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Former Australian Prime Minister Savages Geithner’s Performance in the Asian Crisis

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Paul Keating, former Austrailian Prime Minister, gave an assessment of Timothy Geithners’ performance in the Asian crisis that is sharply at odds with US reports. According to Keating, Geither completely misread the nature of the crisis, that it was the result of hot money flight, but reverted to the standard IMF “country facing currency crisis” playbook, and made a bad situation worse.

And to compound matters, the mismanagement of the Asian crisis led China to decide to build up FX reserves so it would never have to go hat in hand to the IMF. In other words, the “savings glut” that Bernanke and other economists like to portray as a cause, if not the cause, of our current financial crisis, was in response to the misguided Asian crisis program.

From the Sydney Morning Herald (hat tip reader Sean):

When Barack Obama announced his champion to rescue the world from economic ruin, it was the first time most Americans had ever heard the name Tim Geithner.

The initial impression was good…..”Exactly a decade ago, he was Uncle Sam’s golden-boy emissary sent into the stormy centre of what was then the world’s worst financial crisis [the Asian crisis],” reported The New York Post.

The paper gushed: “Just 36 at the time, he’d been raised in Asia and knew the culture so intimately he scored successes and won confidences that other diplomats couldn’t match. Geithner earned widespread plaudits for pulling together quarrelling Asian finance ministers into a $US200 billion rescue of their economies.”

“A fantastic choice,” said a Bank of Tokyo-Mitsubishi analyst, Chris Rupkey, as the Dow rose by nearly 6 per cent. Even one of Obama’s political rivals, the hard-bitten Republican senator Richard Shelby, agreed Geithner was “up to the challenge”.

If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner’s performance since.

In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner’s record in handling the Asian crisis: “Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.”

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

Geithner thought Asia’s problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.

The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.

But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans – Thailand, South Korea and Indonesia – all had sound public finances.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: “Soeharto’s government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power.”

Exactly who was the “gigantic fool”? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.

Worse, Keating argued, Geithner’s misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: “The IMF is the gun that can’t shoot straight. They’ve been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose.”

China, in particular, drew hard conclusions from the IMF’s mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

Keating continued: “This has all been noted inside the State Council of China and by the Politburo. And it’s one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it’s why through a series of exchange-rate interventions each day that they’ve built these massive reserves….

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn’t think so: “After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money.”

And Asian capitals know that they have no real influence over the IMF – while European governments enjoy 40 per cent of the voting power on the IMF, Japan, China and the rest of east Asia put together have only about 16 per cent….

Keating urges that the fund should be decapitated, with control passing to the governments of the Group of 20 countries whose leaders are to meet in London on April 2. The summit, which is to include China, India and Indonesia as well as Australia, is meeting to consider solutions to the global crisis.

As for The New York Post’s claim that Geithner was the hero who cajoled those quarrelsome Asians into agreeing to a $US200 billion rescue, the key fact burned into the minds of Asian elites is that the US was deaf to requests for funds. Washington did not contribute a cent of its own money to any of the emergency packages. Japan and Australia were the only nations that made loans to all three of the stricken Asian countries.

Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy….

“That is the fundamental cause of the problem – the imbalance is the fundamental cause.”

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51 comments

  1. ckasso

    “the imbalance is the fundamental cause”

    finally, someone sees and speaks the truth. Geithner is there because he doesn’t.

  2. capitalist roader

    Say whatever you want about the damage Bush did to America’s reputation around the world. In Southeast Asia the damage done by the IMF program in 1997 – under the guidance of the Clinton/Rubin administration – spawned more hostility to the US than anything.

  3. Anonymous

    I don’t think Geithner is up to the job, but I don’t think the Asian crisis actions were the root of our current situation, either.

    Nothing about that action forced our major banks and financial institutions to become combo gambling houses/utilities or for our government to decide that that gambling was now ‘essential’ to our economy and should be shored up and rewarded with taxpayer funds.

  4. MyLessThanPrimeBeef

    One day, maybe China will dispense her medicine when someone else in the world needs it.

