NYTimes series on the global economic crisis...part two...

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Today, the NYTimes printed part two of a four part series about the global economic crisis:


"How U.S. wooed Asia to let cash flow in"

(for snips from part one, go here: http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=000V7o)

Here are a few snips from today's article: (believe it or not, what I've snipped here represents only about 10% of the article)

. . . Clinton and Rubin, who became his Treasury Secretary in 1995, took the American passion for free trade and carried it further to press for freer movement of capital. Along the way they pushed harder to win opportunities for American banks, brokerages and insurance companies.

This drive for free movement of capital as well as goods was one factor in the long American-led boom in financial markets around the globe. Yet, in retrospect, Washington's policies also fostered vulnerabilities that are an underlying cause of the economic crisis that began in Thailand in July 1997, rippled through Asia and Russia, and is now shaking Brazil and Latin America.

Countries like Thailand and Russia and Brazil are in trouble today largely for internal reasons, including poor banking practices and speculation that soared out of control. But some economists also say that if those countries had weak foundations, it is partly because Washington helped supply the blueprints.

They argue that the Clinton Administration pushed too hard for financial liberalization and freer capital flows, allowing foreign money to stream into these countries and local money to move out. In many cases, foreign countries were happy to open up in this way because they thought it was the best road to economic development, but a wealth of evidence has shown that overhasty liberalization can lead to banking chaos and financial crises.

Even some former Administration officials acknowledge that they went too far. Mickey Kantor, the former trade representative and Commerce Secretary, now says that the United States was insufficiently aware of the kind of chaos that financial liberalization could provoke.

"It would be a legitimate criticism to say that we should have been more nuanced, more foresighted that this could happen," he said. Speaking of the risks of financial liberalization without modern banking and legal systems, he compared them to "building a skyscraper with no foundation."

Although the Clinton Administration always talked about financial liberalization as the best thing for other countries, it is also clear that it pushed for free capital flows in part because this was what its supporters in the banking industry wanted.

"Our financial services industry wanted into these markets," said Laura D'Andrea Tyson, the former chairwoman of President Clinton's Council of Economic Advisers and later head of the National Economic Council.

Ms. Tyson says she disagreed to some extent with the push and was concerned about "a tendency to do this as a blanket approach, regardless of the size of a country or the development of a country." Free capital flows, she worried, could overwhelm small countries or those with weak banking and legal systems, leading to a "run on a country."

This is not to say that American officials are primarily to blame for the crisis. Responsibility can be assigned all around: not only to Washington policy makers, but also to the officials and bankers in emerging-market countries who created the mess; to Western bankers and investors who blindly handed them money; to Western officials who hailed free capital flows and neglected to make them safer; to Western scholars and journalists who wrote paeans to emerging markets and the "Asian Century" -- and to the people who planned an empty city named Muang Thong Thani . . .

. . . Free movement of capital is nothing new, for it was the norm during most of Western history. At the beginning of this century, anyone could move money across borders without difficulty.

The Great Depression changed all that. Governments moved to control capital so as to avoid what they saw as the chaos of capital rushing out of countries and setting off financial crises.

A result was that most countries of the world (including the United States in the 1960's) limited the right of companies and citizens to buy foreign securities or invest overseas. People were often allowed to buy only small amounts of foreign currency.

Then, as memories of the Depression faded, the tide shifted again in the 1970's and '80's. Starting in the United States and Europe, it became fashionable to let money move freely, and the Reagan Administration began to push for free capital flows in other countries.

"Our task is to knock down barriers to trade and foreign investment and the free movement of capital," Ronald Reagan declared in 1985. George Bush described his Latin America program, the Enterprise for Americas Initiative, as a commitment to "free markets and to the free flow of capital, central to achieving economic growth and lasting prosperity."

The Clinton Administration inherited that agenda and amplified it. Previous administrations had pushed for financial liberalization principally in Japan, but under President Clinton it became a worldwide effort directed at all kinds of countries, even smaller ones much less able to absorb it than Japan . . .

. . . The push for financial liberalization was directed at Asia in particular, largely because it was seen as a potential gold mine for American banks and brokerages. Neither Clinton nor Rubin had much experience in Asia -- Clinton as Governor had led trade delegations to promote Arkansas chickens and rice, and Rubin had done business in Japan for Goldman Sachs. But Clinton as President has worked hard to strengthen American ties with Asia, as well as his own.

The idea was to press Asia to ease its barriers to American goods and financial services, helping Fidelity sell mutual funds, Citibank sell checking accounts and American International Group sell insurance. Clinton's links to Asia caused embarrassment after they led to the campaign finance scandals of 1996, but fundamentally they reflected an appetite for business opportunities in Asian countries that had changed, as Clinton once put it, "from dominoes to dynamos."

His Cabinet approved a "big emerging markets" plan to identify 10 rising economic powers and push relentlessly to win business for American companies there. Under Brown, the Commerce Department even built what it called a war room, where computers tracked big contracts, and everyone from the C.I.A. to ambassadors to the President himself was called upon to help land deals.

