In August 1998, Bill Clinton suffered probably the lowest point of his political career. He acknowledged that his bodily fluids did indeed adorn Monicas blue dress. The financial markets, inextricably tied to the economy and opinion polls, were diving. And horror of horrors, his presidency was being likened to that of Nixons.

However, a month later Bill responded with optimism and confidence that he would recover. Today, lo and behold, that has happened. Why?

In a series of articles from the New York Times and Time magazine, coupled with some tie-ins from extraneous articles found on the Web, I believe his comeback can be traced to a 180 degree turn in economic thought in September 1998. He founded this about-face upon thinking like he found in George Soros book entitled, The Crisis of Global Capitalism. The success of this strategy as applied in his fight against depleting world markets and impeachment, miraculous to say the least, will most likely dictate our presidents actions for the remainder of his term in office and greatly influence his policy. In fact, I further believe it will dominate his vision of our nations function and responsibility in the world.

To begin, lets wind back to July 2, 1997, the date that Thailand floated its currency and now regarded as the beginning of the global financial crisis. On that day, typical thinking was that little was in danger. Two beliefs were common at that time: first, that Thailand probably faced a typical temporary downturn, and second, that the problem was largely confined to Thailand. However Rerngchai Marakanond, the head of the central bank of Thailand, warned Alan Greenspan otherwise in a letter sent earlier in May asserting that U.S. hedge funds and banks were investing billions of dollars in a bid to destabilize Thailand. This "could have far-reaching implications on the economy both of Thailand and the Asian region" and "threatens to jeopardize the stability of international financial markets."

The Fed's response came not from Greenspan but from an aide, Edwin Truman. He blandly acknowledged that "large financial firms" can disrupt markets of countries like Thailand but added that these matters were best left to the markets.2

This response stems from a belief called laissez-faire capitalism. The doctrine of laissez-faire capitalism holds that the common good is best served by the uninhibited pursuit of self-interest. Greenspan took root in this faith early on through the objectivist philosophy of the novelist and social critic Ayn Rand, which Greenspan has studied intently. During long nights at Rand's apartment and through her articles and letters, Greenspan found in objectivism a sense that markets are an expression of the deepest truths about human nature and that, as a result, they will ultimately be correct.

The Clinton administration initially saw the Thailand crisis as a replay of what happened in Mexico in 1995. In late summer of 1997, Treasury Secretary Robert Rubin and his deputy, Lawrence Summers, signed on to a standard IMF plan: spending cuts, high interest rates, and a repair job on the Thai banking system.1 The idea was that higher rates would attract capital back to Thailand. The administration also declined to take part in funding the IMF bailout.

In late October 1997, the Hong Long markets plunged 23% over 4 days. This got the attention of everyone in Wall Street, leading to the 554-point loss on October 27, 1997. Latin-American countries also suffered their worst one-day loss ever. This led to a flight to quality, the perception being that emerging markets were no longer attractive, and soon Indonesia needed a $17 billion bailout, and stressed Malaysia, Taiwan, Brazil, and Russia, evolving to South Koreas bailout of $57 billion bailout.

Everyone scrambled to figure out why this Asian contagion was spreading. Some, however, predicted the crisis.

One was Paul Krugman, an MIT economist. He tipped the strategists at Citicorp who adjusted their portfolio accordingly prior to the currency devaluation. Krugman argued that typical currency-crisis models no longer work nor indicate trouble and postulated that the Asian economies allowed over-investment through the work of financial intermediaries who were unregulated, and therefore unseen. As more money poured in, it became not the goods of the country but the value of assets that became inflated. The overpricing of assets drove risky lending which further drove up the prices of assets, a sort of circular escalation that implied more soundness than was real.

And then the bubble burst. The mechanism of crisis, I suggest, involved that same circular process in reverse: falling asset prices made the insolvency of intermediaries visible, forcing them to cease operations, leading to further asset deflation.

Though Krugmans prognostications were discounted by most at the time he made them known, the truth of his predictions earn notice to his broader thesis, wherein he hints at a moral hazard through the investments of the intermediaries.

Asian financial intermediaries were able to raise money at safe interest rates but lend that money at premium rates to finance speculative investments, [giving them] an incentive to undertake excessively risky investments. 5

Essentially they had high risk, but low accountability. And this concept begins to dovetail with the deeper, bigger picture thoughts of George Soros, outlined in two writings, The Capitalist Threat and "The Crisis of Global Capitalism.

George Soros holds the very cemented belief he learned in the late 1940s that people who believe they have a monopoly on truth threaten open societies. Soros denies that humans can have ultimate and perfect truth. In his arguments presented in these papers, he applies this belief toward modern economic theory.

