By William Greider

                  Wednesday, October 7, 1998; Page A21 

                  Official Washington is slowly awakening to the storm upon us, but its
                  faint-hearted response ensures that this global unraveling will become far
                  more severe before the United States and other governments find the will
                  to confront it decisively. 

                  We are not yet at a worldwide depression like the one that unfolded
                  between 1929 and 1933 -- not yet. But leaders in government, business
                  and finance are committing the same basic error of judgment that led, once
                  before, to epic tragedy. Hubris, plus their weak grasp of economic history,
                  blinds many smart and powerful people to the gathering dangers. 

                  Authorities are clinging wishfully to the reigning free-market orthodoxy, as
                  it breaks down before their eyes. The laissez-faire theory of efficient
                  markets did not predict this crisis and can't explain it, but theory laid the
                  predicate. The proposition that utterly unregulated markets rule society
                  more wisely than sovereign governments is being smashed by reality. 

                  Most members of Congress, absorbed in other matters, seem oblivious to
                  the economic portents and vast suffering in other nations. They will be
                  shaken awake shortly. Our economy is sinking toward recession itself,
                  perhaps in the next six to nine months. A lot of Americans are about to
                  lose their jobs and homes, maybe savings too. The recent prosperity did
                  not prepare them for this. Rising unemployment will collide with the
                  extraordinary levels of personal debt. Farmers always go first in such
                  disasters. 

                  A shrinking U.S. economy is ominous for larger reasons. It intensifies the
                  deflationary pressures that have already collapsed so many other nations.
                  And it closes off their best route of recovery -- selling exports to a vibrant
                  American market. Thus, nations will lunge at more self-defensive actions:
                  devaluing currencies, closing borders to imports, cutting loose from the
                  global system. 

                  American politics is about to be transformed by these events, especially if it
                  remains so passive. President Clinton, other troubles aside, stands a fair
                  risk of becoming a "New Democrat" version of Herbert Hoover. Like
                  Hoover, Clinton entrusted his economic policy to conservative financial
                  experts (in his case, Robert Rubin and Alan Greenspan). Now he is
                  captive to their narrow, cautious view of what's unfolding. 

                  The IMF is already in disrepute for wrongheaded diagnosis and
                  prescription. The Federal Reserve may next be disgraced by its own
                  inaction (as it was in 1933). The Fed has already committed a grave,
                  possibly historic error: It decided to slow down the robust U.S. economy,
                  while ravaging deflation built its energy worldwide. The Fed, once more,
                  was fighting the last war.

                  Republicans, given the timing of what's coming, seem very likely to capture
                  both White House and Congress in 2000. But they are ill equipped to
                  pursue the activist-government (liberal) measures required to rescue the
                  global system. Conservatives are deeply divided by their conflicting
                  outlooks on the global economy. Besides, 2001 will be too late. 

                  In a year or so, both parties can stop squabbling over who gets credit for
                  the budget surplus and start blaming each other for the new deficits. My
                  point is this: We are in a historic watershed that upends conventional
                  wisdom -- starting with how the global system operates and how we think
                  about it. 

                  The first imperative is to reverse the deflation before it swallows up more
                  major economies and literally destroys the global trading system
                  (essentially what occurred in the Great Depression). The pivotal policy
                  question is the choice of priorities. 

                  Governments need to recognize that they must focus, first and primarily, on
                  rescuing the real economy of production and consumption from further
                  deterioration -- instead of concentrating only on financial markets and
                  banking systems. 

                  The rhetoric and ideas emanating from Washington make it clear that U.S.
                  authorities are pursuing the opposite course -- still trying to put Humpty
                  Dumpty back together. They dwell obsessively on restoring financial order
                  (currencies, bank liquidations, balanced budgets) while permitting the
                  continuing collapse of demand and falling prices to ravage one market after
                  another. 

                  This ignores a central lesson from the Great Depression: Bankers and
                  investors are not going to get well until the producers and consumers get
                  well. Deflation destroys debtors first (since the real value of their debts
                  increases as prices fall). Then it destroys their bankers too. It wipes out
                  wage incomes and profits, but also sticks the shareholders. It's like a
                  tropical storm that gathers brute strength as it travels.

