Yes, I know (of) Dennis and his occasional prophet in the wilderness pronouncements from the cosy environs of Mass Ave. Poverty has been good to DdeT. I wasn’t aware of the EXIM angle, however, so v much thanks for that. I was more focussed at the time on (perversely) grass roots and the banking workout.

Ok, Dennis did himself no favors arguing against increased governance and anti-corruption efforts in the World Bank after the Volcker panel report last October. He ran a line that better anti-corruption efforts from the World Bank are a bit like putting a burglar alarm in your own home, while recognizing theft of, around, and amongst, the neighbors. (This @ http://www.cgdev.org) . Sorry, does not compute. There’s a fiduciary duty from the top down to see that the money goes where it’s supposed to. This is irreducible. But there are mistakes and failures, so one has to question, why, how, with what impact and is it instance or pattern? At least people should be pushing the bank on that front.

Allied to that point, anyone care to assess why the WB put in Mark Baird fairly swiftly after the Stiglitz/EAP Regional/de Traay fight to straighten things out? .

Matt

Do not know if this post is closed. You must have met Dennis LeTray there, a Canadian who headed the WB in Indonesia at the start of the crisis. He was badly treated later, but I think he would have had similar problems with the IMF approch, especilly following on inexplicble EXIM largess re Indonesian IPPs (all very well connected).

I will read your book suggested and hopefully overcome the insinuation that despite travails in country I am not qualified to have a “serious discussion” about Indonesia and the IMF without having read it. I trust it deals with West Papua.

Lastly, I agree with you and Rien Huizer that there were other things going on - banking issues, expatriation of assets, misc crookedness, and so on, but I still consider that they didn’t provide the sharp end of domestic and social conflict risk. These, I’m advocating in my current job, are especially germane as we look across the developing world to consider security effects of macro positions, food and oil price issue and so on; and they look potentially significant.

M

Money print is simply unsustainable. To most of politicians, the option looks great as it makes all the people apprently happy, especially under these mired financial markets. However, printing out money creates nothing. It just manipulates number. Whether it takes a form of accepting broader range of collateral or intervening overnight interbank rates, it’s all about printing dollar in the bottom line.

As Ponzi-scheme fails in the end, all the number manipulations are doomed to collapse in the end. I’m really worried about Fed’s extremely short-sighted measures to face such destiny soon.

I do agree with you. The Fed has been crying wolf for years, using the depression example to justify easing monetary policy in response to financial market stress (I am thinking of the 1987 crash, LTCM, Y2K, dotcom bust, 9/11 etc). The trouble is that each bailout increases the moral hazard and breaking the cycle becomes even more difficult. For some evidence of how this policy seems to have affected US financial market behaviour, see my blog posting at:
http://reservedplace.blogspot.com/2008/06/greenspan-put.html

As Twofish knows from previous discussions, I reject his argument that letting the present bust take its course could be fatal - economies do not die, they just decline, like Argentina. While I do agree with him that even staid institutions are affected this time (viz Norweigian local authorities), I think that there is a certain amount of relief is provided by (a) bank capital (b) deposit insurance funds and (c) I would levy a windfall tax on many of the management that have done well out of the party (eg Grasso, O’Neal, Prince etc) to help pay for the cleanup.

As in the case of other (arguably related) US economic problems such as the trade, current account and government deficits, I think that the best approach is to spend resources facilitating and compensating for the adjustment, not forestalling it.

Remember the Indonesian case vividly (professionally). There was IMO a confluence of factors: (1)large volume of capital ready to flee in case of unrest in the wake of Suharto’s exit (dead or alive), based on gradual breakdown of the military-civilian-business regime (partilally due to selfish and immature behaviour os some 2nd generation Suhartos) (2) psychology among FX traders, speculators, especially in the region (3) FX option positions priced to unrealistic volatilities , all FX positions faclitated by weak system of exchange control (4) extremely poor quality of banking supervision with apparently massive irregularities in both state banks and private banks with no prospect of surviving that kind of a crisis (5) drought (an often underestimated factor reducing the absorption capacity of the informal economy.

