Global Trends by Martin Khor

Monday 20 October 2008

Double standards in the West’s actions

The global crisis has entered the phase of recession in the real economy.  Recent actions of Western countries contrast sharply with the advice they gave Asian countries a decade ago, revealing clear double standards.

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In the past fortnight the leaders of the United States and Europe have announced one remarkable policy after another to save their financial institutions and system from ruin.

The measures have to some extent stemmed the haremorrhage in the system, giving some breathing space to the banks and other institutions in many countries.  In Iceland, however, the problems were so serious that no measure could save the financial system from imploding. 

And many East European countries like Ukraine and Hungary are turning to the International Monetary Fund for rescue funds.  In Asia, Pakistan is in serious trouble and even South Korea is seen as a candidate for the next crisis. 

More governments are now extending a blanket guarantee of savings deposits in commercial banks.  It started with Ireland, then Germany and other European governments followed.  Late last week, Malaysia and Singapore did the same, after Hong Kong took a lead in Asia.

Once one government gives the guarantee to avoid a possible run of the banks, other governments feel they also have to do so to prevent funds flowing out to the countries providing the guarantee.  Such is the fragile state of confidence in the banking system that jittery savers are searching for safety for their funds.  

Though there is some respite in the finance sector, the global stock markets have not yet recovered their nerve.  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 he does not have the “faintest idea whether stocks will be higher or lower a month or a year from now.”

Last week saw astonishing Western government actions.  The United States injected equity capital into its nine biggest banks in the start of a US$250 billion equity scheme.  Even Switzerland, the haven of safe banking, had to launch a US$60 billion rescue action for its biggest bank UBS (a transfer of US$55 billion of its toxic assets and $5 billion as capital injection).

But at least the situation on the financial front is calming down, since markets know the governments now have the will to bail out the banks. But this has been offset by worries about the “real economy”.

The problems starting in finance have now spread to the sectors providing goods and services. Unemployment is up, industrial production down.  And last week a consumer sentiment index in the US fell from 70 in September to 58 in October, spelling big trouble ahead as consumer spending is the main engine pulling the growth of the US economy and the world economy. 

The past weeks have also remarkably revealed double standards in the actions of Western leaders and the IMF, on the actions they now take which is the opposite of what they prescribed for the Asian countries during their crisis a decade ago.

The affected Asian countries were instructed to raise their interest rates sharply. This led to consumer and companies being unable to service their debts, and to recession.

In contrast, the U.S. has been cutting its interest rates and recently Western central banks in concert lowered their interest rates by 0.5 to 1 per cent in an attempt to kick-start their economies.

Asian countries were ordered by the IMF not to extend aid to their ailing local banks and companies, as this would waste public funds and cause “moral hazard.”  In Indonesia, many local banks (including sound ones) collapsed because the Central Bank was told not to rescue its troubled banks.

But last week the European leaders announced government measures worth almost US$3,000 billion (comprising capital injection, purchase of banks’ toxic assets and loans, deposit guarantees, and guarantees for new unsecured bank loans) to save their financial institutions.  The US is prepared to spend over US$1 trillion. 

No significant bank will be allowed to fail, said the Western leaders.  What is paramount is to save the economy from meltdown.  But when Asian countries wanted to take similar measures, they were told these actions would worsen their crisis.

The then IMF chief Michel Camdessus told Asian leaders not to give in to the temptation of going back from financial liberalization or to rescue their failing companies.   But last week, the present IMF head warned of a global financial meltdown and urged the US and Europe to do even more to prop up their crumbling private institutions.

Some Asean leaders ten years ago, led by Malaysia, fingered speculation activities by hedge funds and others for pulling down the local currencies and stock markets through methods such as short selling.  This was dismissed by the IMF which said poor governance was the problem and speculation was healthy.

Now, the captains of big banks have blamed speculators for the collapsing values of their shares, and the U.S., Britain and several other countries have banned short selling of financial stocks.

When bank loans in Asia went sour, this was blamed on poor management, cronyism and corruption.   There was of course a significant element of truth in that.  But when the Western financial institutions spun bad quality housing loans into securities and spread the “toxic securities” across the globe, this was described with the euphemism “sub-prime”, as if it were merely a technical error.

Fortunately in the mid-1990s crisis Malaysia did not have to seek an IMF loan, so it could implement its own policies, many of which were similar to what the Western countries are now doing.

When the then premier Tun Mahathir Mohamed went to the IMF annual meeting in 1998 and attacked financial speculators and the unregulated financial system for destroying the real economy, he was dismissed by the Masters of the Finance Universe and their political leaders as being ignorant about how modern international finance works.

In retrospect, if the leaders and the IMF had taken him 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.