The main scientific underpinning of the laissez-faire ideology is the theory that free and competitive markets bring supply and demand into equilibrium and thereby ensure the best allocation of resources. This is widely accepted as an eternal verity. Economic theory is an axiomatic system: as long as the basic assumptions hold, the conclusions follow. But when we examine the assumptions closely, we find that they do not apply to the real world.

As originally formulated, the theory of perfect competition -- of the natural equilibrium of supply and demand -- assumed perfect knowledge, homogeneous and easily divisible products, and a large enough number of market participants that no single participant could influence the market price.

The assumption of perfect knowledge proved unsustainable, so it was replaced by an ingenious device. Supply and demand were taken as independently given. This condition was presented as a methodological requirement rather than an assumption. It was argued that economic theory studies the relationship between supply and demand; therefore it must take both of them as given. 3

In short, there is no absolute truth in the Law of Supply and Demand. But Soros gives solid weight to his argument by stating that the buyers and sellers in the financial markets look to future potential, thereby shaping a valuation based not on supply and demand, but upon their own decisions. He takes this concept further by stating that current valuations impact decisions, defining a circular process of pin-pointing asset values, mimicking Krugmans conclusions.

Soros also asserts that instability affects the valuation people give to assets as well, which again flies in the face of Supply and Demand, and again echoes Krugman. In essence he states that instabilities lead to fluctuations in the values which leads to greater imprecision in predicting market performance which leads to instability and so on in a circular fashion. This implies a distinct danger:

Advertising, marketing, even packaging, aim at shaping peoples preferences rather than, as laissez-faire theory holds, merely responding to them. Unsure of what they stand for, people increasingly rely on money as the criterion of value. What is more expensive is considered better. The cult of success has replaced a belief in principles. 3

In short, Soros fought the very beliefs ensconced by the Fed and Alan Greenspan  the markets would not be correct alone without intervention. Soros proposes remedial action in The Crisis of Global Capitalism and argued that the worlds institutions, with national central banking in an international financial system, were long overdue for globalized restructuring.

I alluded that these thoughts greatly influenced Bill Clinton and further produced a completely new turn in White House policy. Aides recall the time when, nursing an aching back, Clinton spent an afternoon stretched out on a White House couch with one eye on the TV and the other on George Soros' complex new book on the risks of capitalism. He finished it in a day and quickly passed the underlined, dog-eared copy to his aides as required reading.4

Suddenly the standard Washington message changed in determining how to deal with the crises. Where it had been raise interest rates, cut government spending, put up with a recession if necessary, allow banks to fail, be stoical, when it appeared the crisis might hit the United States, the administration has a change of heart. Clinton went into overdrive in September of 1998, welcoming three interest rate cuts by the Federal Reserve, pressing Europe and others to cut rates as well, and finally getting money out of Congress for the International Monetary Fund. The Federal Reserve even coordinated the rescue of Long-Term Capital Management, a hedge fund backed by wealthy investors. The rate cuts were precisely the opposite of the prescription that the United States had handed out to everyone else.

The administration went from being laissez-faire to being very activist, ` la Soros.

Though the cry for new economic institutions had been occurring for some time in different parts of the world, Clinton made no move toward this effort until he spoke of it at the IMF/World Bank Annual Meeting on October 6, 1998.

What has caused the current crisis? First, too many nations lack the financial, legal, and regulatory systems necessary to maintain investor confidence in adversity. Second, new technologies and greater global integration have led to vastly increased, often highly leveraged flows of capital, without accompanying mechanisms to limit the boom-bust cycle -- mechanisms like those with are integral to the success of advanced economies.

We can minimize the consequences of the current financial contagion. But the flash of this crisis throws new light on the need to do more -- to renew the institutions of international finance so they reflect modern economic reality. The institutions built at Bretton Woods must be updated for 24-hour global markets if they are to continue to achieve the goals established by the Bretton Woods generation.

Once again ` la Soros, he wants to remake the institutions; laissez-faire wasnt working.

From the beginning of his election to office, Clinton talked up the economy and his popularity is widely believed to lie in the growth of the last eight years. While the countries of the world may suffer recession, allowing the U.S. to fall into recession would affect too much for Clinton.

I mentioned at the outset of this paper that Bill Clinton, as his policies have turned in the direction of Soros, would probably apply the same aversion to a laissez-faire approach in other matters as well. The big foreseeable crisis of his remaining term in office is Y2K, which has many parallels to the recent economic crises that have unfolded.

Foreign countries are known to be far less prepared for Y2K than the United States. Clinton has learned that a laissez-faire approach internationally wont work economically, and he certainly has to know that failure of infrastructure overseas would spell trouble for markets here at home.

What would Soros do? Interestingly, he applies the same critique of current economic thought to geopolitical processes. He says:

At the time of the Soviet collapse there was an opportunity to make the UN function as it was originally designed to. Mikhail Gorbachev visited the United Nations in 1988 and outlined his vision of the two superpowers cooperating to bring peace and security to the world. Since then the opportunity has faded. The UN has been thoroughly discredited as a peacekeeping institution. Bosnia is doing to the UN what Abyssinia did to the League of Nations in 1936.

