People in high places know there's a long way to fall

Asia-Pacific,

By Peter Hartcher

An American delegate at the protest-racked World Economic Forum in Melbourne the other day was frightened by the demonstrators outside the Crown Casino, but she was utterly terrified by the conference inside.

"The quality of the discussion here is not very good and it's certainly not very original, but the really scary thing is that this is as good as it gets," she said. "When you look around the world you realise that there is nothing higher - this is the top."

That's precisely the reason that the highest functions of government are conducted in total secrecy; that central banks cultivate an air of mystique; that the architecture of important official buildings is designed to inspire awe. The people who run our systems don't want us to comprehend just how human, how fallible, they really are. Especially at moments like this when glaring problems are starkly revealed at the highest level of the international financial and economic system.

In the last decade we have witnessed an extraordinary procession of wrenching international financial crises. It got so bad that the people who run the system, top officials of the world's two biggest economies, thought that it was actually finished.

They didn't just suspect that one or two countries or regions would hit the wall - that happened anyway - but that the entire structure of global finance was in the process of breaking down. Of course, they didn't tell us so at the time.

Last year, Japan's then top financial official, Dr Eisuke Sakakibara, known as Mr Yen, recalled one of many frantic phone conversations with his counterpart at the US Treasury, Larry Summers, during the crisis of 1998.

"I remember Larry Summers saying to me, 'The world is collapsing'." And it didn't seem at all implausible. Sakakibara had the same thought. "I think we were on the verge of collapse."

The decade began badly and ended disastrously. It started with the collapse of the European Exchange Rate Mechanism in 1992. Mexico's relapse into acute crisis followed in 1994-95.

Next, the world's fastest-growing region abruptly descended into crisis and recession in a 1997-98 episode known as the Asian crisis. This dragged Russia and Brazil to the edge of the precipice too. It put New Zealand into recession and, with one false move from the Reserve Bank, it would have put Australia into the same ward.

In its final convulsion, the crisis attacked a New York hedge fund and briefly shut down the peripheral parts of the US capital markets. The world's central banks responded by pumping a vast and urgent torrent of liquidity into the system and, for the countries not already in recession, the crisis passed.

It was a near-death experience. It galvanised international officialdom into a flurry of activity to fix the system. But after a few moments of calm, a wave of complacency returned.

Hong Kong's Finance Secretary, Donald Tsang, recalls the emergency meeting of 23 countries in Washington, DC, in 1998 chaired by US President Bill Clinton. It was designed to fix the system.

"Everyone was beating his own chest, but not much has taken place" to reform the system, Tsang says.

Is this dangerous? An few expert opinions:

"I'm afraid the world is fairly vulnerable to a crisis of the kind that happened in Europe, in Mexico, in East Asia," Tsang says.

The biggest omission was the failure to develop a global system to monitor flows of hot capital.

The prominent American economist Paul Krugman, of the Massachusetts Institute of Technology: "If you have a sense of history, you can see that the tequila crises in Mexico were just a rehearsal for the Asia crisis. Now we have to ask ourselves, what was the Asia crisis a rehearsal for?"

Mr Yen, now a professor and adviser to Citibank: "Wall Street forgets that the basic structure is the same. The US authorities have manoeuvred the situation very skilfully, but the basic structure of global capitalism is unchanged.

"The basic problem of this globalised and virtualised economy ... is huge amounts of money, highly leveraged, moving across borders very quickly."

The world's chief crisis manager, managing director of the International Monetary Fund, Michel Camdessus, on his last day after 13 years in the job: "I am ringing the alarm bell to our member countries to tell them that we run the risk of a new financial crisis." The world economy had entered "a dangerous period of twilight".

You no longer need anything to go wrong with an economy to have a crisis - all you need is a stampede of capital. Until there were systemic changes, said Camdessus, the world would remain in this dangerous twilight.

Tsang says although there was international support for a renovation of the system, two countries vetoed any meaningful change: he blames the US and UK, hosts to the world's two main capital markets.

Now, it is clear that there is a misalignment of major exchange rates. There is a good case for the Group of Seven richest countries to decide in Prague to intervene jointly to revalue the euro against the US dollar and yen.

Larry Summers, now the head of the US Treasury, has vetoed the idea as not in the interests of the US. Krugman thinks this unwise. What about the day when the US needs Europe's help, asks Krugman?

Impossible? Mr Yen thinks not: "The US right now is the centre of global capitalism, and if the centre collapses, the world system could collapse. And the situation in the US is not sustainable."

http://afr.com.au/world/20000923/A13053-2000Sep22.html

-- Carl Jenkins (Somewherepress@aol.com), September 22, 2000