                  The pattern of destruction explains why restoring economic growth must
                  come first. To reverse recessionary forces, the governments can do quite a
                  lot -- pumping hard on the demand side worldwide and suspending the
                  usual rules for orderly finance and bank lending. 

                  These solutions, of course, sound far-fetched to the present generation of
                  politicians, liberal and conservative, since they were taught to keep hands
                  off the marketplace. Economists assured them that everything comes up
                  roses, if only they balance the federal budget. Reality is sending them back
                  to school. 

                  To grasp the nature of this crisis, think of three separate deflationary
                  currents surging around the world, viciously reinforcing each other. The
                  first is the abrupt collapse of inflated financial assets (failed loans,
                  investments, stock prices). The deflating financial bubble generates the
                  second surge -- the falling demand for goods, which injures producers and
                  wage earners (falling oil and grain prices, falling sales and closed factories).
                  As economies shrink, the negative energy feeds back into financial
                  markets. 

                  The third current is less tangible but the most dangerous: the psychology of
                  spreading fear. Once people get really scared (consumers, business
                  managers, bankers), they may hunker down in self-defense -- stop buying
                  and borrowing, stop lending and producing. Once people no longer believe
                  any pronouncements from experts, everything can freeze up. Japan is a
                  living example. 

                  Fear and immobilizing pessimism lie at the core of any depression. The
                  longer governments act hesitantly, the more often their forecasts of
                  recovery are refuted by more bad news, the closer we are drawn to the full
                  catastrophe. It would help public confidence if leaders started talking
                  straight about the situation. Yes, some people will run out and dump
                  stocks, but they seem to be getting the word anyway. 

                  A quick list of what governments ought to be doing now: 

                  Stimulate real economic activity on many fronts. Cut interest rates
                  significantly, of course, but also prepare the political ground for a quick,
                  emergency tax cut, not the usual regressive version but one that puts more
                  money in paychecks of working folks who will spend it promptly. 

                  Monetary policy, in extreme circumstances, can "flood the streets with
                  money" (as legendary central banker Benjamin Strong put it in 1928) and
                  induce an artificial inflation that halts the downward spiral of prices. That's
                  an ugly solution, but there is also danger in waiting too long to act
                  aggressively. If central banks are too slow to cut rates, they may find
                  themselves in the same liquidity trap as Japan. 

                  Halt the widening squeeze on available credit. Nervous bankers around the
                  world are, understandably, pulling back from trouble, cutting off business
                  lines of credit, rejecting new loans for developing nations. But this makes
                  everything worse. Regulators and central banks must lean hard on banks
                  and brokerages to keep credit flowing. Lending can be encouraged by
                  temporarily relaxing capital standards and reserve requirements. 

                  Switch the lending objectives of the IMF from financial disorders to
                  economic stimulus. This requires new IMF leaders -- pro-growth business
                  executives from around the world who understand the necessity of
                  re-liquifying failing companies and economies. A new IMF could create a
                  global version of FDR's Reconstruction Finance Corporation that imposes
                  reasonable workouts between firms and creditors. 

                  Restrain the destabilizing adventures of global finance. Banks and hedge
                  funds can be whacked by higher margin requirements on lending for
                  financial speculation. Poorer nations (and ultimately major economies)
                  need the right to impose prudential controls on capital flows to disarm the
                  "hot money." 

                  In all these areas, governments possess enormous power over the
                  marketplace, if they will decide to use it. The long-term instabilities and
                  inequities that produced this breakdown will not be solved by emergency
                  rescue measures, but the crisis makes them more visible. A new Bretton
                  Woods agreement would devise a moderating version of capital controls
                  and a more stable system for currency relationships. It would investigate
                  such suspect matters as the wholesale tax avoidance practiced by global
                  corporations and financiers. 

                  But a new Bretton Woods must ask larger questions. Why do the terms of
                  trade protect property rights but not human rights or the rights of workers
                  to organize in their own self-interest? Why does the global system ignore
                  the random inhumanities in its own factories? Or the deepening inequalities
                  of wealth and incomes that helped to generate this crisis? 

                  A new Bretton Woods understanding, in other words, cannot be left to the
                  bankers and economists.

                  William Greider is the author of "One World, Ready or Not: The Manic
                  Logic of Global Capitalism."