The MacNeil/Lehrer NewsHour

Intro ROBERT MacNEIL: Good evening. Leading the news this Friday, the Federal Reserve Board raised the discount rate a half percent and leading banks upped their prime lending rate. One of the worst forest fire outbreaks in decades is affecting eight Western states. United Nations Secretary General Perez de Cuellar announced a peace mission to Iran and Iraq. We'll have details in our news summary in a moment. Jim? JIM LEHRER: After the news summary, two economists and two bankers examine what the Federal Reserve and the banks are doing to interest rates. We'll have a Charles Krause report on the contras in Nicaragua, a newsmaker interview with the Secretary General of the United Nations, Perez de Cuellar, and we close with an essay about jazz.News Summary MacNEIL: For the first time in more than three years, the Federal Reserve Board raised the cost of money today. It pushed the interest rate it charges banks, the discount rate, up half a percent, to 6%. Leading banks immediately responded by raising their prime rate, the interest they charge favored customers, half a point to 8 3/4. The Fed's move followed continued weakness in the value of the U. S. dollar, and more growth in the economy, raising fears of inflation. It came after the Labor Department announced that the number of Americans working grew sharply last month, keeping unemployment at 6%. Jim? LEHRER: Forest fires continue their rampage through the West. The number of acres blackened rose to nearly 480,000 today. National Guardsmen and other rescue workers are trying to contain the spread in Northern California, Idaho, Oregon and Washington. Twenty two California counties are under a state of emergency. Officials say the devastation is the worst since the huge fires that hit the area 10 years ago. They say it could turn out to be the largest forest fire damage of the century by the time it's over. Most of the fires were originally set by lightening strikes to dry, flammable trees and brush. MacNEIL: United Nations Secretary General Perez de Cuellar announced today that he will visit Iran and Iraq next week, seeking compliance to the cease fire order voted by the Security Council six weeks ago. He said he would go first to Iran, which has not agreed to the cease fire, but had not totally dismissed it. In the Persian Gulf today, a long range missile landed near the coast of Kuwait. Some reports said it was a Silkworm missile of the type Iran has bought from China and fired from the far peninsula captured by Iran in fighting with Iraq. Also today, Iraq claimed its warplanes attacked a large naval target, Bagdad's term for a tanker. Meanwhile, the latest oil convoy under U. S. escort was steaming southwards. We have a report from Kate Adie of the BBC.

