Did the IMF learn from the asian experience?

L’intervention de Marshall Auerbach lors de la conférence « The Financial Crisis, the US Economy, and International Security in the New Administration », New York, 14 novembre 2008.

par Marshall Auerbach

Let me first give you my background: I come from the dreaded world of finance, although I spent most of my time analyzing emerging markets. I have seen Wall Street work its magic on many of the countries in which I’ve lived, in East Asia in particular. I started in Hong Kong in 1982 and saw the Hang Seng index going from 600 to 1100, then back down to 695 again; and I saw the dollar going from 650 to 1250, then the Singapore-Malaysian market declining 50 percent in two years. I started in 1982, but I have a very different perspective from someone who might have started in the U.S. during that period, because that person, having arrived just at the beginning of an amazing bull market, would almost certainly have thought: “this de-regulation policy is absolutely fantastic”. Not surprisingly, most of the people with that background really believed the gospel of the market.

“Some people seem to think that once we take care of the banking system, everything else will take care of itself.”

I, by contrast, saw quite a lot of capital destruction and I would be very cautious about listening to the advice coming out of some of the leading Wall Street banks over the next few months. James Galbraith, at the beginning of his presentation, observed that the financial crisis is now metastasizing into an economic crisis; but there is an implicit argument from many of the people that are now proposing solutions, which is that once we take care of the banking system, everything else will take care of itself. And that is, I think, laying the groundwork for a counter-attack for some of the more dynamic fiscal measures which are likely to be proposed by the new administration. There is a sense, for example, that we can’t afford to let the government spend too much money. This is typical IMF thinking, which has become prevalent in the last 25 years.

I was in East Asia in 1997, and I remember that when the East Asian economies were confronted with a similar type of crisis, the advice given to them by the IMF was, « well, raise your interest rates and appreciate your currencies » - the exactly wrong advice that any sensible person would have given. I know that Professor Stiglitz was one of the courageous voices criticizing the IMF at the time - fortunately, those countries ultimately did ignore everything that the IMF told them. They let their currencies go and began to export. They made other mistakes subsequent to that, but the point is that the IMF has been giving bad advice for the last 25 years, defending the interests of the financial sector at the expense of the real economy.

Did the IMF learn from the experience? Of course, subsequent to the recoveries of those economies, it did say: « we’re not going to make the same mistakes again ». But I saw recently that in the discussions with Iceland, for instance, one of the provisions of the loan is to raise the interest rates from, I think, 12 percent to 18 percent. So I wonder how much has actually been learned by the IMF. This type of snake oil seems to be very prevalent, despite all the evidence that it hasn’t worked in the past.

I also spent time in Japan, and Japan was a wonderfully efficient, well-run economy for most of the 1980s. Things worked like clockwork. They had low inflation and high growth. Then the U.S. Treasury said in 1985-86: « you’re doing this all the wrong way. You must deregulate your financial markets because your allocation of capital is highly inefficient, and this doesn’t work for us at all, it’s very unfair ». And of course the Japanese, with great reluctance, did exactly what the Treasury told them, and this, I think, is what sowed the seeds for their own bubble economy: they essentially lost control of their own economy and credit system. 25 years later, they still feel the after-effects of that.

I think that’s a very salutary example of the challenges that we face ahead in this country. Just think about what happened in Japan. A few weeks ago, the Nikkei index touched a level that it hadn’t hit since 1982, a 25-year low. So it’s not going to be a quick solution to our problems. And Japan, I might add, was a creditor nation with a substantial pool of savings, which is not the case of the U.S.

The other argument you hear these days goes as follows: « well, we can’t spend too much because we risk having a dollar crisis. Foreign creditors are likely to withdraw their capital supporting us ». I accept that there is a risk, although if the Chinese or the Japanese would do such a thing right now, it would be the economic equivalent of playing the nuclear option. It is very possible that there will be some private sector creditor revulsion, but I think we just cannot afford going small; if we do, the problem is likely to get worse. And my experience from observing emerging markets tells me that hemorrhaging economies tend to provoke more capital flight than growing ones. So I sincerely hope that President-elect Obama will be bold and courageous in terms of introducing the fiscal stimulus in the U.S. economy. You probably need something in the range of $5-600 billion. So don’t go small, don’t be cautious; because I think the alternative is likely to be far worse.

I also hope that he will be similarly bold on regulation. The idea that regulation is always invariably bad is one of those persisting myths. There has been a tendency, I think, during the last 25 years, to denigrate the achievements of the New Deal, to suggest that it wasn’t really that effective, and that the only thing that really sorted out the U.S. economy’s problems was World War II. The historic record does not indicate that at all, but there is a great deal of self-serving historical revisionism to support a neo-liberal agenda, which I think has, for the most part, been highly destructive, not just for the U.S., but also for global economies. I’m hoping that the onset of the new administration will mark a change in that approach.

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