Service on Finance and Development (Oct08/07)
Double standards in the West's crisis policies
Even more interestingly, their recent policies contrast sharply with the advice that they and the International Monetary Fund that they control gave to Asian countries during their financial crisis a decade ago, revealing clear double standards.
In the past fortnight, Western leaders announced one remarkable policy after another, aimed at saving their financial institutions and system from ruin.
measures have to some extent stemmed the hemorrhage in the financial
sector in the
problems are also becoming acute in some developing countries.
governments are now extending a blanket guarantee of savings deposits
in commercial banks. It started with
Once one government gives the guarantee to avoid a possible run of the banks, other governments are hard pressed to do so, to avoid funds flowing out to the countries providing the guarantee. This is one sign of the fragile state of confidence in the banking system.
Though there is some respite in the finance sector, the global stock markets have not yet recovered their nerve, and sentiments are moreover weighed down by anxieties over the looming recession and fears for the health of industrial companies.
Last week saw a continuing see-saw between optimism and pessimism, with the swings taking in huge gains and equally large losses from day to day. Even the famed investor Warren Buffet admitted that he does not have the "faintest idea whether stocks will be higher or lower a month or a year from now."
past fortnight has seen some astonishing Western government actions.
at least the situation on the financial front is calming down in the
this improvement in finance has now been offset by worries about the
"real economy". The economic problems have now spread to the
sectors providing goods and services. In the
The past weeks have also remarkably revealed the practice of double standards by Western leaders and the IMF. The actions they now take are the opposite of what they prescribed for the Asian countries during their financial crisis a decade ago.
affected Asian countries (
Instead, this led to consumers and companies being unable to service their debts, thus raising the banks' non-performing loans. Recession soon followed, which in turn dampened investor confidence instead.
In contrast, the reduction of interest rates is seen in the West as a major tool (the other being fiscal stimulus) for countering recessionary trends. Each decision by the US Federal Reserve or the European central banks to cut the interest rates even by small fractions of a percentage point is greeted with near rapture by the stock markets.
Recently, Western central banks in concert lowered their interest rates by 0.5 to 1 per cent in a demonstration of seriousness in kick-starting their economies.
Asian countries were also ordered by the IMF not to come to the assistance
of their ailing local banks and companies, on the grounds that this
would waste public funds and cause "moral hazard." In
last week, the European leaders announced government measures backed
up by almost $3,000 billion (comprising capital injection, purchase
of banks' toxic assets and loans, guarantees for savers' deposits, and
guarantees for new unsecured bank loans). The
No significant financial institution will be allowed to fail, said the Western leaders. Loans by banks to the inter-bank money market will be guaranteed. The Fed was even willing to extend unsecured loans to companies directly, because the trade in companies' commercial paper has been frozen.
The Western leaders have explained that what is paramount is to save their financial system from meltdown and their economies from collapse. Thus, there is almost no limit to the amount of funds that the governments will provide.
The Asian countries also wanted to save their economic system from collapse, but they were told not to extend funds to save their companies, and they also had to implement the very policies that converted a financial crisis into an economic recession.
The then IMF chief Michel Camdesus told Asian leaders not to give in to the temptation of going back from financial liberalization policies. Instead, the countries should press on with even more liberalization, he told an ASEAN finance ministers' meeting at the height of the crisis.
recently, the present IMF head Dominique Strauss-Kahn warned of a global
financial meltdown and urged the
And European leaders led by Gordon Brown of the United Kingdom, Nicolas Sarkozy of France and Angela Merkel of Germany are advocating stronger financial regulation, after they moved to nationalise many of their banks -- both of which represent big retreats from the liberalization that Camdesus pressed Asian leaders to continue with.
years ago, leaders of ASEAN countries, led by
They asked the IMF to study the role of hedge funds and speculation in sparking the Asian crisis. Camdesus personally reported to the ASEAN leaders that speculation and hedge funds played no role in the crisis. The problem was the lack of good governance in the ASEAN countries, and speculation was a healthy activity, he concluded.
the captains of the big banks which have suffered sudden sharp drops
in the value of their shares, have blamed speculators and their short
selling activities. The
bank loans in
the mid-1990s crisis,
The then Malaysian premier Dr. Mahathir Mohamed went to the IMF annual meeting in 1997 and attacked financial speculators and the unregulated financial system for destroying the real economy, he was dismissed by the Western leaders and Masters of the Finance Universe (such as George Soros) as being totally ignorant about how modern international finance works.
Mahathir's call for the banning of speculation in currency trade and for the re-regulation of finance went unheeded.
In retrospect, if the Western leaders and the IMF had taken him more seriously and learnt the proper lessons from the Asian crisis, the Western countries might not have had to go through this present massive crisis, nor would the world be now dragged into a deep and long recession. +