KATE ADIE, BBC: They traveled nose to tail, an obvious but efficient line, and making good speed. There's radio silence. And approaching vessels like ours receive a sudden and swift inspection from helicopters. The convoy had come through an area of the Saudi coast where revolutionary guards in gunboats had crossed right through the shipping lanes in their attacks. Just two warships were moving around their charges this morning. The cruiser Reeves, and the destroyer, Kidd. The scene was peaceful, the waters which this week have witnessed the most concentrated aggression for years, a helicopter niched between the tankers, hovering like an insect over the huge liquid gas and crude oil vessels. It was a signal to start again, after twelve hours lying mid channel. There is no way that this operation is either routine or low profile. As we joined the convoy going flat out down the Gulf, the formation was unique among all the shipping, and the determination to fly the American flag very clear. MacNEIL: Italy joined other European nations in saying it will send a group of warship to the Gulf. The decision followed an attack yesterday on an Italian freighter by a speedboat believed to be Iranian. LEHRER: The young West German who flew uninvited into Red Square was sentenced to four years at a labor camp today. Mathias Rust received the sentence from a Soviet Supreme Court judge. Rust flew his one engine plane from Helsinki, Finland, to Moscow May 28. He said he took the flight to dramatize the need for peace. Rust's sentence was to a general regime facility, which the Associated Press said was the least harsh of Soviet labor camps. The defendant was allowed to meet with his family before the verdict was announced. His mother said afterward she hoped he would be released before his four years were finished. MacNEIL: A thirty game winner and two time loser both made news today. Denny McLain, a Cy Young Award winner, and last Major League pitcher to win 30 games in a season, was released from an Alabama prison. The former ace of the Detroit Tigers served 28 months of a 23 year sentence for racketeering, extortion and drug dealing. That conviction was overturned by the U. S. Circuit Court of Appeals in Atlanta on the ground that he didn't receive a fair trial. McLain is free on $200,000 bond, awaiting a new trial. Two years ago a 29 year old man, Gary Dotson, made headlines when his 25 to 50 year rape sentence was commuted after his victim recanted her testimony. Today, Dotson beganan 8 month sentence after the Illinois Prisoner Review Board revoked his parole. The action was taken despite the dismissal last week of wife beating charges against him. LEHRER: Finally in the news today, the Department of Transportation said consumers filed 6,822 complaints about U. S. airlines in August. That is a sevenfold increase over the same month last year. The airlines with the most were Northwest, Continental and Eastern, in that order. And that's it for the news summary tonight. Now it's on to interest rates, the Nicaraguan contras, the Secretary General of the U. S. , and an essay about jazz. Rising Interest MacNEIL: First tonight, to the meaning of today's jump in interest rates. Why the Federal Reserve Board raised the discount rate for the first time since 1984, and how it will affect consumers. As expected, the nation's major banks responded by raising the prime rate a half percentage point to 8 3/4%. But where are interest rates headed next? We get differing views from two leading Wall Street economists and two bankers. First, the economists. David Jones is Senior Vice President and Chief economist with Aubrey G. Lanston, a New York investment firm. Allen Sinai is chief economist with Shearson Lehmann Brothers. Mr. Jones, a one time increase by the Fed, or the first of a series? DAVID JONES, economist: This is the first of a series of moves, Robin, that I expect to push interest rates, particularly short term interest rates, significantly higher through the end of this year and into early next. MacNEIL: The first of a series, or one time, Mr. Sinai? ALLEN SINAI, economist: Oh, we could have another discount rate hike, but I think the jury's out on whether we're going to have a lot of discount rate hikes here by the Fed over the next three to nine months. MacNEIL: Why did they do this? What is their thinking, do you think? Mr. JONES: The Fed was aiming at killing two birds with one stone. First, it looks as though we're starting the second half of 1987 at about the same 3. 5% gross pace as the first half. That's not an exceptionally high growth rate under normal conditions, but we have to remember we're at near full employment. We pushed the unemployment rate down to levels economists think are going to leave us some shortages in the labor market, and maybe some wage price pressure later next year. And so the Fed wants to cool the economy down, maybe to something like a steady 2. 5% pace. It also wants to help support a battered dollar in the foreign exchange markets, which might lead to inflation as well if it had kept falling. MacNEIL: Do you put the priorities that way around? Mr. SINAI: No, I think a little bit differently. I think the Fed really is trying a preemptive move on inflation to stop it from worsening further. The chief ingredient in our inflation problem has been a lowered dollar. So higher short term rates can help shore up the -- MacNEIL: Spell it out for us in ABC terms -- why a lower dollar means the threat of inflation? Mr. SINAI: A lower dollar raises the price of imported goods, so -- which we buy from a broad cost market. Second, our own companies, under the umbrella of higher foreign goods prices, raise prices here. Third, the lower dollar tends to raise the prices of precious metals and commodities. And the lower dollar sets up expectations of future inflation down the road, and it really is those inflationary expectations that I think the Fed is aiming at. I don't think they really want to cool the economy. We do not have a booming economy at this point. MacNEIL: Allen Sinai puts more emphasis on the falling value of the dollar than on the threat of rising labor costs. Mr. JONES: Can we disagree, Robin? Have you ever known two economists to do otherwise? I think essentially we're in a cyclical period, when the economy's gonna be watched very closely by the Fed, and I see something much more than just a blip on inflation from a lower dollar. I see the danger that if we keep growing at, let's say, 3. 5%, we're going to end up with labor shortages, we're going to end up with a wage price spiral next year. It could push inflation above 6%, up from 5%, this year, up from 1. 1% last year. So I think the new Fed Chairman, in order to establish anti inflation credibility, and to keep this economy on a steady, moderate pace, wants to do something more than simply fight the dollar. It wants to keep things cool in the economy. MacNEIL: Is this sending a signal, or taking action in advance, I mean is it putting out a fire that hasn't started yet? Mr. SINAI: It's one of the more early moves on discount rate hikes that the Federal Reserve has undertaken. Actually, inflation rates have moderated the last few months. I think it's a constructive move, and among the choices the Fed has, it's the right thing to do, to take the wind out of the sails of inflation before it gets into our industrial side of our economy, and before it gets into (unintelligible). MacNEIL: But isn't there a danger by raising interest rates, you're not only raising for consumers, you're raising for everybody else -- industry, retooling and expanding and one thing and another. Isn't there a danger of dampening whatever growth there is in the economy by doing this? Mr. JONES: There's a danger of overshooting. As I said, the Feds may be hoping to bring the economy down from 3. 5% to 2. 5%. The danger is that some sectors in the economy are still soft, the energy sector in Texas, the farm sector out in the Midwest. So the new Fed chairman, Alan Greenspan, is playing hard ball here. He has to be very cautious. But remember, Robin, he's a numbers cruncher. And I think the timing today was very relevant. We've got these employment numbers, an unemployment rate that looks like we're close to full employment. He thought he had the cushion, or the margin, to start a series of moderate tightening steps that would cool the economy without pushing us into recession. MacNEIL: What do you think about the impact on the economy? I mean, could it send unemployment up again? Mr. SINAI: Oh, the unemployment rate might pick up again in the next two or three months. I don't think the levels of interest rates we now have, nor this increase, are really going to slow the economy down a lot. Remember, funds flows are very ample in our economy now, we have a deregulated financial environment. What really would stop our economy growing would be two or three percentage point increases in interest rates, not a half, or one percentage point. MacNEIL: What kind of message does it send to people who trade in dollars and who watch these things about the new Federal Reserve Board Chairman? You're a Fed watcher. You've written a book about Fed watching. What does it say? Mr. JONES: Well, the new Fed chairman was being tested by the financial -- particularly the foreign financial markets. It was curious, the foreign investors said, ''We don't know this man, Alan Greenspan, the way we knew his predecessor, Paul Volcker. And in a sense, markets began to test someone. So the dollars began to fall. It wasn't only the test of Greenspan, we also had a very large trade deficit that Alan Greenspan had virtually nothing to do with that helped push the dollar down. But what he had to prove, and I think he did in a very good way, it's a feather in his hat, is that he began to convince, I think, today the foreign financial market that he does mean business, and particularly means business in terms of fighting inflation early. MacNEIL: He means business, to say to the foreign markets, the -- at least as far as the Federal Reserve Board can do it -- it's not going to let the value of the dollar go down further for want of a higher interest rate to attract investment here, is that the -- ? Mr. SINAI: Oh, I think there were really several objectives here. Number one, it is an inflation fighting move. And the Federal Reserve statement only mentioned preventing future inflation problems. Second, it shows that our Federal Reserve now under the new chairman, is willing to make a fundamental change in policy along the lines of the coordinated policy moves of our trading partners. And that's very significant for the dollar. Third, it wasn't a big enough increase to really, I think, scare me that our economy is going to go in the tank. And fourth, it was politically astute, because it's better to do it early than to do it later. MacNEIL: Politically astute in what sense? Better to do it the year before a presidential election gets under way? Mr. SINAI: Exactly. A little bit of preventative medicine now on inflation before it gets way out of line is just the right thing to do for the economy, I believe. And also, the odds are that next year we will have less trouble because of an early move on inflation this year. MacNEIL: One quick question -- the stock market fell 38 points today. It's been a bit gloomy for several days. Is this going to send it further down? Is this the end of the gloom, David Jones? Mr. JONES: It looks like it's the beginning of the end of the Bull Market. The Stock Market can never fight Fed tightening, particularly on a sustained basis, to fight inflation. Interest rates go up. Eventually that makes bonds attractive relative to stocks, and eventually the economy slows and profits weaken. So the Stock Market is the one real victim today. MacNEIL: In a few seconds, do you want to comment on that? Mr. SINAI: Oh, I think the Stock Market definitely is in a correction phase, but if what the Fed is trying works, it'll do better again. But it's going to go through a correction now. MacNEIL: Okay, Allen Sinai, David Jones, thank you. Jim? LEHRER: Now, for the bankers' view of all of this, it comes from Angelo Mozilo, president of the Country wide Funding Corporation, the nation's second largest independent mortgage banking company, which has 104 offices in 30 states. He joins us from Los Angeles. And from William Gibson, Executive Vice President of the Continental Illinois National Bank in Chicago. Earlier today, Mr. Gibson met with his associates at his bank to raise its prime lending rate. He joins us from Public Station WTTW in Chicago. Mr. Gibson, why did you do it? WILLIAM GIBSON, banker: Well, the cost of funds have gone up in wholesale markets and the Federal Reserve has taken action to take note of that