[Congressional Record Volume 144, Number 127 (Tuesday, September 22, 1998)]
[Senate]
[Pages S10704-S10712]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                 CONSUMER BANKRUPTCY REFORM ACT OF 1998

  The Senate continued with consideration of the bill.
  The PRESIDING OFFICER. The pending business is the bankruptcy bill.
  The Senator from Iowa.
  Mr. GRASSLEY. Mr. President, I ask unanimous consent there be 2\1/2\ 
hours of debate equally divided on the Harkin amendment regarding 
interest rates. I further ask that all debate time on the amendment be 
consumed this evening and the amendment then be temporarily set aside.
  The PRESIDING OFFICER. Is there objection?
  Mr. HARKIN. I object.
  Mr. President, I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. HARKIN. Mr. President, I ask unanimous consent that the order for 
the quorum call be rescinded.
  The PRESIDING OFFICER (Mr. Smith of Oregon). Without objection, it is 
so ordered.
  Mr. HARKIN. Mr. President, tomorrow I will be laying down a Sense of 
the Congress amendment calling on the Federal Reserve to lower interest 
rates as a preemptive strike against a recession in 1999. This is a 
very crucial issue coming at this point in time. I am going to take 
some time to speak about it and lay out why it is necessary for us, I 
believe, to take this kind of action and to express ourselves.
  The amendment I will be offering on behalf of myself and Senators 
Dorgan, Conrad, Wellstone, Kerrey, and Bryan will urge the Federal Open 
Market Committee to promptly reduce short-term interest rates as a 
preemptive strike against a recession in 1999. One week from today, the 
Federal Open Market Committee will meet to vote on interest rate 
policy. That is why it is crucial that the Senate send a clear message 
to the Fed: ``Lower interest rates now.''
  Mr. President, if we want to significantly decrease the number of 
bankruptcies in this country, one of the best ways to accomplish this 
important goal is to reduce the risk of people losing their jobs.
  With the chance of deflation and a recession rising, we need to lower 
interest rates.
  Over 2 years ago, against the conventional wisdom of the time, I took 
to the floor of the Senate to speak and to openly put a hold on 
Chairman Alan Greenspan's renomination to the Federal Reserve Board 
until we had a debate on U.S. monetary policy.
  One of the reasons I did this was to ensure that we had a significant 
debate on the Fed's focus only on inflation to the exclusion of other 
factors. I believed then, and I believe now, that it is wrong for the 
Fed to maintain high real interest rates without any significant signs 
of inflation threatening our country.
  I believed at the time, and I continue to believe, that we should 
lower interest rates, allow the economy to grow, and to provide a 
maximum level of employment. Specifically, I said at the time that I 
thought our economy could grow at least at a rate of 3.5 percent a year 
for a number of consecutive years, with an expansion of the labor force 
and improved productivity. I also argued that we could at the same time 
have an unemployment rate of 4.5 percent a year without triggering a 
significant level of inflation.
  That is what I said 2 years ago. At the time, many economists and 
economic writers took me to task on this, openly questioning my views. 
Many of these economists believed in a theory--an economic theory--
which called NAIRU, which stands for the ``nonaccelerating inflationary 
rate of unemployment.'' I will get to that and what it means in just a 
moment.
  But a couple of years ago, advocates of NAIRU, believed that if the 
unemployment rate fell below a certain rate--at that time it was 
somewhere between 5.5 and 6 percent--if the unemployment rate went 
below that level, employers would have to significantly raise wages and 
salaries igniting a 1970s style of inflation. And these economic 
theorists believed that the Fed should raise interest rates as a 
preemptive strike against inflation.

[[Page S10705]]

  In other words, if unemployment ever fell to that level, regardless 
of anything else, these economic theorists under this theory believed 
that the Fed should raise interest rates right away to preempt any 
inflation from occurring.
  That is what the Fed has done in the past. They have raised interest 
rates to a very high level.
  But look where we are today. The unemployment rate currently is at 
4.5 percent. It has been below 5 percent for nearly a year and a half, 
and it has been under 6 percent for 4 years. And there is no inflation. 
Our gross domestic product was 3.8 percent last year and 5.5 percent 
during the first quarter of this year. During this time, inflation 
hasn't gone up. In fact, it has gone down.
  The rate has decreased to its lowest level since the 1960s during the 
past 2 years.
  To Chairman Greenspan's credit, he has recently distanced himself 
from the view that there should be a preemptive increase in interest 
rates, simply because of NAIRU. He has, through his actions at the Fed, 
allowed our economy to grow and unemployment to fall without raising 
interest rates.
  So unemployment has fallen from 6, to 5.5, to 5, to 4.5 percent. 
Under NAIRU, this would have triggered automatic increases in interest 
rates, but under Mr. Greenspan they have not. And I applaud him for 
that.
  Unfortunately, many on the Federal Open Market Committee have 
continued to push for higher interest rates even as the signs of an 
economic slowdown in the United States continue. While they have not 
succeeded in raising interest rates, they represent a major obstacle 
against lowering interest rates, an action which is becoming 
increasingly needed.
  Real interest rates are at a historical high. Although the Federal 
Open Market Committee has not directly raised interest rates since 
March of 1997, real interest rates are rising. In fact, real interest 
rates are at historically high levels, the highest in 9 years, because 
inflation has continued to fall while the Federal Reserve has failed to 
lower the Federal funds rate. The chart that I have here points that 
out.
  This chart shows, for example, the real Federal funds rate. That is 
the market rate less the CPI percentage. As we can see, it has been, 
for a short period--from 1996 to 1997--going up, and last year and this 
year has gone up. Actually, this tick, it would be going up here again 
over the last few weeks. So we have about 4 percent real Federal funds 
rate right now. In fact, even Chairman Greenspan noted during his 
Humphrey-Hawkins testimony on February 24 of this year:

       Statistically it is a fact that real interest rates are 
     higher now than they have been on the average of the post-
     World War II period.

  That is a quote from Mr. Greenspan. It is a fact that real interest 
rates are higher now than they have been on the average of the post-
World War II period. I ask why--why are real interest rates so high? 
There is no inflation; no signs of inflation. In fact, the economy is 
slowing down a little bit. We see some recessionary signs. Yet we still 
have these high interest rates. The high interest rate policy that is 
being imposed by the Federal Reserve, I have always said, is really a 
stealth tax on hard-working American families, and I believe it is a 
contributing factor to the near collapse of several economies 
worldwide.
  It is time for the FOMC, the Federal Open Market Committee, to 
provide a significant and immediate cut in interest rates as a 
preemptive strike against a recession in 1999. Interest rates have a 
significant impact on virtually every family in America, on every 
producer, business and family farmer in this country. I believe lower 
interest rates have been needed for a long time, but now quick action 
is truly crucial for our country's well-being.
  The economic signs, not only in the U.S. economy but in economies 
worldwide, demand swift and appropriate action to counteract the 
problems that lie ahead. I can only say that I believe we have waited 
too long. Just as inflation can spiral, and spiral out of control, so 
can deflation spiral out of control. I hope that because the Federal 
Reserve would not act a little sooner, that we have not reached a point 
where we are now in a deflationary spiral, and that even more drastic 
action may have to be taken. But I do believe that significant action 
has to be taken right now to lower these interest rates.
  Don't just take my word for it. Here is a quote from Mr. Jerry 
Jasinowski, the President of the National Association of Manufacturers, 
and Earnest Deavenport, the CEO of Eastman Chemical Company. On 
September 8th they said:

       The current volatility in world financial markets and its 
     threat to global growth . . . could lead to recessions 
     throughout the developing world and Eastern Europe, as well 
     as a slowdown in the United States.

  Here is what they said on this chart, on September 8:

       We recommend a significant loosening of monetary policy. 
     Specifically, the Federal funds and the discount rates should 
     be reduced by 50 basis points as soon as possible.''

