Baker: "Wait And See"

A seven-year veteran of the Reagan Administration, Treasury Secretary James Baker is no stranger to crisis. Rarely, however, has he been placed so squarely in the vortex. On Friday, Baker met over breakfast in the Treasury Secretary's ornate dining room with TIME's international economics correspondent, Christopher Redman. For 90 minutes they discussed the week's tumultuous events. Excerpts from the interview:

Q. There have been accusations that your remarks about interest rates were ill-timed and helped trigger the Monday crash. Is that so?

A. What triggered it was not my remarks but a front-page story in one of our major newspapers. It quoted an unnamed Government official, not me, and drew inaccurate conclusions from my remarks in a way that could not but contribute to market nervousness.

Q. What needs to be done to prevent this crash from leading to a depression?

A. We need to continue to work hard to coordinate our economic policies in the manner envisaged by the Plaza and Louvre ((international monetary)) accords. And each country needs to do its utmost to take actions that are sometimes very difficult politically. We must recognize that more and more we are an interdependent world.

Q. Can we avoid a recession?

A. I think we can with the right policies. And we're pursuing the right policies in the United States by moving to negotiate a budget-deficit- reduction package with the Congress and by adopting an easier monetary policy stance. But it's important that monetary authorities around the world recognize that there's been a large loss of wealth and that consideration should be given to an easing of monetary policy.

Q You didn't mention protectionism.

A. Trade is very important, and fear of protectionism was one thing that had equity markets unsettled. The Administration is totally committed to free trade, and the President has said he will veto protectionist trade bills now on the Hill.

Q There's clearly going to be some negative impact from the crash. What's the damage, and how can it be limited?

A. We don't know yet, and we won't know until we get a better readout on some of the credit problems that might spew out of this. Although we don't know of any, there may be problems in terms of ripple effects. So we have to wait and see. But we're doing what we can. I think the policy moves we've made are the right ones. We're in close contact with the exchanges. And we've just had some good numbers: growth in the third quarter came in at 3.8%, much stronger than we anticipated. That's good because we're going to have some adverse effects from this market decline and we'd rather have that coming off a high GNP number.

Q. Do you expect America's economic partners to make further efforts to ensure that the recovery continues?

A. We've all got to do what we can to bring our economies into better balance.

Q. Does that mean you still want to see faster growth in West Germany?

A. We want to see deficit countries -- to wit, the United States -- move on fiscal deficits and fight protectionism. And we'd like to see surplus countries generating as much growth as possible, consistent with maintaining the gains the world has made against inflation.

Q. As part of the U.S. contribution, the President said he will consider tax revenues in a deficit-reduction package.

A. Right.

Q. He also said they should not harm the economy. What form could they take?

A. As the President said, we're not going to negotiate in public by saying what is or is not that kind of tax.

Q. What was the President's objective at his news conference?

A. It was important for the President to be seen to be in charge, to be leading and taking action. He also needed not to be seen as another Herbert Hoover. He couldn't say, "Don't worry, everything's O.K." But at the same time he needed to be reassuring, and that's not an easy line to walk.

Q. Why the need for budget compromise?

A. The major plus to a negotiated deal is that the markets would see the two branches of Government cooperating to solve the problems.

Q. What's the time frame for reaching a deficit package?

A. We have to do this not in the months ahead but in the days ahead.

Q. Can any good come from this turmoil?

A. We probably wouldn't be doing this ((negotiating with Congress)) but for the events of the past week. It is clear that they were the catalyst that was needed to bring about face-to-face discussions on debt reductions.