and to try to take some of the winds out of the sails of inflation. So, like just about every other business, when our costs go up, we have to raise our prices. LEHRER: So, it's kind of an automatic thing? The Fed raises the discount rates, you all meet for ten minutes and decide to raise the prime rate, is that what happens? Mr. GIBSON: No, not at all. The prime gets evaluated every week at our bank, and I think at most major banks around the country, and this is not the first move in the prime this year. We evaluate the relationship between our lending rates and our funding rates weekly, daily. And they've been under pressure, really, all year long, and this is not the first of several tightenings in the marketplace. This is the first that the Fed has joined in and validated. It's not the first time that funding rates have risen this year. LEHRER: You expected the Fed to do this? You knew it was coming? Mr. GIBSON: Well, no one knows exactly when that swing vote on the Fed Board among the governors is going to take place. So the timing is always a surprise. But certainly we thought it was likely at some point here, because the discount rate is so far below lending rates, other rates, and also the market, as the two earlier guests have mentioned, the markets have really become turbulent. We're looking for a sign that the central banks of the world care. LEHRER: Okay, what's the next step? When does it trickle down to the consumer on your consumer loans at your bank? Mr. GIBSON: Well, on loans like car loans, and installment loans, etc. , those loans are not tied to the prime. For several reasons. There are different -- LEHRER: Well, I know they're not technically, but in a real world's psychological sense, they are, are they not? Mr. GIBSON: Well, they're longer term that the prime, which is the point I was trying to make. And all rates are rising. Indeed, the longer rates have risen more to date than short rates. So that there already is a -- LEHRER: What do you mean -- what's the difference between a long rate and a short rate? Mr. GIBSON: Well, prime rate is an overnight rate or a 30 day rate, or something like that. Whereas a car loan rate'll be three years, four years, five years, and mortgage loan rate will be 15, 20 or 30 years. Those rates have already been under upward pressure, particularly in the mortgage market, which is more and more hooked into the wholesale bond markets of the world, really. LEHRER: I want to bring Mr. Mozilo into that. That's your area. What does this do to mortgage rates? What happened today -- the prime rate and the discount rate going up? ANGELO MOZILO, banker: The money rates have been under pressure since March or April, the beginning of this year. We've seen dramatic increase -- we saw a dramatic increase in March and April. It settled down. There was some abortive rallies up until the last couple of weeks, and then the market came apart at the seams. And rates have gone -- from March when financial rates were around 8 3/4% for 30 year loans, they're up to 11% today. So you can see there's been a dramatic increase. And the Fed was really anti climatic what they did today, as far as long term rates are concerned. LEHRER: What has been the effect of that kind of jump -- from 8 3/4 to 11% already on people coming in and wanting to take out mortgage loans? Mr. MOZILO: There's been two major impacts. One is that the volume of activity, particularly during 1986, the rates came down, there was a rush to refinance existing loans, there was a pent up demand for homes, and 1986 was a record breaking year. In 1987, as rates began to climb, the refinancing disappeared, and now it has seriously impaired the volume of new house transactions, or new reconveyances, that's existing houses as well as new homes. That volume, according to most bank associations, our trade associations, is down 50% vs. last year. So there's been a serious decline on mortgages. The second aspect of that, however, is that people have been more inclined to gravitate towards the variable rate loan and more willing to stay away from the fixed rate, because it's just not affordable today. And that has sustained volume, but still the volumes are about 40 to 50% less than it was last year. LEHRER: All right, both to you and Mr. Gibson, is this the psychology here now, that people read about these big actions, they're getting a lot of news coverage, going to be all over the papers in the morning, on television tonight, is there -- would you say, Mr. Gibson, the impact on consumers, based on past experience, would be, ''Oh, my goodness, this is the time I'd better quickly go ahead and buy the car -- or buy the refrigerator, or whatever, because the rates are going to go up even higher now. ''? Mr. GIBSON: Yeah, there is a tendency for just that to happen. Although rising interest rates are really not a favorable thing for consumer household budgets. In fact, very often the first impact is to spur action. When mortgage rates rise, consumers very often think that there's more to come, and -- LEHRER: That's what I mean, yeah. Mr. GIBSON: Yeah, so I think that in terms of the impact on the economy from the consumer's side, the initial impact will not be very negative. I think in time, the impact to the housing sector, in particular, will begin to add up. We've had a big increase in long term interest rates through today. I mean, not talking about what the Fed did today. Long term interest rates have really risen. I think you're going to see that to be a drab on the economy. But in terms of psychology and expectations, if anything, I would expect the consumers will move a little quicker to take out a car loan or a personal loan, or a mortgage loan? LEHRER: What's your view of that, Mr. Mozilo? Mr. MOZILO: Well, as far as housing is concerned, I think that paralysis sets in. I don't think they're going to be running to buy houses this moment. I think they're caught in a situation where either they can't afford it at all, or they feel that maybe rates will go down, and if we -- we've never seen over the 30 years I've been involved in this business people rush to the marketplace in a fear that the rates are going up. I think they really are concerned presently, and really paralyzed. LEHRER: Let's bring Mr. Jones and Mr. Sinai back into this. You've heard the view from Chicago and Los Angeles, David Jones. Do you agree with their analysis on what the effect this is going to have on consumer and consumer loans? Mr. JONES: What I'd like to add to this, Jim, is the fact that I think the consumer is going to be much more sensitive to this Fed move, and I don't think this Fed move was really after the fact at all. It's starting the process of something going. I sense that consumer may be in a little bit of difficulty in borrowing at some of those banks, because they've begun to take out a lot of home equity loans. And those home equity loans have rates that tend to be tied to that very prime rate that went up today. So what you get is a zing for the dollar in terms of an increase in rates. It's not like it used to be when you could sit back and wait for five or six months before you felt the effect of an interest rate. I think those consumers are heavily in debt, borrowing heavily on the equity side, with their house as the collateral, and they're going to get hit by these higher rates fairly soon. LEHRER: Mr. Mozilo? He disagrees with you. I think you do, right? Mr. MOZILO: No, I don't think he does. I agree with him. I think he's coming from a different viewpoint, but that's true. With the tremendous amount of variable rate loans in the marketplace today, the consumer is hit immediately. He's not sitting with a fixed rate loan for 30 years and unconcerned about what's happening today. Everybody's involved today. I think these high rates are going to have a very unique effect on the economy, unlike any other move of this kind in the past. LEHRER: Allen Sinai, you agree? Mr. SINAI: Well, I think we're going to see consumers cut back on big ticket item buying off these higher rates. That's both houses and home sales and also on consumer spending. Big ticket item buying hasn't been that robust anyway, except for the bargain basement sales on autos we've had here in August. So I -- LEHRER: About a big ticket -- what's a big ticket item? Mr. SINAI: I'm talking about a car, I'm talking about a house, items related to that, and involved borrowing. This is -- this could cost in terms of dollars per month, anywhere from $35 to $50 a month, this increase in interest rates on mortgage type loans, and $10 to $15 a month in added expense on consumer loans. And existing loans are going to be more costly as well, if any of them are floating rate loans. LEHRER: Mr. Gibson, that's a tremendous impact on a tremendous number of your customers, is it not? If he's right? Mr. GIBSON: Well, yes, there's no dodging that. You were asking earlier about the timing of this. In terms of the overall impact, there's no question that higher interest rates for consumers are tougher on consumers who borrow. I think you have to remember, though, the consumers are very large recipients of interest as well. And for every household that is impacted negatively by higher borrowing costs, there are one or more households out there who are going to be benefited by this, because money market accounts are going to yield more, bond funds are going to yield more in time. Money market mutual funds are going to yield more. Treasury securities are going to yield more. So that -- LEHRER: Won't that take a while for that to catch up? That won't be done overnight, will it? Mr. GIBSON: Well, it will be done overnight for money market accounts. I think you'll see ads in the paper next week from banks offering distinctly higher rates than they were offering this past week. Because of this move. LEHRER: All right, Mr. Mozilo, and back to you, Mr. Gibson. We heard what Mr. Sinai and Mr. Jones had to say about the signal this sent from the new head of the Federal Reserve. How does he look from Los Angeles after this decision today? Mr. MOZILO: Well, I think that he did what had to be done. The long term rates, as I said, have led the way. There was no way that you were going to have a bifurcation of that effort. Nor is the short term rates staying where they were and then long term rates going on their way. They generally catch up with one another, and tend to follow one another. LEHRER: But my point is, did he say, ''Okay, I'm Alan Greenspan, Paul Volcker is gone. '' Did you get a message that was new and different today? Mr. MOZILO: I didn't, no. LEHRER: You didn't? Mr. Gibson? Mr. GIBSON: Well, sure it's a new message. It's the new chairman and we got a message from him, which is an important message. LEHRER: Are you saying if Paul Volcker had been there, he wouldn't have done what he did today? Mr. GIBSON: No, I think he probably would have. People are arguing whether or not more would have been done. There are a lot of people who think that maybe a full point on the discount rate would have been more appropriate. But I think it is terribly constructive to markets, both foreign exchange markets and fixed income markets, mortgage markets, that here is a leader at the Federal Reserve who is now leading. And I think in a matter of days and weeks that's going to be a very positive underpinning for the market going forward. LEHRER: Allen Sinai, would Paul Volcker have done this today? Mr. SINAI: Yes, I think he would have. In fact, this can be viewed as a continuation of that nine and one vote in May by the Fed where they had a trigger on the discount rate, and they didn't pull it -- when the pressure was a lot worse then than it is now. LEHRER: David Jones, do you agree? Mr. JONES: I think the style is a little bit different, but I think we'll see essentially Alan Greenspan speaking softly and carrying a big stick in terms of the potential to raise rates. LEHRER: Yes, but would Paul Volcker have done the same thing today? Mr. JONES: Well, he'd have done the same thing, maybe even slightly earlier, and maybe a little more. LEHRER: All right. Gentlemen, all four of you, thank you very much. Whither the contras? MacNEIL: Next, an extended update on the fate of the Nicaraguan contras. The U. S. --supported resistance, which is fighting the Sandinista government, faces several days of reckoning in the coming weeks. Their American aid runs out September 30. Congress must decide whether to renew it or await the results of a Central American peace plan a month later. But for all the controversy the contras have generated in American politics, little is known of what and how they're doing militarily against the Sandinistas. As correspondent Charles Krause reports, even those assessments are subject to controversy.