Our global open society lacks the institutions and mechanisms necessary for its preservation, but there is no political will to bring them into existence. I blame the prevailing attitude, which holds that the unhampered pursuit of self-interest will bring about an eventual international equilibrium. I believe this confidence is misplaced. I believe that the concept of the open society, which needs institutions to protect it, may provide a better guide to action. As things stand, it does not take very much imagination to realize that the global open society that prevails at present is likely to prove a temporary phenomenon. 3

Soros implies a political umbrella for all governments. Conceiving such a thing, even temporarily, in the face of potential global crisis is not out of reach for a president who wanted to centralize all medical care in the United States. The opportunity to remake the UN, an arguably failed institution, simply lacked political will, according to Soros. Bill Clinton has never been accused of lacking political will. If his policy and thinking were truly affected by Soros in the realm of international economy, who could doubt his animus to produce a policy toward steering the world through Y2K?

1. World's Markets, None of Them an Island, by Nicholas D. Kristof with Sheryl WuDunn, New York Times, February 17, 1999 2. Who Sank, or Swam, in Choppy Currents of a World Cash Ocean, by Nicholas D. Kristof with Edward Wyatt, New York Times, February 15, 1999 3. The Capitalist Threat, George Soros, Atlantic Monthly, February 1997 4. The Three Marketeers, by Joshua Cooper Ramo, Time Magazine, February 15, 1999 5. "What Happened to Asia," by Paul Krugman, January 16, 1998 6. The Crisis of Global Capitalism, by George Soros, The Wall Street Journal, September 15, 1998 7. Remarks by The President to Opening Ceremony of the 1998 International Monetary Fund/World Bank Annual Meeting, October 6, 1998

-- Sniff Jones (jones@research.com), February 18, 1999

Answers

Like I said once before: He aint steppin' down in 2000

Emperor Clinton. I'm sure he likes the sound of that. The saviour of the world.

To all our peril.

-- INVAR (gundark@aol.com), February 18, 1999.

Valuable, provocative post. Thanks.

-- BigDog (BigDog@duffer.com), February 18, 1999.

Sniff: This is the most interesting post I have read in a while. Thanks. Since George tries to apply the same "critique of current economic thought to geopolitical processes", and based on your reasoning and assumptions, so does Clinton (by extension), perhaps they can conceive of this worldwide "political umbrella for all governments". But conception and bringing it to fruition are two different things entirely, right? So while I can understand the will to "produce a policy toward steering the world through Y2K", I just do not see it actually happening. Certainly not before or during Y2K, perhaps afterwards, but there are a lot of 'ifs'. What do you think?

-- Rob Michaels (sonofdust@net.com), February 18, 1999.

You're right, Invar, he ain't steppin' down in 2000. Jan. 20, 2001.

Sniff, I recently bought Soros' book, but unfortunately, haven't had time to start it yet. I am familiar with his idea of "Open Societies." The NYTimes series has also been very instructive. This is a very interesting connection you're making here. However, as Rob suggests, if there is massive "communication breakdown" due to Y2K, I have trouble seeing how "open society" can be fostered in a climate of disrupted flow of information. I tend to think that the old "closing up" mindset will be pervasive as smaller geographical entities attempt to protect their interests, local strongmen seize power, and "data islands" emerge in previously unknown configurations. IF (the big IF?) money and markets, as they are currently understood, were to change radically, power could shift (or be consolidated?) so as to make "openness" an impossibility.

-- pshannon (pshannon@inch.com), February 18, 1999.

Superbly done!

One may not always agree with what Soros says or does, but it's difficult to discount the results of his thoughts and actions.

The complexity of the concepts presented are further proof of the difficulty of the subtleties of concepts like y2k being understood by but a very few.

Thanks,

Perry Arnett

-- Perry Arnett (pjarnett@pdqnet.net), February 18, 1999.

Many economists are calling this era of world recession/depression/and deflation the greatest economic crisis in 60 years. Any policy implemented by the Federal Reserve and other central banks have unintended negative repercussions. For instance, the F.R. and other central banks eased the global crisis in the fall of 1998 with those three interest rate cuts. These cuts had adverse side effects like keeping marginal producers alive. They also extended the stock market bubble, which grew the US economy to the point of rising interest rates that we are having now. So lowering rates actually caused rates to go up shortly after. Did you notice this?

The US is supporting the world economy, but is going deeper into debt. For the first time since 1929 this country has a negative savings rate as a result. So, the Fed is stuck on hold while the global economy continues to deflate. This condition of "excess global capacity" will continue to deflate until that capacity is reduced. This deflation will soon reach the US.

