ms. rivlin discusses the state of the world economy and its implications for the united states remarks by vice - chair of the us federal reserve system, ms. alice m. rivlin, at the state university of new york - brockport and buffalo state college in buffalo, new york on 22 / 10 / 98. i am delighted to be here today and to have this opportunity to talk with you. i am particularly pleased to be here with my friend congressman john lafalce, who brings such energy and good sense to the congress, especially to the hard work of the banking committee, which is where i see him most frequently. i want to talk with you this morning about the turmoil in the world economy and what it might mean for us here in the united states. why should people in upstate new york care about the economy of thailand or russia or brazil? what can we do to keep our own economy strong? we are all used to the cliche that the world is getting smaller, that the electronic age has brought us closer and put us in instant touch with remote parts of the globe. we know that cross - border trade and investment have increased enormously in recent years, bringing both greater prosperity and greater interdependence. still, when bad news from asian economies began flashing across our screens in the summer of 1997, it didn ’ t seem to have much to do with us. currencies with odd names, like the baht and the ringgit were said to be plunging, stocks prices on the hang seng or the nikkei were falling, by the end of the year korean banks were negotiating with their creditors. but here at home the economy was doing better than it had in a generation. the news from asia seemed like a small dark cloud appearing on the horizon in the middle of a sunny day at an outdoor festivity. it might mean rain, but with any luck it would go away. we have been enjoying a truly extraordinary performance of the us economy. since the beginning of the 1990s, we have had a long period of growth that didn ’ t seem to be sputtering out. in fact, growth accelerated in 1997 and early 1998, which is not the usual pattern for a “ mature ” business cycle. we have seen few signs of strain or imbalance. although some areas, including upstate new york, have lagged, we have experienced mostly good growth across the country and across sectors of the economy. unemployment has been very low -

investors began to view investing in emerging markets as not much more risky than investing in their own more familiar industrial country markets. capital flowed freely to finance projects in emerging market countries with lenders demanding only slightly higher interest rates than they would have required to lend at home. but the downside of interdependence is that when something goes wrong, the impact also spreads quickly from one country to another, through trade channels, prices and asset markets. asian countries in trouble quickly cut their imports from each other and from the industrial world. the reduced asian demand for food, oil and raw materials was felt by farmers in the us and canada, australia and new zealand ; by producers of oil in mexico and venezuela, nigeria and russia and the middle east ; by copper producers in chile and exporters of industrial raw materials in africa and elsewhere. companies in rochester and buffalo found their sales falling. as the contagion spread, investments in many emerging market countries began to look less promising. investors became generally more cautious and began looking for safe places to put their money - like buying us government bonds - even at low rates of return. as they saw us companies affected, they became less eager to finance them as well. we ’ ve learned a lot in the last few months about the power of contagious loss of confidence in an interlinked world. the meltdown in russia was the clearest case. russia is not an important economic and trading power in itself. losses to major money center banks, here and in europe, though magnified by unexpected interrelations with hedge funds and other operations, were not in themselves destabilizing. but what apparently mattered was the surprise, both of the suddenness and unpleasantness of the russian default and of the fact that the western “ powers ” were so powerless. no one thought the us and its allies would take the political risk of letting russia fall apart. in the end, there was nothing they could do to stop it. the russian collapse led investors to pull back just about everywhere. some who had borrowed to invest in russia had to sell assets in other markets to cover losses. others simply said to themselves, “ if it can happen in russia, it can happen anywhere ; i had better get my money to a safe place. ” the result was plummeting markets in latin america, south africa, asia and elsewhere, more difficulties for the countries struggling to recover. it is now clear that the asian crisis that started in thailand in the summer