CHARLES KRAUSE: It's often said that truth is the first casualty of war. That's clearly been the case in Nicaragua, where the contras and the Sandinistas have fought for years, the government claiming victories it often couldn't prove, the rebels denying defeats they often couldn't hide. What is true is that thousands of Nicaraguans have been killed, and the country's economy is bleeding, almost destroyed. Yet, for all the apparent suffering, it's an elusive war, difficult to gauge. In part, that's because the Sandinistas, the contras, and the United States each tailors intelligence from the battlefield to meet its own objectives. Ed King, a retired U. S. Army colonel, analyzes military trends in Nicaragua for Democratic senators generally opposed to administration policy. Col. ED KING, U. S. Army, retired: There's no source that says, ''This is the way it is. '' I mean, you have to constantly be doing analysis of what each side is saying. And in doing that, you're also getting the political and the ideological views mixed up. And as a result there isn't a data base that you can rely on.

KRAUSE: One example, conflicting estimates of the number of contras now fighting inside Nicaragua. Morris Busby is principal deputy to the Assistant Secretary of State for Inter American Affairs. MORRIS BUSBY, State Dept. : At the present time, there's something in excess of 15,000 of these resistance fighters inside, having successfully infiltrated against the Sandinista opposition into virtually every part of the country. I think by any measurement that you want to use, that has to be a description of a military force that has significant capabilities.