It's my opinion that Clinton put self preservation before world preservation, if he was instrumental in the policy direction that the Fed took in Fall of 98. Ask yourself,.. if you was in his shoes would you have put your own self preservation before the world? Would Jesus? Would Satin?

I want to beleive that he will resign his office to make ammends to the world. The house of cards is ready to collapse and 99% of America does not see it. Its a new era in economics they say. Just like they said before the 29 crash. I am amazed at the lack of independent thought in this country. Sheeple their called and I understand why.

May GODS Will Be Done

Mike

-- flierdude (mkessler0101@sprynet.com), February 18, 1999.

Thanks Sniff. What a pleasure to read a provacative piece. It is articles like this that kick my mind out of a rut and force me to see things differently. Love him or hate him, Soros is a player. Looks like Clinton is a quickstudy. That's ok..look where his thinking got him.

-- Mike Lang (webflier@erols.com), February 18, 1999.

The thesis that Clinton is following Soros' advice, I cannot dispute, as I do not have evidence pro or contrary.

My quibble is with Soros' interpretation of economics. I've heard Soros speak before congress, and I know his background. He grew rich with money from government money. His entire life has been spent safeguarding his ill-begotten wealth.

He is a total statist, and doesn't have any qualms about inflicting that view on the US.

Laissez-faire capitalism has failed, he says, and is supported by the current world's financial crisis. That's absurd. The meddling and intrusion by various governments makes even the statement that we have "mixed" economies silly at this point.

"Private" banks and other institutions with billions invested overseas are basically given free money from [our] government. They are not allowed to fail. If they do make unwise investments, a Senator or Congressman is quite willing to write legislation paying them back at taxpayers' expense. The banks are insured by the FDIC with pitifully low premiums.

The IMF has been propping up the various regimes around the world for years, preventing true capitalism from taking hold by causing artificial markets in goods and services that do not reflect the reality of the particular country.

I cannot go into all the falacies and self-serving plattitudes in Soros' works.

Any assessment that a person makes that modern economies even remotely resemble laissez-faire capitalism makes their subsequent arguments based on a very shaky foundation.

Jolly

-- Jollyprez (Jolly@prez.com), February 18, 1999.

Thank you Mr. Jones for this amazingly thoughtful and incredibly researched post.

Anyone else think that the collapse of the world economy is already understood as a given with the powers that be?

Mike ==================================================================

-- Michael Taylor (mtdesign3@aol.com), February 18, 1999.

This is a great post, very insightful and though provoking. One thought that occured to me is that in our 'free' society, there are an awful lot of laws; there are likely an awful lot of laws in the 'free' market, too. I believe it was Heinlein who wrote that the chief business of government should be deleting laws, not making them. Some days, I agree; some days I catch myself saying/thinking "There should be a law!"

-- Tricia the Canuck (jayles@telusplanet.net), February 19, 1999.

"Bottom line 1" the reason all this manipulation is possible is that there is not one honest government money system and banking system in the world. All governments control the money (fiat -- fake) through their established central banks (The Federal Reserve in the U.S.) and try to do so to their advantage. This makes great speculative opportunities for speculators large (like Soros) and small.

"Bottom line 2" if (when) TSHTF, all the electronic money (computer bits) is going to evaporate and all the funny money will be useful only as asswipe.

It has been said that only government can take a useful commodity like paper and make it worthless by imprinting it with its seals.

-- a (A@AisA.com), February 19, 1999.

Sniff, thanks very much for the work you've done and also for providing footnoted sources. Up until now my favorite explanatory quote for many problems has been "an undeveloped sense of consequence," but Soros' blame of "the prevailing attitude which holds that unhampered pursuit of self-interest will bring about an eventual international equilibrium," will run a very close second. At the risk of being boring, I must again urge you all to read the Atlantic Monthly article, "The Coming Anarchy," which blows this all-too prevalent belief out of the water. It's a bit of a lengthy article but stick with it--it's worth the read.

http://www.theatlantic.com/election/connection/foreign/anarcf.htm

I believe this confidence is misplaced. I believe that the concept of the open society, which needs institutions to protect it, may provide a better guide to action. As things stand, it does not take very much imagination to realize that the global open society that prevails at present is likely to prove a temporary phenomenon. 3

-- Old Git (anon@spamproblems.com), February 19, 1999.

A@AIS: The actual quote is: "If you don't trust gold, do you trust the logic of taking a beautiful pine tree, worth about $4,000 - $5,000, cutting it up, turning it into pulp and then paper, putting some ink on it and then calling it one billion dollars?" (Kenneth J. Gerbino)

-- Rob Michaels (sonofdust@net.com), February 19, 1999.

Sorry, that last para should have been deleted--very untidy.

-- Old Git (anon@spamproblems.com), February 19, 1999.