The stakes could be huge. Japan had been the first target of pressure for financial liberalization, even under the ReaganAdministration, and these days it is finally engaged in what it calls a "big bang" opening of its capital markets. The upshot is that American institutions are swarming into Tokyo and finally have a chance to manage a portion of the $10 trillion in Japanese personal savings. And when a big Japanese brokerage, Yamaichi Securities, collapsed 15 months ago, Merrill Lynch took over many of the branches -- an acquisition that would have been unthinkable just a few years earlier. . .

. . . A flood of capital poured into emerging markets in the early and mid-1990's, including $93 billion in 1996 alone into just five countries: Indonesia, Malaysia, the Philippines, South Korea and Thailand. Then there was a net outflow of $12 billion from those five countries in 1997. This turnabout, which was most evident in short-term loans, amounted to a financial hurricane, one that would harm any country in the world.

So while economists welcome free capital flows in principle, extensive scholarly work had clearly established the importance of "sequencing" -- meaning that countries should liberalize capital flows only after building up bank supervision and a legal infrastructure. A French scholar, Charles Wyplosz, of the Graduate Institute of International Studies in Geneva, concludes in an academic paper that "financial market liberalization is the best predictor of currency crisis."

Summers himself had emphasized the need for caution in financial deregulation in 1993, when he was still chief economist at the World Bank. He noted in a paper then that poor countries usually have "only quite limited banksupervision," adding, "As is true for nuclear power plants, free entry is not sensible in banking. . ."

. . . In practice, liberalization frequently takes place without any improvement in bank supervision, and it is often accompanied by a rise in shady dealings. In 1996 Thailand's Justice Minister accused his fellow Cabinet members of taking $90 million in bribes in exchange for handing out banking licenses. And when the Bangkok Bank of Commerce, Thailand's ninth-largest bank, collapsed in 1996 it turned out that 47 percent of its assets were bad loans, many of them to associates of the bank's president.

Still, cronyism and corruption, while aggravating factors, were not necessary to touch off a crisis.

"The simple fact," said James Wolfensohn, president of the World Bank, "is that very sophisticated banks loaned to Indonesian companies, without any real knowledge of their financial condition, based on name, based on competition. So you have to say to yourself, would it have made any difference if they had known? Well, maybe, but they did go nuts. . ."

. . . So what were the causes of the crisis?

There are two main camps in the academic battleground. One, led by Jeffrey Sachs of Harvard University, argues that the crisis was essentially a panic, in which investors rushed for the exits because everybody else was rushing for the exits. The other, initially led by Krugman of M.I.T., argues that the hardest-hit countries had fundamental weaknesses that sealed their fates.

Still, there is general agreement that there were both structural problems and a panic, even if there is a critical dispute about their relative importance. The most common view is that several key factors worked together to set the stage.

The countries had severe internal vulnerabilities. These included weak banking and legal systems, overvalued currencies, and mountains of short-term loans in dollars and other foreign currencies. And investors delivered the coup de grbce, panicking and frantically pulling their money, so that currencies plummeted and capital dried up in these countries.

The banking system was frail because of several built-in flaws. . .

. . . The intellectual trend has changed in every way since the crisis began. Emerging markets are now seen as risks, not opportunities. And the ethos that drove the wave of investment in small countries -- the triumphalism of free markets for capital as well as for goods -- has abated. Now it is fashionable to talk about the dangers of unregulated free capital flows and the need for caution in opening them up. One result is that although the United States economy is so far unscathed, American credibility is not.

As Seichi Kondo, a senior Japanese Foreign Ministry official, puts it, "Washington wasn't the major source of the crisis,but it added considerably to the worsening of the situation. If they haven't learned lessons, if they still think it was Asian values that prolonged the crisis, then I have to blame Americans. But I think the United States has learned a lot from the crisis."

"Of course," he added pointedly, "the learning cost has been very expensive for Asian countries."

-- pshannon (pshannon@inch.com), February 16, 1999


Thanks once again pshannon.


-- flierdude (mkessler0101@sprynet.com), February 16, 1999.

Thanks from me too, ps. Ironically, if you check out the Herald-Sun (and maybe the News & Observer too), you'll find a similar philosophy has been behind Durham's current Hayti Heritage Foundation scandal, in which millions have been lost through lack of oversight. To a lesser extent, there is also the "misuse" of a city credit card by an employee to the tune of $55,000. Scuttlebutt is that these are not the only financial scandals around City Hall. Have we not seen this same disregard for fiscal management before--remember the savings and loan fiasco? I guess we never learn.

-- Old Git (anon@spamproblems.com), February 16, 1999.

Thanks for posting the article web page. (you can access the first part of the article from the NY times site on this page as well). Looking forward to seeing parts 3 & 4. !

-- ScaredyCat (KLT@DittosRush.com), February 16, 1999.

Thanks again pshannon. This is an interesting series.

-- Mike Lang (webflier@erols.com), February 16, 1999.

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