KRAUSE: Carlos Tunnerman is Nicaragua's Ambassador to Washington. CARLOS TUNNERMAN, Nicaraguan Ambassador to U. S. : The U. S. Administration always inflated the amount of contras, the numbers of contras, in order to create the impression in the American public opinion that the contras are a real force inside Nicaragua. But that's not true. The reality is that the contras fighting in Nicaragua, inside Nicaragua, are about 4,000.

KRAUSE: Fifteen thousand vs. four thousand, numbers that are irreconcilable. Like so much else related to the war, there's no agreement on what should be a verifiable fact. How many contras there are today inside Nicaragua? Some information is generally accepted by all sides. For example, there are far more contras in Nicaragua now than there were a year ago, when most of the rebel army had retreated to camps in neighboring Honduras. The rebel soldiers had left Nicaragua because from 1984 through most of last year, all U. S. military aid was officially prohibited by the Boland Amendment. It wasn't until last October that Congress lifted the prohibition and approved another $100 million to revive the contras militarily. The aid, administered by the CIA, is used to buy food, uniforms, weapons, ammunition, and reportedly for specialized guerilla warfare training in the United States. Since January, the contras have been engaged in a major offensive, reinfiltrating thousands of their men into roughly half of Nicaragua's 16 provinces. Resupplied by air, the rebels are under great pressure to achieve victories in the field in order to justify more aid from a reluctant congress back in Washington. For the record, administration officials say they're pleased with the contras' military progress so far. Mr. BUSBY: What they've succeeded in doing is not only infiltrating into the country, they have established bases of operations, they have gathered the support of the Nicaraguan people, the rural people in these areas, and they have moved the Sandinistas into a strategy which is much more a static operating fire base kind of strategy, where they are in garrisons and have to move out to counter various actions that the resistance initiates.