  That is what they said on September 8.
  Or we can listen to Mr. John Smith, President of General Motors. On 
September 15th he said, here it is on this chart here:

       The question is whether the Fed will wait until the 
     recession is imported and then act, or act now. GM believes 
     it should act now.

  That is the President of General Motors on September 15, just last 
week.
  Or, James Glassman at the American Enterprise Institute, he has 
written several op-eds in the Washington Post calling on the Fed to 
lower interest rates. Again he said recently:

       The most important step right now is for the Federal 
     Reserve to cut interest rates. That would pump more money 
     into the system, encouraging businesses to borrow and 
     consumers to spend. It would also temporarily weaken the 
     dollar, thus helping the currencies of countries in dire 
     economic straits.

  I could go on all day quoting business leaders, economists, editorial 
writers and others calling on the Federal Reserve to lower interest 
rates. From the Business Roundtable to the U.S. Chamber of Commerce, to 
the Economic Policy Institute and progressive economist Jamie Galbraith 
at the University of Texas, from the chairman of the Joint Economic 
Committee, to Robert Samuelson at the Washington Post, and Stephen 
Roach at the New York Times, the message to the Fed is clear: Lower 
interest rates now.
  The Fed's policy needs to be reversed and interest rates 
significantly lowered or our growing economy is likely to quickly sink, 
perhaps into a very serious recession. So, what we need is to lower 
interest rates as a preemptive strike against these ominous economic 
signs.
  If we do not do this soon, we will see our hopes for higher wages, 
more jobs, and the end of Federal deficits dashed on the rocks of 
recession and rising unemployment. We could be driven by deflation 
rather than fearing inflation. With deflation, people delay major 
purposes because they know it is going to be cheaper later on. The last 
time, of course, that we saw significant deflation was in the Great 
Depression of the 1930s, but it used to happen regularly in the last 
century.
  How bad can it get? From 1929 to 1933, wages fell by 25 percent; 
wholesale prices fell by 30 percent; farm commodities fell by 51 
percent. And with the shrinking economy, unemployment increased from 
5.3 percent to 36.3 percent. Prices were cheaper, but with no money 
coming in, most people could not benefit at all.
  Today, the signs of increasing global deflation are widespread. The 
problems in the U.S. economy are greatly exacerbated by the enormous 
difficulties in many Asian Pacific nations, Russia, Latin America and 
Mexico.
  As former Assistant Secretary of the Treasury C. Fred Bergsten wrote 
in the Washington Post on September 20th:

       The Asian economic crisis is much deeper, much more 
     pervasive and likely to last much longer than anyone 
     imagined. Economies that had grown 6 to 8 percent annually 
     for two decades are declining by like or greater amounts, a 
     swing of Depression-era magnitude with incalculable political 
     and social consequences. The contagion has already spread far 
     beyond Asia, engulfing Russia and much of Latin America, and 
     could do so even more violently in the days ahead. We now 
     face a truly global crisis, which has already hit the United 
     States hard and will do so with increasing force.

  The fall in the Canadian and Australian dollars, two countries 
largely dependent on agriculture and mining is a demonstration of the 
worldwide impact of the deflationary trend in commodities.

[[Page S10706]]

  A far more severe threat is the long-term economic paralysis of the 
Japanese economy which has turned into a significant recession. Some 
predict that a bailout of the Japanese banks could cost as much as 20 
percent of Japan's entire GDP.
  That is much larger than our savings and loan crises back in the 
1980s. Some estimate that the bad loans of Japanese banks may be about 
$1 trillion. It is unfortunately clear that the Japanese government is 
not moving quickly enough to resolve the difficulties in their 
financial sector. The Japanese have already seen their wholesale prices 
decline in 5 of the last 6 years. To further illustrate this point, I 
would like to quote an article in September 14 Wall Street Journal 
which I found very troubling.
  It says:

       News that Japan has fallen into its longest economic 
     contraction in 5 decades has led some economists and 
     government officials to suggest that the country has nudged 
     closer to a viscous spiral of falling prices, falling 
     employment and falling output that would damage its economy 
     even further.

  Mr. President, I ask for unanimous consent that this entire article 
be printed in the Record.
  There being no objection, the article was ordered to be printed in 
the Record, as follows:

             [From the Wall Street Journal, Sept. 14, 1998]

               Japan's Weak GDP Suggests Little Hope Soon

                           (By Bill Spindle)

       Tokyo.--News that Japan has fallen into its longest 
     economic contraction in five decades has led some economists 
     and government officials to suggest that the country has 
     nudged closer to a vicious spiral of falling prices, falling 
     employment and falling output that would damage its economy 
     even further.
       Economic activity fell 0.8% during the April-to-June 
     quarter from the previous quarter, the government said 
     Friday, an annualized decline of 3.3%. And with spending by 
     companies and consumers plummeting, there was almost no sign 
     the situation will improve soon.
       ``The Japanese economy is walking along the edge of a 
     deflationary spiral,'' said Taichi Sakaiya, head of the 
     government Economic Planning Agency.
       Even before the gross domestic product numbers were 
     released Friday, the benchmark Nikkei stock index plunged 
     more than 5% amid concern over the economy and the gyrating 
     U.S. stock market. At the end of the morning session on 
     Monday, the Nikkei was up 30.12 points to 13947.10. The 
     dollar weakened almost five yen during the Asian trading day 
     as spooked investors brought dollar investments home and 
     cashed them in for yen. The Japanese bond market touched 
     another record high as yields, which move in the opposite 
     direction of prices, plunged to 0.79% on the benchmark long 
     bond.
       Japan's report on gross domestic product--the total value 
     of goods and services produced in the economy--was a litany 
     of problems that exceeded even the downbeat expectations of 
     most private economists.
       Consumer spending, the largest chunk of Japan's economy, 
     fell an annualized 3.3%. Housing investment, which provided 
     one of the few bright spots in the preceding quarter, plunged 
     by an annualized rate of 4%. And corporate capital investment 
     posted a second straight decline, falling 20% at an 
     annualized rate. That is a particularly bad omen, since 
     business investment has historically been a key engine that 
     drives employment and thus consumer spending. That ``suggests 
     the economy is going to be contracting going forward,'' said 
     Brian Rose, an economist at Warburg Dillon Read.
       While Japan's trade surplus made the biggest contribution 
     to economic growth, even that silver lining was more a sign 
     of economic weakness than strength. The surplus expanded 
     because Japan's imports--which fell 6.8% from the previous 
     quarter--are declining faster in the weak economy than 
     exports, which slipped 0.4%. The only clear plus for the 
     economy was an annualized 1% rise in government expenditures, 
     indicating some of the spending from a fiscal stimulus 
     package may be trickling into the economy.
       These most recent data--showing that Japan's economy 
     deteriorated for a third straight quarter, the longest 
     contraction since the government began compiling figures in 
     1955--comes as the government gropes for effective tools to 
     turn the tide. On Wednesday, the central bank loosened 
     monetary policy by cutting the interbank lending rate to 
     0.25% from 0.5%. However, private economists and even some 
     government officials said the move would provide little help 
     for an economy where the usual tools of monetary policy have 
     broken down.
       The government is also pouring some $100 billion worth of 
     tax cuts and spending into the economy, part of an economic 
     rescue package passed in April. Still, private economists say 
     the stimulus package--the centerpiece of the dominant Liberal 
     Democratic Party's economic strategy--could be swamped by the 
     deterioration in the rest of the economy. Nonetheless, many 
     economists still think the spending and tax-cut package will 
     be enough to at least break the momentum of the contraction 
     temporarily over the next two quarters.
       The fallout from the continued economic deterioration could 
     also eventually hit the banking system. Already a swelling 
     number of bankruptcies is creating concern that banks' huge 
     portfolios of bad loans will grow further as more borrowers 
     fail.

