KNOXVILLE, Tenn.– The Dow’s 500-point drop Monday came as no surprise to a University of Tennessee economist who said markets will remain vulnerable pending an overhaul of the international monetary system.
Short-term, said Dr. Paul Davidson, economics professor at UT-Knoxville, further market declines depend on the actions of Federal Reserve Chairman Alan Greenspan.
Davidson said Greenspan is scheduled to testify to Congress this week in Washington, D.C.
“If he gives the right testimony, that will be the end of it,” Davidson said. “If he gives the wrong testimony, more can happen.”
Davidson said he doubts that so-called safeguards built into the market since the 580-point drop in 1989 will help investors.
“They stopped trading (Monday afternoon) for 30 minutes and then what happened? When the market reopened, trading started to accelerate rather than slow down.”
The underlying problems are much too serious to count on such ad hoc safeguards, Davidson said.
Davidson said he blamed the drop on failure to deal aggressively with the crisis in the Southeast Asia currency markets.
He compared it with the recent Mexican currency crisis when the United States stepped in within two weeks and acted decisively to resolve the problem.
“In the case of Mexico, that was on our border and the United States had an immediate interest in not allowing the crisis to continue,” Davidson said. “In Southeast Asia, it was on Japan’s border and everybody said it’s their problem. It’s not just their problem.
“We are in a global economy and someone must step in before things spin off on their own, out of control. In Southeast Asia we allowed the fire to smoulder for four months.”
Davidson said the first order of business should be to resolve the crisis in Southeast Asia’s currency markets, then overhaul the whole international monetary system.
“Put out the fire first,” said Davidson. “Then figure out how you build fireproof walls so it doesn’t happen again.”
Contact: Dr. Paul Davidson (423-974-4221)