KRAUSE: Lawrence Tracy is a retired U. S. Army colonel, and an expert on Central America, who's currently a consultant at the Pentagon. He says the contras have begun to hurt the Sandinista army. Col. LAWRENCE TRACY, U. S. Army retired: The resistance leadership is saying now that they're killing about a thousand Sandinistas on a monthly basis and only taking a hit of about 100. If that is so, then it's coming close to being unacceptable casualties on the part of the Sandinistas. The military objective would be basically to bleed the Sandinista army as much as possible. We know that the Sandinista army has very serious morale problems. A lot of defections are taking place.

KRAUSE: But King says that on his trips to Nicaragua, he's seen no evidence that the contras have begun to successfully challenge or demoralize the Sandinistas. Col. KING: The Sandinista army is very well organized in terms of their counterinsurgency patrolling. They have good aerial observation. They have a lot of intelligence coming in from their own sources on the ground. There's a greater dedication to combat on the part of the Sandinistas than there is on the contras. And I'm not disparaging their bravery or their valor, I'm just saying that in infantry terms -- and I'm an infantry officer -- that there's a certain sense about wanting to close with and destroy that's very critical to infantry combat. And when one side has more determination to close combat than the other, they generally are the ones that take the prevailing position. That's been the case with the Sandinistas.

KRAUSE: Case in point: the Bocay River, remote, malaria infested waterway that's changed hands at least twice since the contras began their January offensive. Early in the year, the Bocay became a strategically vital artery for the contras, who were able to really move their men and supplies down the river from Honduras. By April, the contras had established a forward base camp along the river. Proof, the rebels said, that they could hold and defend fixed positions within Nicaragua. But in May, the Sandinistas overran the camp, then reestablished their presence in the region by creating a military garrison near the tiny river town of San Jose de Bocay. It was here in July that the contras counterattacked, killing 9 government soldiers and at least four civilians, but failing to overrun the military garrison, or to retake the town. Nonetheless, Busby says skirmishes like those in the Bocay Valley demonstrate that the contras have become an effective insurgent force. Mr. BUSBY: They have devised a guerilla warfare strategy to put pressure on the Sandinistan government. And in spite of everything that the Sandinistas have been able to do, and there have been ups and downs, they have stuck to that strategy, and I think we are seeing a successful outcome to that strategy, in that its purpose is to bring pressure to bear, and they're doing that.

KRAUSE: But Ambassador Tunnerman says that every time the contras kill civilians or destroy more of the economy, they damage their own cause more than the government. Amb. TUNNERMAN: The problem with the contras is they have not social support inside Nicaragua. Remember the attack was the contras against San Jose de Bocay in Nicaragua. Really, they prefer terrorists acts instead of engaging in a real war with our army.

KRAUSE: King says that both politically and militarily, the contras are going after the wrong targets. Col. KING: If you're going for insurgency in Nicaragua, the targets are on the Pacific Coast with the population -- it has to be urban strikes. You have to strike pipelines, you have to strike bridges, you have to strike cities. They're not doing any of that, and they don't show any capability of being able to do it. And so if you're talking about an insurgency, I don't see it going anywhere. There are more of them in the country, and they're operating more of them in the same areas, but they're not moving toward either decisive military victory, which is impossible for them, nor are they moving toward a successful insurgency, which is to create a larger base of insurgency operation in the inhabited areas.

KRAUSE: At least two thirds of Nicaragua's people live along the Pacific Coast in cities like Managua, Leon, and (unintelligible). So far, as King says, there's no evidence the contras have much support among the urban population. In part, that's because the Sandinistas retain the loyalty of many Nicaraguans who believe they've benefited from the revolution, and in part it's because the government has created an effective internal security system, which has frustrated both the contras and the United States. Mr. BUSBY: Clearly, one of the things that I think they should be doing is to move into the urban areas in the political sense. And that is extraordinarily difficult in Nicaragua today, because what's happened is that the Sandinistas, being advised by Cubans and by East Germans and others, have put into place in most of the populated parts of the country, a very good system, which is classic, including block wardens, political action committees on a small scale, and so forth -- and that kind of system is very, very efficient, and very difficult to penetrate.

KRAUSE: Cuba, East Germany and the Soviet Union have also helped Sandinistas build the largest and most powerful army in Central America. According to the Pentagon, Nicaragua now has 75,000 soldiers on active duty, including 12 specially trained counterinsurgency battalions. The Sandinistas have also received more than 50 heavily armed Soviet helicopters. They provide mobility and fire power that proved to be particularly effective against the contras. But it may be that the rebels greatest handicap is their failure to develop an effective political message. Col. KING: For insurgency to be successful, it has to have a political dimension. This one does not. The political dimension within the country. This one does not. Mr. BUSBY: I think that you can't deny but what the resistance has failed internationally and within Nicaragua to portray itself as a legitimate democratic alternative to the Sandinistas. That is a failing of the movement, and I think it's a failing which they recognize.