  Mr. HARKIN. Mr. President, as the second largest economy, Japan's 
poor economic situation is going to have a very significant effect on 
our economy and the economies of most other countries.
  Again I quote Fred Bergsten, a very respected expert in international 
economics. He urges that ``the United States and European Union should 
globalize the strategy of cutting their own interest rates. This would 
encourage capital reflows to the crisis countries, reduce their debt 
burdens and improve their competitive position by promoting a stronger 
yen. It would also ensure continued world growth and help prevent 
further stock market declines.''
  Mr. Bergsten went on to note the fact that the 30-year bond interest 
rate is below the Fed funds rate and urged a cut in this rate by a full 
percentage point.
  Chairman Greenspan recently said that the U.S. can't ``remain an 
oasis of prosperity'' in ``a world that is experiencing greatly 
increased stress.''
  Again, this statement does appear to be a significant and positive 
shift in the views of the Chairman of the Fed.
  However, I am concerned that there are members of the Federal Open 
Market Committee who both refuse to consider the global economy when 
determining monetary policy and are still worried that low unemployment 
will automatically trigger inflation.
  The financial crisis in Asia, Latin America, Russia and many other 
areas of the world poses a serious threat to our economy and, to date, 
the United States has not established the appropriate monetary policy 
to minimize it. The FOMC, through its control of the federal funds 
rate, has the ability to take decisive action against the economic 
problems that face us.
  Many economists note that devalued currencies in several countries 
will not only reduce the rate of inflation but also sharply increase 
our trade deficit, eliminating many jobs and slowing growth in the 
process. Worldwide commodity prices are at their lowest level in 
decades.
  With regard to our record trade deficit, on September 18, the 
Christian Science Monitor reports that ``So far this year, the trade 
deficit in goods and services is running at a record annual rate of 
$185 billion, 68 percent higher than last year's record deficit of $110 
billion. America's deficit with Pacific Rim countries hit $87.8 billion 
in the first seven months--42 percent above the imbalance for the 
period in 1997.''
  The September 7 issue of Insight Magazine, says that ``Santa Claus is 
coming to America, only his goods are making the early trip by sea 
rather than sleigh--in huge freighters filled to capacity.''
  What will this mean for the U.S. economy? Most importantly, it means 
a significant loss of jobs, perhaps as much as 1.1 million. In fact, 
Wilbur Ross, the senior managing editor of the Rothschild Investment 
Group, believes that ``the loss of American jobs due to decreased 
domestic production for export will outweigh any short term benefits of 
lower prices.''
  Experts on balance-of-trade issues say nearly every major industry 
will be affected: automotive, steel, electronics, appliances, 
machinery, textiles and apparel.
  Mr. President, lower interest rates would allow people in other 
countries to buy out goods, and, in turn, reduce the risk of Americans 
losing their jobs.
  Lower interest rates are also needed to help our farmers. Worldwide 
commodity prices are at their lowest level in decades.
  The price of farm commodities are connected to this problem, and we 
know what is happening to farm commodities in our country. I was just 
recently in the Midwest, and I can tell you that corn, beans, wheat and 
all the attendant crops are at their lowest prices in years. They are 
falling dramatically. Livestock prices are also going down. We are 
seeing average hog prices this year at their lowest level since 1974 
and, again, no indication that they are going to go up.

[[Page S10707]]

  This is an idea of what is happening to corn prices. We can see how 
they are dropping in the Midwest. I have shown these charts before in 
discussing the need for some legislation on agriculture.
  Basically, what this chart shows, and all the other charts indicate, 
is corn, soybeans, wheat, cattle hogs--all the commodities we have in 
the farm sector--are drastically dropping, and dropping very rapidly.
  Wayne Angell, a former Federal Reserve Governor appointed by 
President Reagan, and one of the last experts in farm economy to sit on 
the Federal Reserve Board, I might add, said on September 9, ``The 
Federal Reserve should cut interest rates to stem declines in the 
prices of key commodities.''
  Angell goes on to say that, ``If commodity prices continue to fall 
unchecked, the U.S. economy risks a fall in the prices of hard assets, 
such as real estate, with potentially severe risks to the economy.''
  He said that on September 10.
  He is right, we are already seeing this. We are seeing this happen in 
the Midwest. Already we are seeing a softening of land prices, and 
perhaps it could lead to a downward spiral. I and many others in this 
body are working on solutions to fix the problems in the ag sector, 
like increasing loan rates, providing storage payments to farmers, 
helping those who have suffered disasters, helping to do something 
about the Federal Crop Insurance Program. One of the best things the 
Federal Reserve can do for farmers is lower interest rates.
  There are direct effects. For example, a 1-percent reduction in 
interest rates means the average farmer in Iowa will save $1,400 in 
interest payments on their land each year. In addition to reductions in 
land payments, lower interest rates means farmers will be able to 
receive a much-needed break in the prices they pay for new machinery, 
fertilizer and seeds. It means that farmers' incomes will increase and 
the negative effect on the rural economy will be somewhat reduced.
  Again, for example, a 1-percent reduction in interest rates means a 
typical 950-acre grain farm in Iowa will see an increase of about 
$2,500 in income a year.
  But the indirect effects of lower interest rates, as I mentioned, are 
even more important. We need the engine of the U.S. economy working at 
full speed to help the world economy to recover. Lowering interest 
rates will help restore worldwide markets for our agricultural goods. 
As I have said many times in the past, lower interest rates amount to a 
badly needed tax break for hard-working families.
  Mr. President, the U.S. economy is the only large, healthy economic 
engine in the world, and if our economy does slow (and our growth 
increased just 1.6 percent in the last quarter compared to 5.5 percent 
in the first quarter), it will be exceedingly difficult for the 
worldwide economy to recover. The chance of a long, deep, worldwide 
economic recession is, unfortunately, very possible.
  There are already increasing signs of a possible recession in the 
U.S. economy. For example, 30-year Treasury bond rates have sunk to 
record lows and are now below the short-term Federal funds rate. This 
is indeed a yellow warning light that the U.S. economy could be headed 
for a significant decline. Again, this chart shows that. The 30-year 
Treasury bond rates are now lower than the short-term Federal funds 
rate. That sends a very powerful signal that we could be headed for a 
very, very steep decline.
  Wholesale prices slid a steep 0.4 percent just in August alone. For 
the first 8 months of the year, producer prices have fallen at a 1.4 
percent annual rate, compared with a 1.2 percent rise for all of 1997.
  Nobel laureate Milt Friedman, with whom I do not very often agree on 
economics, called this a ``significant decline.'' And former Fed Vice 
Chairman Alan Blinder, says:

       If you ask about the prospect of deflation and you restrict 
     your attention to goods, the answer is yes, and in fact we've 
     had some.

  So, Mr. President, we are already seeing troubling deflationary signs 
in our own economy. Action must be taken now.
  The fall in the U.S. stock market, another flashing warning signal, 
will clearly have its own impact on what is referred to as the ``wealth 
effect.'' To describe the troubling nature of this situation, I would 
like to quote an article from the September 14 issue of Time magazine. 
The article pointed out that:

       A slumping stock market can certainly add to the drag on a 
     slowing economy, through the so-called wealth effect. In a 
     rising market, economists estimate that for every dollar of 
     increased wealth, consumers spend an additional 4 cents. And, 
     they often stop spending that money when their stock gains 
     erode. If $2 trillion has been lost from investors' pockets 
     over the past couple of months, then at 4 cents on the dollar 
     we could expect an $80 billion drop in annual consumer 
     spending, or about 1% of the total U.S. economy. While that 
     alone is not enough to stop the economy from growing . . . it 
     could combine with the global currency crisis to tip the U.S. 
     into recession later this year or in early 1999.

  The article in Time goes on to say that:

       . . . a persistent stock market decline can also hurt the 
     economy by making companies more cautious about expansion and 
     hiring. That usually means layoffs or plant closings, which 
     ripple through our economy as laid-off people cut spending.

