International Herald Tribune
To the Asians, a déjà vu
Thursday, September 20, 2007

LONDON: Asian countries, which suffered horrendously through the financial crisis of a decade ago, may reasonably view with a mixture of resentment and derision the government bail-outs of financial systems now taking place in the West.

Although they may in the short term be relieved that markets have reboundced, there is a perception that some Western countries are now as overextended as some Asian ones were then.

The unwillingness of the two major deficit countries, the United States and Britain, to suffer even a modest amount of pain as the price to be paid for years of excess is particularly striking to those accustomed to being lectured by those nations on the importance of sound money and banking systems to economic stability and growth.

Asia did need a financial cleansing then, and while its recession was far more severe than it need have been, it did restore equilibrium and leave lasting benefits.

In the United States, Fed Chairman Ben Bernanke has followed in the footsteps of his predecessor and been wildly cheered on Wall Street for providing yet more cheap money.

In Britain, the governor of the Bank of England - who a few days ago was adhering to a tough policy to avert "moral hazard" - reversed course by coming to the rescue of a major lender which had been funding itself irresponsibly. The government followed this up by declaring that all bank deposits would be honored, a statement which in effect nationalized the liabilities of the banks but not their assets!

For Asia, several issues resonate. The first is that the United States and Britain have only been able to get away with this without a currency collapse of the sort which accompanied the Asian crisis because of their privileged position as reserve currencies. Their huge and structural current account deficits are as big as those in Asia which preceded the crisis.

Secondly, in Asia, bailouts of banks and government guarantees for depositors (as recommended by the IMF) served mainly to further inflate money supply, depress currencies and convert private debt, much of its owed to foreigners, into public debt which has been a burden ever since.

Thirdly, it is well remembered in Asia that though there were good domestic reasons for the crisis, it was exacerbated by foreign banks which withdrew foreign-currency loans made on a short-term basis but for financing long-term projects. Now it is the Western financial institutions that have behaved like the Asian ones then, financing long-term loans with short-term paper.

Four, lack of transparency was rightly cited as a one factor for the Asian crisis. But what could be less transparent than the pyramid of complex securitized instruments and derivatives, often traded by equally opaque hedge funds, that have played such a large part in Wall Street and London trading?

After years of easy credit sustaining massive rises in house prices on both sides of the Atlantic, and attendant debt-financed consumer booms, the United States and Britain appear so much in the grip of financial sector interests they have been induced to throw more oil on the credit flames in the name of protecting economic growth.

But what sort of economic growth is it that depends on consumption paid for by the savings of much poorer countries? Pre-crisis Asian external deficits and credit growth were far, far too big. But they were at least mostly for investment by countries with rapid growth records and young populations.

It is with amazement that many in Asia view the failure of aging Western societies to save for a rapidly approaching retirement, a trend exacerbated by the latest infusions of cheap money which erode the value of savings.

Asian countries themselves are partly to blame by keeping their own currencies depressed and looking to the U.S. consumer as their market. But the situation also owes much to being trapped in an international financial system that protects the old rich from the consequences of their follies.

Eventually the folly of cheap credit and opaque, overcomplex lending systems will come home to roost. The longer that Western countries practice the opposite of what they preached to Asia, the worse it will be.

The dollar could well see a repeat of the debacle resulting from "guns and butter" expectations - a consumer boom and the Vietnam war - which forced it to end gold convertibility in 1971. And Asia will be the loser as its hard-earned savings are devalued or even (China note) become the subject of a debt moratorium.