Bush may be forced to wade into financial crises abroad

During the presidential campaign, President Bush and his economic advisers criticized the Clinton administration for its intervention in foreign financial crises, such as those in Asia, Russia, and Brazil.

Now in office, Mr. Bush may adopt his predecessor's tactics.

"My guess is that a hands-off policy will not be sustained," says Richard Cooper, an international economist at Harvard University, in Cambridge, Mass.

A catalyst for change could be the collapse of the Turkish lira last month. So far this crisis hasn't seriously spread to other "emerging" nations. It shows few signs of becoming a global financial crisis, like those of the late 1990s.

And it's certainly no threat to the American economy, even though Procter & Gamble lost some revenue in its operations in Turkey.

"There isn't that much they [Bush officials] have to do," notes Jeffrey Frankel, another Harvard economist, and former adviser to President Clinton.

The International Monetary Fund is already on the job in Turkey. It has assisted a year-old program of disinflation and economic reform. It announced Dec. 6 a $7.5 billion emergency loan. But the program was fragile in the wake of 30 years of steep inflation, erratic growth, and corruption in Turkey.

Amid a public dispute between Prime Minister Bulent Ecevit and President Ahmet Necdet Sezer, the nation's somewhat loose tie of its lira to the euro collapsed Feb. 22. Turks and foreigners rushed their money out of the country.

By now, the lira has been devalued 25 to 30 percent.

Only a few days before the crash, in an interview with the London Financial Times, United States Treasury Secretary Paul O'Neill held that the failure in recent years to stop crises from developing was a failure to let markets operate freely. "Why do we have to intervene? Especially, why do we have to intervene on a crisis basis? [Crises] are great media fodder but they're not real hot for anybody else."

But Mr. O'Neill, his seat barely warm at the Treasury, did not rule out US involvement, either in coordinated intervention by the US and other nations in currency markets or by leadership in IMF rescue operations.

And right after the lira collapse, O'Neill issued a brief statement noting that Turkey is "an important [NATO] ally and good friend" and that the US continues to back the IMF program for reform in Turkey.

That program is financial intervention.

A believer in the perfectibility of capitalism, like O'Neill, figures the free market can mostly prevent and solve crises by itself. Nonetheless, he is regarded as an economic pragmatist.

There is some speculation, however, that the White House rather than the Treasury will have the dominant role in American international economic policy. Under President Clinton, the Treasury took the leadership in the series of financial crises.

President Bush's top economic adviser in the White House, Lawrence Lindsey, is considered more rigid in his adherence to free-market control of the economy.

"If [Turkey] needs more money, will the Bush administration join in?" asks Morris Goldstein, an economist at the Institute for International Economics, a Washington think tank. "This is going to be challenging for them."

Professor Frankel recalls how views changed after the Reagan administration's free-market enthusiasts took office.

When a financial crisis broke in Mexico in July 1982, then Federal Reserve Chairman Paul Volcker and the IMF quickly put together a rescue package. It's no wonder. Banks in the US and other industrial countries had loaned hundreds of billions of "petrodollars" - money from the newly enriched OPEC nations - to developing countries.

These banks were in danger. The Reagan people could have held that the banks took the financial risk and should suffer the consequence. That's the argument O'Neill makes in talking of the "moral hazard" involved in rescue packages for developing countries. By saving banks and other financial institutions from their mistakes, they may be encouraged to take even greater future risks.

Nice theory. But will the Bush people really endanger American prosperity in another financial crisis to prove how right they are?

Frankel doubts it.

But if they do, that decision will have consequences. Developing countries, to get out of a crisis, will put up trade barriers, block the departure of foreign capital, and unilaterally default on their foreign debts. "We may move toward a worse world," says Peter Kenen, an economist at Princeton University in New Jersey.

Yet Mr. Kenen agrees on the need for a system to assure private capital shares in the losses involved in a poor-country crisis. Just how, though, he's not sure.

(c) Copyright 2001. The Christian Science Publishing Society

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