  Mr. President, I ask unanimous consent that this article from Time be 
printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                  [From Time Magazine, Sept. 14, 1998]

What a Drag! Asia, Russia, Latin America--Trouble Abroad Threatens the 
                              U.S. Economy

 (S.C. Gwynne Reported by Bernard Baumohl, William Dowell and Aixa M. 
 Pascual/New York, Julie Grace/Milwaukee, Alison Jones/Durham and Adam 
                          Zagorin/Washington)

       Smack in the American heartland, far from both Wall Street 
     and Asia, the 15,500 workers of Harnischfeger Industries, 
     based in St. Francis, Wis., got slammed from both directions. 
     A proud world beater that builds mining equipment and huge 
     machines that produce 70% of the world's printing paper, 
     Harnischfeger has just seen its sales to Singapore and other 
     troubled Pacific Rim countries drop from $600 million a year 
     to nearly zero. Its stock, riding high at $44 a year ago, was 
     beaten down to $16 in last week's market rout, gutting the 
     401(k) retirement plans of many of its employees. ``What I 
     have in Harnischfeger stock is down by two-thirds,'' says a 
     glum Dave Trench, 57, a machinery stock attendant at a 
     Harnischfeger subsidiary in Nashua, N.H. ``When I look at 
     retirement, I might start to sweat.'' At least he still has 
     his job--for now. Harnischfeger announced in late August that 
     it soon will begin dismissing 3,100 employees, or a fifth of 
     its work force.
       Look at Harnischfeger, and you can see the origins of the 
     stock market's grinding 1,698-point decline, a loss of 8% 
     from the July 17 peak of the Dow Jones industrial average at 
     9337.97. The company also offers a glimpse of what might come 
     next, as American workers and investors like Dave Trench 
     wonder whether the long boom is over. Should they pull their 
     money out of stocks? Does the market slide foretell a 
     recession? How is any of this bad news possible when the U.S. 
     economy seems so strong, with the lowest unemployment, 
     inflation and interest rates seen in a generation?
       Like American business generally, Harnischfeger entered 
     this turmoil strong and lean. Well-managed with a skilled and 
     productive work force, it had prospered from the past 
     decade's explosive growth in global freedom and commerce. But 
     then came the currency crisis that began in Thailand in July 
     1997 and spread like a contagion through the rest of Asia--
     and last month to Russia and last week to Latin America, 
     hammering down local currencies and slashing demand for U.S. 
     exports. Cheaper Asian exports began grabbing more and more 
     domestic business away from U.S. companies and sliced into 
     their earnings. That trend finally drove down an overheated 
     stock market, taking back, in the past seven weeks, almost a 
     quarter of the $9 trillion that stocks have pumped into U.S. 
     portfolios during the roaring '90s.
       When the Dow plunged 512 points last Monday, investors at 
     first regarded it as an irrational response to the financial 
     and political turmoil in Russia--a vast country that still 
     bristles with 7,000 strategic nuclear warheads but whose 
     economy scarcely rivals that of the Netherlands and accounts 
     for less than 1% of U.S. exports. Investors treated Monday's 
     market action as another of those ``dips'' in which they had 
     been taught to buy stocks on the cheap. Heck, it wasn't even 
     as big as the one-day dip last Oct. 27, and the market had 
     shrugged that one off six weeks before powering to new highs 
     and greater glory.
       With that in mind, bargain hunters on Tuesday sent the Dow 
     rebounding 288 points, in the second-largest single-day point 
     gain in history, President Clinton, for whom rising stocks 
     have covered a multitude of sins these past six years, 
     tracked the Dow anxiously as

[[Page S10708]]

