasury Secretary Robert Rubin to take further stimulative moves at their San Francisco meeting last Friday.

Richard Cooper, a Harvard University economist at Cambridge, Mass., says Japan should apply twice as much stimulus to its economy as now planned.

Persuade Congress to provide an extra $18 billion in funding for the IMF, the multilateral agency that provides bailouts to nations that get into international payments trouble. The big concern is that the IMF will not have sufficient uncommitted funds to provide a multibillion-dollar loan to a nation in Latin America, should it get into a crisis. .

Professor Sachs calls for the resignation of IMF managing director Michel Camdessus, saying the fund needs "fresh new leadership." IMF policies in Asia and Russia, he says, failed because of their strict requirements.

Make sure that China doesn't devalue its currency. Just back from China, Professor Cooper regards a devaluation as unlikely. China, he notes, has a large international-payments surplus and $140 billion in monetary reserves that can be used to defend the yuan.

Assure East Asian nations and other developing countries of rich nations' concerns.

President Clinton and other G-7 leaders should call a meeting with the leaders of several key developing countries to restate their commitment to global stability with space for these poorer nations, says Sachs.

He's concerned that some of these financially troubled nations show signs of bolting from the international financial system. "Crises have a way of leading to bad and balkanized policies," Sachs warns.