KRAUSE: Former CIA Director William Colby blames the Reagan Administration for not insisting that the contras develop a clear and convincing political program as a condition of U. S. support. Colby also argues that instead of relying on a large guerilla army, the CIA should have recruited a much smaller number of covert agents, then used them to create the conditions for counter revolution inside Nicaragua. WILLIAM COLBY, former CIA Director: Send agents in to begin the organization process, agitation for the cause against the Sandinistas for a better regime. Look for local leaders within the country, the brave people who are willing to go to jail, get killed if necessary, in order to carry on their belief in a free government, a better system than the Sandinistas offer. KRAUSE: Why didn't the United States do that? Mr. COLBY: I don't know. Well, I think the reason is generally impatience. Because the kind of program I'm talking about takes many years. You don't achieve it overnight.

KRAUSE: The question now is, if the Arias peace plan for Central America doesn't lead to a negotiated cease fire, what can the United States expect from the contras? Already, the White House has said it will ask congress for more military aid, to be put in escrow for the rebels. If there's no peace accord by November, the fighting will almost certainly continue, and some administration officials claim that with enough support, the contras can win. Mr. BUSBY: I would point you to their past successes. I think that they have proven their capabilities as a guerilla force, and I wouldn't expect that to change. Col. KING: If you recall, last year they said, the administration said that in 12 months, this operation will be all over Nicaragua, and we'll be winning. Well, it's been 14 months, and they haven't got that much better yet. Now, they're telling us in 16 more months they're going to be better. This is beginning to sound like an installment program. And I'm beginning to wonder when do they get better? If they're always going to be, when are they going to become?

KRAUSE: Clearly, the Reagan Administration continues to support the contras. But just as clearly, the chances of their winning a military victory in Nicaragua are remote. To succeed, even their supporters see the contras must find a way to convince the Nicaraguan people that they, not the Sandinistas, can provide Nicaragua with a better economic and political future. Until then, the contras' own future remains very much in doubt. Newsmaker/Javier Perez de Cuellar MacNEIL: Next, we return to the Persian Gulf story. The latest effort by the major powers to cool down the combat between Iran and Iraq. A point man in that effort is going to be the United Nations Secretary General Javier Perez de Cuellar. Today, the U. N. Security Council authorized him to go on a diplomatic mission to Iran and Iraq. I talked with the Secretary General this afternoon. Mr. Secretary General, with your mission to Iran and Iraq, what will you be trying to achieve? JAVIER PEREZ de CUELLAR, U. N. Secretary General: Well, my mission is to achieve the full implementation of Resolution 598. MacNEIL: The resolution by the Security Council six weeks ago calling for a cease fire. Now, if Iran has neither accepted nor rejected that resolution so far, do you expect that your trip may result in a clear acceptance? Sec. Gen. de CUELLAR: Well, actually, I would like to tell you that this is a mandatory resolution -- which means that the agreement of the parties concerned is not needed. They have to implement a resolution. That's what I want to do is to discuss with them the implementation of the different points contained in the resolution. MacNEIL: I see. You're not giving them a choice of accepting or rejecting, you're saying, ''Here's what you would have to do to implement it,'' is that --? Sec. Gen. de CUELLAR: That's right. That's right, because as I told you before, you know, this resolution has been -- it is placed in the framework of the Chapter 7 of the Charter of the United Nations, which means that it is obligatory for the parties concerned. MacNEIL: The Iranians say that -- they have said in the past, they would not accept a cease fire unless Iraq was branded as an aggressor, the original aggressor. Is that open to negotiation? Sec. Gen. de CUELLAR: Well, yes, you perhaps know the resolution contains in paragraph, I think, six, contains a point which covers their concern. Because they asked me to set up an impartial body, which I will set in consultation with the parties, and the body as its task to determine which country is responsible for the initiation of the war. MacNEIL: I see. Do you have a firm invitation yet from Iran to go to Teheran? Sec. Gen. de CUELLAR: Yes, I had -- I think three days ago -- I had a written invitation from the foreign minister to visit the country. But I felt that I could not accept the invitation without the (unintelligible) consent of the Security Council. And I had this morning the consent of the Security Council. That's why I am prepared to leave for the area around the middle to the end of next week. MacNEIL: Does the invitation from the Iranian government indicate that they are now willing to discuss terms and conditions for an agreement, or abiding by a cease fire? Sec. Gen. de CUELLAR: Well, actually, all indications I had about their willingness to negotiate a resolution were presented to the council this morning. And after listening to me, the council decided to support my visit to the area. MacNEIL: I see. Were those -- you were able to report to the council that there were indications that Iran would be prepared to discuss terms? Sec. Gen. de CUELLAR: I gave the council the indications I had from the Iran side. And it was for the council to judge whether the indications I had were enough for my going to the area on behalf of the council. MacNEIL: I see. It was reported earlier this week that you would insist, if you went there, that both countries observe a cease fire while you were there. Is that a condition? Sec. Gen. de CUELLAR: Well, actually, it is the council which has decided to make an appeal to both sides -- a cease fire is observed while I am in the area. MacNEIL: And have they agreed to that? Sec. Gen. de CUELLAR: Well, I think that the President of the Security Council is meeting the two countries in the afternoon. MacNEIL: Now, Iraq on the other hand, has indicated that it does accept the cease fire order. In the meantime, however, it has resumed its attacks on shipping in the Persian Gulf. Is it going to be your mission there to persuade them to stop those attacks? Sec. Gen. de CUELLAR: Well, as you know, my mission there is the mission of peace. Then I would like very much to persuade the two bodies to stop hostilities. But I think the Iraqi position is that the other side has not clearly started implementing the resolution, has not yet decided to start negotiating implementation of the resolution. They feel that they are free to reinitiate their military activities. MacNEIL: Mr. Secretary General, in the spring of 1985, you visited both capitals of Iraq and Iran, and you came up with an 8 point plan for peace between the two countries. Which the two countries nominally accepted, as I understand it. Yet, here we are, two and a half years later, and the war is not over. Why would it be more likely to stop this time? Sec. Gen. de CUELLAR: Well, first of all, because of the eight points which I submitted to the parties two years ago were my proposals -- proposals which I presented to them in my capacity as Secretary General. They were proposals which had not obligatory character. By this time, what we have is Security Council resolution, which, as I told you before, is a mandatory one. And then the parties are forced to accept the resolution. It was not the case with my eight points. MacNEIL: How will they be forced, if Iran refuses? Sec. Gen. de CUELLAR: Well, that is something for the Security Council to decide. But if I come back empty handed, well, the Security Council will have to decide what to do. MacNEIL: And is one of the obvious options what the United States has been talking about -- trying to impose a world, a global arms shipment embargo on the country that refuses to cease fire? Sec. Gen. de CUELLAR: Well, not only the United States, but some other governments as well, think on the possibility of imposing sanctions on the party which does not implement the Security Council resolution. But my mission is a mission of peace, not necessarily related to this threat of sanctions. My mission consists of obtaining from the two parties that they implement Resolution 598. MacNEIL: Well, Mr. Secretary General, thank you very much for joining us. Jazz Notes LEHRER: And finally tonight, an essay. The subject is jazz. The essayist is Jim McBride of the Washington Post.