     he traveled to beleaguered Moscow. During a dinner with 
     Russian President Boris Yeltsin, Clinton stopped economic 
     adviser Gene Sperling in the receiving line to tell him, 
     quietly but with palpable relief, that ``the market's up'' 
     and flashed a thumbs-up sign.
       But this time things were different. The Dow fell 
     Wednesday. And the next day. And the next day, losing ground 
     for the seventh trading day out of the previous eight and 
     posting a 411-point, or 5%, setback for the week. Despite the 
     release last week of fresh reports chronicling persistent low 
     unemployment and rising orders for factory goods, anxiety 
     spread from the stock market to the ``real'' economy of 
     jobs and paychecks. The market drop served as a reminder--
     one about as subtle as a poke in the eye--that in today's 
     global economy, not even a healthy U.S. can quarantine its 
     factories and offices and markets from the illnesses of 
     countries halfway around the world. It vividly showed 
     Americans how the turmoil in Asia and Latin America is 
     slashing the profits of U.S. corporations, which might be 
     forced to respond with layoffs and cutbacks in spending.
       Federal Reserve Chairman Alan Greenspan, speaking after the 
     markets closed last Friday, revealed that Fed policymakers 
     are worried that the threat to the U.S. economy from global 
     financial turmoil rivals the danger of wage and price 
     inflation. The Fed is now as likely to cut interest rates, he 
     hinted, as to raise them. ``It is just not credible that the 
     U.S. can remain an oasis of prosperity unaffected by a world 
     that is experiencing greatly increased stress,'' Greenspan 
     said in a speech at the University of California, Berkeley. 
     Then he headed off to join Treasury Secretary Robert Rubin in 
     a meeting where they urged Japan's new Finance Minister to 
     deal with his country's insolvent banks and other financial 
     troubles, which are dragging down not only the huge economy 
     and financial market of Japan but also those of other Asian 
     countries--and now the U.S.
       Only 21 months ago, with the Dow at 6500, Greenspan was 
     warning against ``irrational exuberance'' in the stock 
     market. Several other wise elders expressed hope that last 
     week's correction will have the cleansing effect of 
     strengthening the historic relationship between stock 
     valuations and the earnings of the underlying companies--a 
     notion that had fallen out of favor after years of ``momentum 
     investing,'' in which all that mattered was that someone 
     would buy the hot stock that some greater fool would soon bid 
     up to an even higher price. The price-earnings ratio for the 
     S&P 500 has approached a record 30 this summer, twice its 
     historical norm. Securities analysts, reassessing the impact 
     of the turmoil in Asia and other foreign markets, last week 
     began chopping down their estimates for growth of U.S. 
     corporate profits, to as little as 3% for all of 1998, and 
     zero growth for 1999, a sharp drop from last year's robust 
     12%.
       In a bit of lucky timing, Fidelity Investments, the mutual-
     fund giant, last week rolled out a promotional and 
     educational campaign starring Peter Lynch, its legendary fund 
     manager. Lynch was troubled, he told TIME, that ``in the 
     first half of this year, the S&P 500 was up 15%, but 
     [corporate] profits were down.'' He also expressed relief 
     that the correction came now, rather than having the market 
     drop to 7500 ``after it's gone up to 14000.''
       There was remarkably little evidence of panic among 
     individual investors last week. One measure of that is the 
     amount of money that flows in and out of equity mutual funds. 
     In August, a month that included several gut-wrenching weeks, 
     there was a net outflow of $5.4 billion, or well under 1% of 
     the total invested in equity funds. Though this was the first 
     such exodus since the recession and stock slump of 1990, the 
     number is still quite modest when compared with the 4% that 
     fled equity funds after the October 1987 correction. Last 
     week investors pulled a net $6.2 billion out of stock funds 
     Monday and Tuesday, but on Wednesday a net $6.5 billion 
     flowed right back as the market bounced, according to Trim 
     Tabs Financial Services. ``There has not been any retail 
     panic as far as we can see,'' says Scott Chaisson, a branch 
     manager for Fidelity in midtown Manhattan. ``There seems to 
     be an awareness that there are going to be ups and downs like 
     this.''
       The real test, though, won't come until later, when new 
     investors face the results of their first sustained market 
     decline. An unprecedented 43% of adult Americans are now 
     invested in stocks, up from only 21% in 1990. (That helps 
     explain why we are hearing less Schadenfreude over the 
     discomfort of Wall Street yuppies than in past corrections.) 
     A striking 57% of all household assets today are allocated to 
     equities. Small wonder: the market has doubled just since 
     1994. But these investors are about to get account statements 
     showing declines of 20% to 30%. Even if they have been in the 
     black over the past 12 months, not to mention the past few 
     years, it will be a shock to be reminded, for the first time 
     in years, that stocks can go down as well as up.
       Investors large and small who had put money overseas in 
     search of diversification, or simply higher returns, were 
     sorely disappointed last week. Day after day, one giant U.S. 
     bank after another came forward, like sheepish A.A. members 
     fallen off the wagon, to confess they had succumbed to the 
     lure of big returns from Russian investments on which--
     surprise!--the Yeltsin government has defaulted. Citicorp 
     announced that its earnings for the third quarter will be cut 
     by about $200 million in Russian losses. The price tag at 
     Bankers Trust, about $260 million; at brokerage firm 
     Salomon Smith Barney, $360 million in the past two months.
       All told, U.S. financial institutions had losses mounting 
     to $8 billion by week's end, and one of the fears that 
     drugged the stock market was that U.S. companies might face 
     even larger losses in Latin America, where they have much 
     more exposure (about a third of U.S. exports) and where 
     currencies came under fresh assault late last week. Brazil 
     saw $11 billion in capital fleeing the country in the past 
     five weeks--not because its economy is weak but because of 
     each investor's fear that other investors might flee any 
     economy slurred with the label ``emerging.'' Money also fled 
     the stocks of financial institutions with lots of business 
     and investment in the merging markets. Citicorp's stock 
     dropped to about half of its recent high, losing $40 billion 
     of market value.
       Other companies that took major hits were transportation 
     stocks whose business involves trade and travel: the parent 
     companies of such airlines as American, United and Delta. 
     Companies like Coca-Cola, Procter & Gamble and Gillette, 
     which not long ago were praised for their successful 
     penetration of global markets, last week were punished 
     harshly through stock sell-offs. General Electric, the 
     world's most valuable public corporation and one of the most 
     admired, fell 22%, losing $68 billion of its market value.
       The near panic over emerging markets was strongest among 
     some of the hedge funds, the high-risk vehicles that often 
     deliver high returns to wealthy investors. After famed 
     investor George Soros lost $2 billion in Russia, John 
     Meriweather's Long-Term Capital Management announced that it 
     had lost $2.1 billion, or half its asset value, so far this 
     year. ``Russia and Asia became the trigger for the correction 
     in the U.S. stock market,'' says David Wyss, chief economist 
     at DRI/McGraw-Hill, a consulting firm. ``Although there had 
     already been a softening in earnings over the past few 
     quarters, traders needed to be hit with a two-by-four to make 
     them realize you just can't get double-digit increases in 
     earnings every year.''
       Russia also became the trigger for another concern, at once 
     political and economic: ``We were suddenly threatened by an 
     old fear--the Soviet Union and militarism,'' says John 
     Silvia, chief economist at Scudder Kemper Investments. ``If 
     the world is not as peaceful as we expected, then a lot of 
     money in the U.S. that went into consumer spending and 
     capital investment may now have to go back to defense, and 
     that's going to shock the budget here.''
       As the Dow ended its week at 7640.25, it was approaching 
     one of the standard benchmarks for a bear market: a 20% drop 
     from a previous peak. Many investors, though, have been in a 
     quiet bear market for several months; that's because, during 
     the last stages of the run-up in the Dow and the S&P 500, 
     most of the increase was accounted for by such large 
     companies as Coca-Cola and Microsoft; many smaller stocks 
     were left behind. In the S&P 500, virtually all the gains in 
     share prices in recent months were made by the 50 largest. At 
     the same time, the Russell 2000 index of smaller stocks--
     traditionally favored by many individual investors--was off 
     29% from its April high. And as of Monday, the average stock 
     in the New York Stock Exchange was off 38% this year. Even 
     before last week, nearly half of U.S. domestic stock funds 
     were losing money for the year.
       Several economists see the current market as an 
     untraditional bear market or, as Harvinder Kalirai, an 
     economist at the consulting group I.D.E.A., sees it, what's 
     happening on Wall Street is ``a cyclical bear in a secular 
     bull market. This is a cyclical fluctuation.'' The longer-
     term or secular trend in the market, though, ``is still 
     high.''
       Many individual investors also hold that faith. Dennis 
     Lese, 52, an executive with Amoco Corp. in Chicago, says that 
     he is staying in the market but that the six-figure losses he 
     suffered last week have caused him to postpone his planned 
     early retirement. ``I was thinking about retiring and living 
     off stocks,'' he says. ``But now I think I'll work a few more 
     years.''
       Others seemed content to ride it out, in the knowledge that 
     the gains of the past few years will cushion the impact of a 
     down market now. ``Anyone with brains knows the thing to do 
     is to sit back and wait,'' says Stephanie Rubin, 52, an 
     executive with a search firm in Chicago who has about 
     $300,000 in stocks. ``If it's down 25% on paper, it doesn't 
     bother me because it's money tied up in an IRA account. I'm 
     not going to touch this money till I'm 65.''
       Some people who were actively playing the market, however, 
     were singing a different tune. ``I was panicking,'' said Alan 
     Herkowitz, 39, a New York systems analyst and a self-
     described ``short-term trader'' who invests ``play money'' in 
     the market.
       One of the biggest worries in a sustained market downturn 
     is that it might depress consumer confidence and spending. 
     Contrary to popular belief, though, bit stock market drops 
     alone rarely herald recessions. According to a study by Peter 
     Temin, an economics professor at M.I.T., falling stock prices 
     directly caused only one minor economic downturn in this 
     century, in 1903.
       But a slumping stock market can certainly add to the drag 
     on a slowing economy, through the so-called wealth effect. In 
     a rising market, economists estimate that for every dollar of 
     increased wealth, consumers spend an additional 4 [cents]. 
     And they often

[[Page S10709]]

