Wall Street Takes a Dive
Ronald Reagan’s 1985 budget took a thunderous shelling last week. Day after day, jittery Wall Street investors fired sell orders, hitting stock prices with their heaviest declines since 1982. Testifying in Washington, federal Reserve Chairman Paul Volcker fired the single most damaging salvo by warning that the deficits envisaged in the budget pose a “clear and present danger”, threatening to keep interest rates high and tip the economy into a new recession. The size of the deficits is staggering. Rudolph Penner, director of the Congressional Budget Office, predicted that if policy is not changed, the flow of red ink will swell from $ 190 billion this year to $326 billion by 1989.
In testimony on Capital Hill, the President’s men acknowledged that the economy was in danger.
Chief Economic Adviser Martin Feldstein, known as the Administration’s “Dr. Gloom,” agreed with Penner’s warning that the deficit could reach the $300 billion range by the end of the decade. If that happened, said Feldstein, federal borrowing would be swallowing 75% of the American savings and putting powerful upward pressure on interest rates. Even Treasury Secretary Donald Regan, usually an optimist and a critic of Feldstein’s dour outlook, admitted that “without proper
fiscal and monetary policies, there is a possibility of our slipping back into a recession on the U.S.” Unless the Federal Reserve speeds up growth of the U.S. money supply, warned Treasury Under Secretary Beryl Sprinkel, a recession could start this year.