All in all, Indonesia was due for a little clean up. Both within the state/army sector and in the the ethnic Chinese informal hierarchy. A few people enriched themselves enormously,the wealthy generally did not suffer much more than a temporary period of hardship (or leave in Spore/US). many poor did not get much poorer, Indonesia got a slightly more modern government, etc. Among all these factors, the most important factor was loss of credibility on the part of the government (i.e. Soeharto) in the presence of well organized contingency plans of cronies and a large part of the upper strata. IMF acted predictably.

I do not think that he US can learn much from the Indonesian case. It was completely different. If one wants to look for paralel cases, perhaps the UK in the late 1920s or, indeed, BW 1 .

As to remedies: it is nice to dram about a cathartic collapse of the financial system, followed by dramatic resurrection (there we have an Asian paralel that is useful: the banking systems in Asia did not get better, the states (except Korea, where the banking system continues to be stressed) extracted so much money from their private sectors that they would never ever have to ask foreigners for assistance. The leson rom the Asian crisis is, IMO, that thre is no such thing s a therapeutic crisis. So the chllenge is to muddle through and deal with possibly angry creditors (the Chinese perhaps in a few years) coperatively. That will take a pretty special kind of US administration. I wish the winner of this year’s election all the luck in the world. Especially domestically. Only one term..

matt — I remember asia well, tho i watched it from the point of view of junior staff economist at the treasury. I also remember indonesia well. I think the IMF made enormous mistakes. But I don’t think it all hinges on the IMF’s advice to cut cooking oil subsidies. A couple of other things also mattered:

– there were a host of insiders who benefited enormously from suharto’s rule. the first family. the plywood monopoly. etc. it was a political requirement for the uS and the IMF that suharto demonstrate that this system was changing, and the status quo was being bailed out.

this i would note is separate from the question of whether or not all of the imf’s specific advice was right — when a well connected bank was allowed to fail w/o creating a system of deposit insurance, there was a rather damaging bank run that caused a lot of trouble. and some of the recommendations seemed to me to go too far — i.e. cooking oil.

– there was an assumption in the imf and at the US that reform would be rewarded with capital inflows. in retrospect that was naive. a lot of banks had lent money to well connected business men and reform meant they were less good credits.

– the $ exposure of the corporate sector was an important factor. firms with $ debts had to hedge as the rupiah fell, and that fueled a very destructive cycle.

the lesson that many took from this was don’t ever put yourself in a position where you have to turn to the imf, especially if you are an insider in a regime that rewards insiders. that tho cannot explain all of asia’s current reserve accumulation. I can see why china wants limited short-term external debt and reserves of 10 to 20% of GDP (that implies, at 20%, may be $800b … ). but that doesn’t explain why china is adding $800b to its current $2 trillion stock (counting the banks fx and the CIC) this year …

read bailouts and bail-ins, my book with dr. roubini on emerging market crises. there is a lengthy discussion of indonesia. you may disagree with our conclusions, but it would provide a decent basis for a serious discussion of the imf’s response.

Don was correct when he responded: “Well, for one thing, aggregate U.S. demand for U.S. production would gain tremendously, as both demand for U.S. exports and import-competing production would grow.”

But there are three other macroeconomic effects: (1) U.S. interest rates would increase, (2) fixed investment opportunities in U.S. production would increase, and (3) the dollar would fall in currency markets causing the cost of imports to increase. Let me discuss each in turn:

1. Interest Rates Up. The increase in interest rates would cause an inflow of private foreign money and an increase in domestic US savings, but it would also cause several US financial institutions to go bankrupt.

2. The increase in investment opportunities would cause US corporations to stop buying back their shares and instead they would invest their profits in US production. It would also cause foreign companies to build many new factories in the United States. These fixed investments would cause unemployment in the United States to fall to miniscule levels causing US wage rates to rise.

3. The dollar would fall much further in world currency markets. This would cause the prices of things we import to rise. Americans would have more income that they could spend, but it would also cost them more whenever they were buying imported products, such as gasoline.

All of these adjustments would be much less severe if they were to occur gradually. It would be much better for both the U.S. and for the world economies if foreign governments were to gradually reduce their reserve accumulations over five years instead of stopping cold turkey.

Howard Richman
co-author Trading Away Our Future
http://www.trade-wars.blogspot.com