     stop spending that money when their stock gains erode. If $2 
     trillion has been lost from investors' pockets over the past 
     seven weeks, then at 4 [cents] on the dollar we could expect 
     an $80 billion drop in annual consumer spending, or about 1% 
     of the total U.S. economy. While that alone is not enough to 
     stop the economy from growing, economists say, it could 
     combine with the global currency crisis to tip the U.S. into 
     recession later this year or in early 1999.
       A persistent stock market decline can also hurt the economy 
     by making companies more cautious about expansion and hiring. 
     ``If the stock price isn't doing well,'' says John Lonski, 
     chief economist for Moody's Investors Service, ``shareholders 
     will put pressure on management to cut costs to improve 
     returns.'' That usually means layoffs and plant closings, 
     which ``ripple through the economy'' as laid-off people cut 
     spending.
       Pushing against these negative currents, fortunately, is 
     the persistent, fundamental strength of the U.S. economy. The 
     trend in wages and employment, which wield far more influence 
     over consumer confidence and spending than stock prices, 
     remains strong. As she placed a tortilla warmer in her 
     shopping cart last week at a store in Nashville, Tenn., Sue 
     Allison, 53, a public relations officer for the Tennessee 
     supreme court, observed that ``there are a million people out 
     tonight spending $90 on nothing, just as I am. My husband and 
     I won't touch [our retirement stocks] for at least 15 years, 
     so I don't worry about short-term losses.'' In fact, aside 
     from corporate profits and stock prices, most other leading 
     indicators are pointing briskly upward. Orders from American 
     factories rose 1.2% in July, the strongest performance since 
     November. As investors around the globe sought a safe haven 
     for their capital, long-term interest rates continued their 
     slide to 5.3%, a silver lining for the U.S. in the cloud over 
     emerging markets. Those low rates in turn have boosted the 
     used-housing market, which recorded an all-time high of 
     houses sold in July. Housing values, another important factor 
     in Americans' calculation of their wealth, are rising smartly 
     at about 5% a year. Unemployment stands at 4.5%, nearly a 28-
     year low, and only 1.8% for those with college degrees. 
     Thanks to rising productivity, real wages have been rising 
     for the first time in nearly three decades without spurring 
     inflation. The U.S. growth rate, while down from its feverish 
     5.5% in the first quarter, is still expected to register 2%-
     plus for the rest of the year. The only skunk at this picnic 
     is the Asian, Russian and Latin financial crisis, estimated 
     to have knocked about 2.5 percentage points off second-
     quarter growth of 1.5%.
       If recession comes, economists say, the cause will be the 
     inability of countries such as Brazil, Indonesia, Malaysia, 
     Mexico and Venezuela to buy as many U.S. exports with their 
     devalued currencies--and the hit on U.S. wages and corporate 
     earnings as cheap imports from those countries grab a greater 
     share of the U.S. consumer's wallet.
       At Nucor Corp., a $4 billion North Carolina steelmaker, the 
     global tumult has hit home in both ways. Nucor's exports are 
     down, falling globally from an annual rate two years ago of 
     700,000 tons to the present 30,000 tons, much of which is 
     accounted for by Asian markets. But far more worrisome is the 
     tough competition in the U.S. market from cheap steel made in 
     Japan, Korea and Russia. Currency devaluations in those 
     countries have made their products cheap for American buyers, 
     says chairman Ken Iverson. ``The U.S. is the only economy 
     left that's doing well, so they're going to ship it all 
     here.'' That makes America the consumer of last resort--a 
     lifeline to many foreign economies, but at a heavy cost to 
     many U.S. companies and workers. Again, such disruptions 
     quickly get capitalized into stock prices: Nucor shares have 
     fallen from $61 a year ago to $39 last week.
       Another North Carolina company feeling the pain is Beacon 
     Sweets, which makes, among other products, ``gummi watches'' 
     (gelatin candy in the shape of a watch). Although most of its 
     business is domestic, Beacon had begun to grow in China, 
     Korea, Singapore, the Philippines and Japan. But over the 
     past year, Beacon has seen its export business evaporate. 
     Says Stephen Berkowitz, an executive vice president: ``Our 
     business in those countries has absolutely dried up as a 
     result of currency devaluations.''
       Perhaps the greatest risk to both the U.S. and global 
     economies is that today's hard times could bring a rising 
     tide of global protectionism, including controls not only on 
     trade but also on flows of capital. With the leadership in 
     Russia and Japan virtually paralyzed, and President Clinton 
     distracted by his personal problems there is a danger that 
     the trend toward freer markets could be reversed. This is 
     already happening in places like Malaysia, which last week 
     imposed foreign-exchange controls hurtful to multinational 
     firms in the U.S. and elsewhere--not to mention to Malaysia 
     itself, which will be hard pressed to attract investment. Nor 
     is the U.S. immune. If unemployment begins to rise, blame 
     will quickly attach to the rocketing U.S. trade deficit--one 
     of the most immediate effects of the crisis in Asia--and will 
     tempt members of Congress to impose new limits on imports. 
     That, more than any other factor, could eventually lead to a 
     significant recession in this country and others. ``What we 
     need is leadership,'' says Hugh Johnson, chief investment 
     strategist at First Albany, a brokerage firm. ``Without it, 
     we have a vacuum, and the market always hates that.''
       For Clinton, much is at stake. The rising market and robust 
     economy have long boosted his approval rating and made both 
     is allies and his adversaries loath to cross him. A 
     significant downturn in the economy, or a longer stock 
     decline than expected, could make Americans feel much less 
     patient with his foibles, and could embolden his enemies. 
     Studies of polling show that a sour economy in 1973-74 
     contributed significantly to Americans' disgust with 
     President Richard Nixon in the later stages of the Watergate 
     scandal.
       For American investors too, much is at stake. One of the 
     worst things they could do is let rising volatility and 
     uncertainty drive them out of stock investments. Returns on 
     stocks have far outdistanced most other investments over 
     time, producing an average annual return, after inflation, of 
     6.4% from 1927 through 1995, which includes the period when 
     stocks struggled to regain the highs they reached before the 
     1929 crash and the Great Depression. Investors can also take 
     heart that the stock market usually bounces back far more 
     quickly than it did in the 1930s. In nine of the 11 months 
     where the S&P 500 lost 4% or more since October 1987, returns 
     were positive within two months of the drop. In all cases, 
     including the 1987 crash, the market returned to positive 
     returns within six months. As TIME's Dan Kadlec explains in 
     the following story, most investors should stay with stocks, 
     except when handling money they might need within the next 
     three years.
       For all its problems, Harnischfeger offers encouragement to 
     other Americans at this uncertain time. Folks at the 
     Wisconsin company have earned higher wages and have been able 
     to educate their children better because of the profits they 
     have reaped from the unprecedented spread of global commerce 
     and free trade. But the price of that prosperity is a global 
     economy so interlinked that the troubles of America's trading 
     partners very quickly become its troubles too, even when 
     America's domestic economy is showing remarkable resilience, 
     as it is now. Harnischfeger's managers believe they are in 
     for a rough ride for several quarters, but that the company's 
     future, like that of the American economy, is bright over the 
     longer term. Says Francis Corby Jr., the company's executive 
     vice president for finance and administration: ``We'll bounce 
     back.'' They always have.

                                Excerpts


                          when the dow breaks

       Monday, Aug. 31--
       Tuesday, Sept. 1--Financial and political turmoil in Asia 
     and Russia trigger a plunge in the Dow on Monday, but bargain 
     hunters help it recover more than half its loss on Tuesday, 
     setting a record for trading volume.
       Wednesday, Sept. 2--Stocks drift down slightly in 
     relatively light trading as exhausted investors await signs 
     of the market's direction.
       Thursday, Sept. 3--Worries of an economic slowdown and 
     lagging corporate profits contribute to the Dow's sixth drop 
     in seven days.
       Friday, Sept. 4--A burst of bargain hunting late in the day 
     erases most of a sharp decline on Friday, leaving the Dow 
     down 411 for the week.


                          a little perspective

       A Short-Term Loss--If you had invested $10,000 in the S&P 
     500 at the market's peak on July 17, it would have been worth 
     $8,206 on Sept. 4, after last week's market drop.
       An Even Year--But if you had invested $10,000 12 months 
     ago, on Sept. 1, 1997, it would now be worth $10,827.
       A Long-Term Gain--And if you had invested $10,000 on the 
     eve of the big market plunge a decade ago, on Oct. 19, 1987, 
     your investment by now would be worth $34,450.--Source: 
     Datastream


                             united states

       The Problems--The economy's increasing dependence on stock 
     market, exports suffering as the world economy stumbles; 
     widening income inequality a concern
       The Solutions--Federal Reserve can lower interest rates to 
     ease economic strains in troubled nations. At home, higher 
     priority for education and training to enhance job skills


                                 japan

       The Problems--The economy has been stagnant for seven 
     years; banks crippled by massive amounts of bad loans; weak 
     political leaders won't make hard decisions; exports hurt by 
     Asian crisis
       The Solutions--Pass permanent tax cuts to stimulate growth; 
     use taxpayer funds to revitalize banks so they can issue 
     credit again.