JIM McBRIDE: They come from Chicago, Philadelphia, Houston, and Kansas City. They bear their instruments like six shooters, coming to New York with the hopes of walking into a club and blowing the house down, making the big dream happen. These are jazzmen. There are no guarantees for these young players. Most jobs don't pay much. The hours are terrible. Fringe benefits, few. What, then, is so potent about the jazz experience that convinces them to leave home for almost certain destitution, making statements that most of us will neither understand, nor care about? Louis Armstrong, one of the greatest jazz trumpet players, was once asked to define the word, ''jazz. '' He said, ''If you have to ask, I don't know. '' If he didn't know, one would not expect that we lesser mortals would. As it stands, a great deal of music passes for jazz these days -- like rock, easy listening, Broadway show tunes, even new age music. There's a computer program named jazz. Even a basketball team. But jazz is none of those things. It's an American art form, a music steeped in painful and also glorious chapters of black American history. From the drummers of West Africa, to the slavetime fiddlers, to the hard driving beebop in New York and Chicago. The names of its pioneers, Charlie Parker, John Coltraine, Duke Ellington, Art Tatum, might change over the years, but the story behind their lives remains largely the same. Ignored by the majority, revered by a small minority, they are honored more in death than in life. Yet, no music better expresses the deferred dream of black America. None better reflects the paradox black Americans face. Jazz was born in America, but is far more popular in Europe. Many, like tenor sax man Dexter Gordon, star of the French film, ''Round Midnight,'' moved to Europe to find an audience. But race is not the principal element in jazz. There are black jazz musicians and white ones that play the same music. They love it equally. Others who claim to love jazz seem to be constantly declaring jazz to be dead or alive. No one ever says that about classical music, although most classical musicians play music written by composers who are long dead. But classical musicians better than most, understand what compels others to seek the jazz life. They understand the years of study and practice that are behind the Miles Davis trumpet solo. They understand that all musicians share the same obscurity. They understand, like Bach, Beethoven and Stravinsky, that this is the musician's life. There is little difference, it seems, between a gutter in Vienna and one in Harlem. These young musicians play with the knowledge that they will probably never be rich nor famous. They play out of love, with a conviction that they're somehow involved in truth and history -- no small change. There are no philanthropically funded orchestras for them to aspire to. No one spends tax dollars to support them playing the music of Tommy Dorsey, Count Basie, Benny Goodman. We prefer to support orchestras that can play the music of composers from Europe. Conversely, Europeans happily buy tickets by the thousands to hear American jazz. They honor our music. We honor theirs. Why is that so? Louis Armstrong said, ''If you have to ask, I don't know'' MacNEIL: Finally, another look at the top stories today. The Federal Reserve Board, responding to fears of inflation, raised the discount rate half a percent, and leading banks passed the same increase along by raising their prime lending rates. United Nations Secretary Perez de Cuellar confirmed that he will go to Iran and Iraq next week to get the cease fire the Security Council ordered six weeks ago enforced. A long range missile, reportedly a Silkworm, fired by Iran, landed on the coast in Kuwait. In eight Western states, some of the worst forest fires in decades are consuming hundreds of square miles of timber and brush. Good night, Jim. LEHRER: Good night, Robin. Have a nice holiday weekend. We'll see you on Monday night. I'm Jim Lehrer. Thank you and good night.