Fixing Global Finance
There's progress on turning around Asian economies. US and European officials aim for growth. Now what?
In the movie "Groundhog Day," the antihero played by Bill Murray had to repeat a nightmarish day over and over again until he at last began to learn that day's (life's) lessons.
Substitute world financial leaders for Murray and the boom-bust economic cycle for groundhog day and you have the essence of today's global economic and market crises. They're part of a long-running learning experience.
Note that the previous paragraph says "economic and market crises." People tend to mix the two. Although related, they're not identical. Look at 1997-98.
How crises interact
First, in mid-1997, a financial crisis caused by reckless lending for questionable projects, turned into an economic crisis in once-booming Asian nations. Currencies plunged. Dollar debts couldn't be repaid. Exports piled up. People lost jobs.
This economic crisis spawned a market crisis as investors ran away from emerging markets - good and bad - to safer, less risky havens in the US and Europe. Russia closed its barn door after the fast money had fled, defaulting on the slower money of bank loans. That put pressure on all investments perceived as risky.
Such negative "irrational exuberance" was as indiscriminate as the euphoric irrational exuberance Alan Greenspan had criticized for causing an overvalued US stock market. Investors fled even sound US corporate bonds and stocks in their rush to the safety of US treasuries.
Impact on everyday life
Now this market overreaction threatens to play back into the real economy, as companies don't invest in new equipment, and don't hire new workers (or lay off existing ones). Sobered investors and worried workers join the gloom and cut spending.
At least that's the scenario argued by chronic decline-mongers.
It doesn't have to be so.
Last week we urged finance ministers and central bankers gathered for the annual meetings of the International Monetary Fund (IMF) and World Bank to concentrate on rescue efforts for Brazil, and growth plans for Japan, Europe, and the US. Only after such urgent rescue work should they move to design grand new global economic machinery. That machinery would focus on a lender of last resort for the central banks of nations that reform their economic systems, creating sound, open, audited banking and market systems.
Putting aside such grand plans for now, how are major nations doing on their immediate problems?
Japan's government has at last moved to provide funds for a cleanup of its long-slumping banks. It's a king-sized version of the cleanup of US savings and loan banks a decade ago. This move strengthened the yen, relieving pressure on other Asian currencies, crucially China's. That in turn sparked a rally on Asian stock markets. Some lands - Thailand, Taiwan, and Singapore - may be reaching a turning point.
In the US, the Fed's Mr. Greenspan indicated further interest rate cuts in coming months. That should bolster confidence, consumer spending, and business lending. A lower dollar will help some US exporters - if Latin American markets remain strong. That requires that Brazil gets adequate backing for its currency and cuts government spending (and bureaucracy) as promised.
European growth moves
Meanwhile, European central banks are also ready to pitch in to stimulate growth and create jobs. Spain made a decisive interest cut to fit into the launch of the new euro currency in 11 weeks. Britain followed. Ireland may be next. Even Germany's stern inflation hawks show a readiness to cut rates when the euro arrives. And lower US interest rates will be a goad, as Europe's exporters press to stay on par with American exporters.
None of this is a magic wand. Japan, for instance, must face the fact that a stronger yen makes it harder to restore its economy on the back of hefty export earnings. And a weaker dollar may cause outside investors to think twice about going back into the US. But all these stimulus moves help restore confidence. And they help to turn negative growth (recessions in many nations and depressions in a few) back toward real growth in some and a halt to sinking in others.
On the larger canvas of history, the world may be learning a groundhog day lesson: When economic conditions are as rosy as they have been in the mid-1990s, don't throw money at projects indiscriminately. That got the world into trouble in the '70s when petro-dollars were thrown at the developing world. That got the US and Japan into trouble in the '80s when rich earnings were foolishly ploughed into overbuilding and bad bank loans.
Next time the temptation comes, remember groundhog day.