                                germany

       The Problems--High unemployment; excessive spending on 
     social programs, high tax rates could threaten German 
     competitive under Europe's new single-currency system, the 
     euro
       The Solutions--Accelerate labor-market reform to allow 
     easier hiring and firing of workers; equalize tax rates 
     before the euro arrives


                               Indonesia

       The Problems--Risk of social upheaval as poverty increases; 
     dysfunctional banking system; absence of investor confidence; 
     large companies closely linked to the government.
       The Solutions--Restructure banks and companies; promote 
     domestic stability; restore confidence of ethnic Chinese 
     businesses

[[Page S10710]]

                                 brazil

       The Problems--Massive government-budget deficit; foreign 
     reserves dwindling as the nation defends its currency, the 
     real
       The Solutions--Overhaul the social security plan and pare 
     back spending to lower the deficit; privatize more 
     government-owned companies to free resources and increase 
     productivity


                                 mexico

       The Problems--Low oil prices are slashing government 
     income, causing the budget deficit to swell; the peso is 
     unstable because of highly volatile world currency.
       The Solutions--Political leaders need to set strict limits 
     on domestic spending; the central bank should maintain a 
     tight monetary policy to support the currency.


                                 russia

       The Problems--Poor tax collection; corruption; little 
     access to credit markets; creeping hyperinflation; zero 
     credibility that the country will carry out economic reforms.
       The Solutions--Collect taxes owed to pay wages owed; stay 
     committed to free and open markets to stabilize the ruble; 
     overhaul the banks; stop the crooks.


                               hong kong

       The Problems--The government is fiercely defending an 
     overvalued currency; interest rates are excessively high; 
     real estate is overvalued; a faltering financial sector is 
     burdened by shaky real estate.
       The Solutions--End the currency peg to the dollar; reduce 
     interest rates to ease pressure on the banks.


                                 china

       The Problems--Falling exports and foreign investments plus 
     damaging floods will slow economic growth below 8% target; a 
     virtually insolvent banking system; state-owned enterprises 
     are drowning in red ink.
       The Solutions--Devalue the renminbi 15% to keep exports 
     competitive; privatize government-owned companies.


                                malaysia

       The Problems--An autocratic ruler is turning toward a 
     controlled economy; foreign investors have little confidence; 
     domestic debt is dangerously high; a serious threat of 
     inflation.
       The Solutions--Revamp the banking system and promote a 
     level playing field in the economy; stick to austerity plan 
     to support the ringgit.
                                  ____

  Mr. HARKIN. One argument against lowering interest rates is that our 
unemployment levels are already low. Some say that our current rate of 
unemployment at 4.5 percent is too low, companies cannot find workers 
and will be forced to pay more, hurting their profits, hurting the 
economy.
  Businesses have surprised many economists by creating multiple ways 
to improve efficiency. Of course, more can and should be done. I 
believe there is room for additional job growth. Companies have also 
been effective at finding new employees who were not actively looking 
for work and were, therefore, not counted as unemployed.
  We need economic growth to continue in order to improve wages, to 
bring still more people into the labor force, to give those working 
part time the chance to work full time, and to provide opportunity for 
those on welfare, and for those who have entered the workforce at the 
bottom rung, to start moving up the ladder.
  With only those looking for work counted as unemployed, there are 
still millions of others not counted as unemployed who could be brought 
into the workforce. As difficult as it may be to find workers now, this 
will be viewed as a small problem compared to a serious economic 
downturn, a recession, and deflation.
  Again, if inflation should start to accelerate we can always apply 
the brakes and whatever inflation may have occurred can be reduced. But 
to forever limit our growth to a preset limit blocks Americans from the 
opportunity of reaching their full potential.
  If we do move to deflation, if we go into a serious recession at this 
point, without America's strength, the world's economy could sink to 
Depression-era levels.
  For the sake of our farmers and our small business owners, for hard-
working Americans, and the rest of our economy, and for countries 
around the world, I sincerely hope that Chairman Greenspan and the 
Federal Open Market Committee do not misjudge the current economic 
indicators in the U.S. and worldwide economies.
  While I am pleased that Chairman Greenspan recently hinted at a 
possible rate cut, I am afraid the Federal Open Market Committee may 
have already misjudged the ominous economic signs that are out there. I 
only hope it is not too late. That is why, Mr. President, the Senate 
must send a clear signal to the Federal Reserve: Lower interest rates 
now.
  The Fed must show that it has as much concern for the jobs of 
American workers as it has for the interests of U.S. investors 
throughout the world. An immediate cut in interest rates will give our 
economy the boost it needs to maintain its strength during the next 
year as the fragile nature of many economies throughout the world 
recovers.
  So, Mr. President, that is what we need--for this Senate to send a 
clear signal that we have looked at the economy, we have listened to 
our constituents, we have been out in our States; we see it, we feel 
it, we know it. Things are declining --I can tell you that--in the farm 
sector and in rural America. We know what is happening worldwide. Now 
is the time for the Fed to act for a significant cut in interest rates.
  Mr. President, I yield the floor.
  Mr. GRASSLEY addressed the Chair.
  The PRESIDING OFFICER. The Senator from Iowa.
  Mr. GRASSLEY. Mr. President, I had asked one of the smartest people 
in the Senate on this issue, Senator Domenici, to debate it. And there 
is going to be some discussion of this amendment tomorrow before we 
vote on it. At that time, Senator Domenici will speak about it for our 
side. But I also want to address the issue shortly, but not from the 
standpoint of the merits of where interest rates ought to be, but just 
the issue of whether or not it is appropriate to do this on this 
bankruptcy legislation, as well as the whole issue of whether or not 
Congress should try to interfere with the issue of the Federal Reserve 
deciding what the interest rate should be. Because I think it is fair 
to assume that we want to make sure that interest rates are 
appropriate. But who should make that decision?
  So I offer this advice to my colleagues on this amendment offered by 
my colleague from our State of Iowa, Senator Harkin.
  While we are all for lower interest rates, I think this amendment 
should be opposed because of the traditional separation of the Federal 
Reserve from the political process. What we generally speak of is the 
independence of the Federal Reserve System. For short, we all speak of 
the independence of the Fed.
  This country has a very long history of protecting the work of the 
Federal Reserve from political manipulation. Since the 1930s, Congress 
has gently refrained from passing legislation in an attempt to 
influence monetary policy. In fact, according to the Congressional 
Research Service, in the past 25 years, Congress has acted on only five 
occasions on legislation that affects the Federal Reserve System. Most 
of these actions have been in the form of nonbinding resolutions or 
report language. So congressional action of a statutory nature has been 
rare, and when it has been done whenever Congress has spoken on this 
issue, it seems it has had a very tempered approach. Maybe we ought to 
say that this sense of the Senate is a tempered approach in the sense 
that it doesn't change statute, but still it is an attempt by a 
political body to influence a part of our government that we have 
always tried to keep immune and separated from politics.
  There is a sound reason for keeping the Fed independent of this 
political process. It is because we in this body, whether we want to 
admit it or not, tend to think too much for the short-term. We tend to 
think in terms of the next election rather than the next generation. 
Too often, it is even more personal than that--what can I do to 
increase my chances of reelection? These short-term policies, as we too 
often find out, can lead to long-run disasters.
  While increasing the money supply can put more people to work prior 
to an election, of course, it can lead to crippling inflation in the 
long run. The Fed appropriately is not subjected to the pressures to do 
something potentially reckless for the purpose of short-term gain. This 
policy has served us well for generations and the U.S. economy remains 
the envy of the world because of it. In fact, in this decade alone, 
many nations have followed the lead that the United States has 
practiced for over 60 years. They have done this by bringing more 
independence to their own central banks. Great Britain, under a new 
labor Prime Minister, has moved to make the Bank of England

[[Page S10711]]

more independent. Other European Union nations in their new union have 
committed to an independent central bank upon the creation of that 
monetary union which starts January 1, 1999.
  Furthermore, every nation that has faced a monetary crisis in recent 
memory has attempted in the name of reform to keep its central bank 
from political influences. We saw it in Mexico just 3\1/2\ years ago 
when the peso declined so rapidly in Mexico. They have moved in that 
direction. We see it today in Japan, Korea, and Thailand. A major 
reason for each of their economic problems, of course, is the cronyism 
in bank lending practices and political influence over the banking 
systems. Maybe another way to say it is too much of an incestuous 
relationship between their corporations and their government, between 
their bank and their government, to a point where there was no arm's 
length transactions; the marketplace did not work appropriately. Nobody 
had to make a sound business judgment because there was always somebody 
there to bail them out.
  These people now, after the crisis in Southeast Asia, have begun to 
see the wisdom of a central bank, free of political influence. We 
should recognize the wisdom of it, as well.
  As I said earlier, we are all for low interest rates. The relatively 
low interest rate environment that we currently enjoy has allowed 
millions of Americans to purchase a home for the first time. It has 
kept the cost of doing business for small business and farmers down. It 
has helped the Federal Government reduce its budget deficit by reducing 
the costs of the national debt.
  Instead of pointing fingers at the Fed, Congress should instead focus 
on the things that are within its authority that lead to lower interest 
rates, like balancing the budget and reducing Government borrowing. We 
have been on this course now for the last 3 or 4 years. So, September 
30th of this year for the first time we can tell the people we finished 
the fiscal year not only with the budget balanced but with paying down, 
probably 60-billion-some dollars, on the national debt.
  During this 30-year period of irresponsible Federal spending in which 
the national debt has been run up to $5.4 billion, and without the 
changes made in the last 3 or 4 years, at the end of the Clinton 
administration the debt could have gone to $6.7 billion--at least that 
is what we were projecting in the 1994 budget resolution discussions. 
During this period of time of 30 years the Fed has been a 
counterbalance to an irresponsible Congress, trying to make sure that 
inflation was kept down as a result of fiscal policy that would tend to 
drive interest rates up for the Federal Government because the Federal 
Government always stands first in line for credit and is always willing 
to pay more and will pay more than any other borrower would pay or have 
to pay.
  Congress has sole constitutional authority over the fiscal policy of 
this country, and in many respects fiscal policy has had as big an 
impact on interest rates as monetary policy. For instance, interest 
rates will remain relatively high as long as the Federal Government is 
competing with borrowers for money. That is why I find it interesting 
that often the same Members who want to direct monetary policy at the 
Fed tend to vote against sound fiscal policies such as balancing the 
budget and reducing Government spending.
  If a Congress did its job of managing fiscal policy better, maybe we 
wouldn't have to worry so much about what the policy of the Federal 
Reserve is. Now we are in a position of balancing the budget, paying 
down some on the national debt, not having the Federal Government 
eating up all of the total credit that is needed, the Federal Reserve 
job will be much, much easier.
  In short, I oppose these efforts to subject the decisionmaking of the 
Federal Reserve to the vagaries of the political process. By most 
accounts, the Fed has been largely responsible for this period of 
unprecedented economic growth fueled by both low interest rates and low 
inflation. So I say that we should stay on course that Congresses for 
the past 60 years have laid out for us, and that is keeping the Fed 
free of political influence that has led to economic calamities in so 
many other parts of the world.
  I yield the floor.
  Mr. HARKIN. Mr. President, I just want to respond a little bit to my 
colleague from Iowa by again pointing out to Senators that while we do 
respect the independence of the Fed, as we say, some argue that it is 
not even appropriate to debate monetary policy or to send signals to 
the Fed.
  I say to my colleague from Iowa, as William Jackson at the 
Congressional Research Service writes in the report to Congress,

       Constitutional authority to regulate the value of money, 
     and by implication, to determine monetary policy, rests with 
     Congress, article I, section 8 of the Constitution.

  This authority has been largely delegated to the Federal Reserve by 
the Federal Reserve Act, as amended. Nonetheless, the Fed, as a 
creature of law, may have its policies dictated as well as its 
structure changed by Congress. Since the 1930s, Congress has generally 
declined from doing either. But in the past 25 years, Congress has 
occasionally legislated more Fed accountability, with an aim towards 
influencing policy. And Congress has periodically enacted nonbinding 
language to express its monetary policy preferences to the Fed, with 
the implication that more structural changes could be forthcoming in 
the absence of policy response by Fed officials.
  Again, I think it is not only our right but our duty as Senators to 
debate monetary policy and to give our thoughts and guidance and 
direction to the Fed.
  The Federal Reserve, I keep reminding people, is nowhere mentioned in 
the Constitution of the United States. It is not a separate branch of 
government. It is not something that is under executive powers 
enumerated in the Constitution. The Constitution gave Congress the 
power to coin money and regulate the value thereof. Of course, we don't 
want to do that. I would hate to see us do that. So we delegate it. We 
set up the Federal Reserve with the Federal Reserve Act. We amended it 
many times to do that. And it has worked well.
  But it still means that as policymakers we have a right and, I think, 
an obligation to send guidance and direction to the Fed about what is 
happening in the economy and what they ought to do. The last time the 
Senate debated a sense of the Congress calling on the Federal Reserve 
to lower interest rates was on December 19, 1982. It passed by a vote 
of 93 to nothing here in the Senate. Ninety-three to nothing the Senate 
passed a sense-of-the-Senate resolution asking the Fed to lower 
interest rates.
  Again, given all of the recent support for interest rate cuts in the 
business community by economists, editorial boards, and political 
leaders on both sides of the aisle, I see no reason why the Senate 
should not vote unanimously, again, urging the Fed to lower interest 
rates to stem what I and others--not only myself but a lot of others, 
from conservative to more liberal economists all over America--are 
saying: there are ominous signs of a possible recession in the U.S. 
economy.
  As I said, even the Chairman of the Fed himself, Chairman Greenspan, 
has moved in this direction recently. He said encouraging things about 
the need to perhaps cut interest rates. But I am fearful that the rest 
of the Federal Open Market Committee hasn't gotten the word yet.
  I think we need to send them the word that what we see as 
policymakers in our daily lives, what we see in our States, what we see 
in terms of the issues that we deal with in the Senate, that we see an 
economy that is going down from a 5.5 percent growth rate last quarter 
down to 1.6 percent next quarter. We see rapidly falling commodity 
prices, especially in the farm sector. We see wages beginning to 
stagnate. We see the 30-year Treasury bonds now lower than the Federal 
funds rate. There are some very ominous signs out there.
  This amendment is designed to simply exercise not only our right but, 
I believe, our obligation as Senators to debate this situation.
  Of course, if Senators don't agree that is what is happening--that 
indeed there may be a recession out there, that there are some signs of 
falling commodity prices, for example, and of worldwide recession--I 
guess people can debate that. Obviously, if Senators feel the other 
way, they obviously should not vote for a sense-of-the-Congress 
amendment like this. But I hope

[[Page S10712]]

that Senators who feel that they shouldn't vote against it because 
Congress has no right telling the Fed what to do--I would just say look 
at the history.
  I will have more to say tomorrow about the many times Congress has 
passed some legislation, or sense-of-the-Senate, or sense-of-the-
Congress resolution giving guidance and direction to the Fed. I hope 
that we will exercise not only our right but I believe our obligation 
to do so.
  I yield the floor.
  Mr. GRASSLEY addressed the Chair.
  The PRESIDING OFFICER (Mr. Brownback). The Senator from Iowa.
  Mr. GRASSLEY. Mr. President, my colleague from Iowa has accurately 
stated what the Constitution says and what we can do. I don't have any 
dispute with that. The only dispute I would have is whether or not it 
would be wise for Congress to do that after we have had such a success 
of building confidence in the economy when there is an absence of 
congressional manipulation of monetary policy. I fear if there is a 
perception in the private sector of Congress from time to time making 
an impact upon monetary policy, that is going to build in protection 
for people who are investing and, consequently, drive interest rates 
up. We don't want that to happen.
  I yield the floor. I suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. GRASSLEY. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

                          ____________________