    Let’s hope it will not be IMF style, but that unique Chinese style. Of course, I refer to the way the Chinese write the word ‘medicine’ which consists of a top radical meaning herb, or grass and a bottom part meaning happy. That is to say, to the Chinese, medicine is happy grass or put it in another way, happy grass is medicine.

  5. Anonymous

    * really * off topic here…but…

    2:56 said, “that gambling was now ‘essential’ to our economy.”

    precisely when or how this happened is interesting, , with people around the world able to make trades on the internet 24/7 move money around with the click of a mouse, with CNBC figuring out how to do ‘live 3D tick by tick’ with their graphs…

    with vegas thinking of making prostitution legal there, gambling joints opening up all over the eastern seaboard, one can’t help but imagine where this country will end up…

  6. Swedish Lex

    Thanks. Adds a lot of perspective.

    Also explains Keating’s FT op-ed from the other day; he wants to make the G20 less distasteful to the Asians by opening it up and modifying its scope and perspective to become more global.

    As with any bureaucracy, however, the G 20 and the IMF are unlikely to give out influence to outsiders (Asia) for free. If the Asians as result choose to ignore the G 20/IMF and continue down their own path (as the article suggests), the result could be the marginalisation of existing international institutions. It seems that many agree that they more reflect the 1945 world than the current one anyway.

    Does Keating have something at a personal level to settle with Geithner? In order to rule out that possibility completely, I would first like to see a couple more stories that corroborate Keating’s views.

  7. macndub

    China, in particular, drew hard conclusions from the IMF’s mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

    They decided to wean themselves from the U.S. by buying… U.S. treasuries? Something smells here.

    Keating continued: “Soeharto’s government delivered 21 years of 7 per cent compound growth.”

    That’s like saying the U.S. economy grew since 2002, right? I mean, it did, sort of, but not in any real sense that had meaning to ordinary people. It was growth financed by unsustainable leverage and an asset bubble.

    I’m not defending Geithner here (kind of a big task), nor am I defending the IMF bailout of southeast Asia, but I think that either Keating or the writer are being a little wooly-headed here.

  8. Anonymous

    Who are the apostles of the General Asshatery that gave a 36 year-old such an important job?

    I know that “La valeur n’attends point le nombre des années” but still…

  9. Anonymous

    Keatings was both the Treasurer and Prime Minister here in Australia. His own performance as an economic manager left a lot to be desired.

  10. Victor

    I thought everyone already knew this. Asian countries have built massive foreign reserves to fight a run on their currency a second time. Just read Mahathir’s comments during the Asian financial crisis, attaching Soros et al. Soros was not really the root problem so much as a global system that allowed panicked flight of capital across borders. US Treasuries were merely the “safest” place to keep foreign reserves as a line of defense.

  11. Anonymous

    The problem here is that Geithner was somewhat blinded.

    1) and most importantly, western financial institutions are heavily dependent on cross-national arbitrage. Actually solving the problem extant during the 97 crisis would have been completely against western interests. Geitner would not have had institutional backing for a real plan.

    2) Ideological blinkers was also a problem. Korea and Japan have long-term intragisant problems with too-powerful industry groups spending money unwisely To an extent, the kind of incestous banking/industry/government situation is common in E Asia. Thus the recomended policy wasn’t *that* far off. There was just a need to target free-spending national corporations without targeting the polity, which *would* have been very difficult in the first place. However, poor people are easier to target than rich people. No Luis Vitton for you, young lady!

    3)Keating is a self interested idiot. The IMF failed, but it never *really* had a chance in this situation, which was national corporations siphoning money and hiding behind the public trust. There was never a way to enforce austerity on the proper people.

    That said, gaming international bankers really made the situation worse, and a proper shutdown a la what was done to the Hunt Brothers would have really helped to create breathing space for real solutions. But bankers would have lost easy money, and would have never allowed Geithner or anyone else to do that.

    One should really make an effort to learn about the third world debt crisis of the late 70s and early 80s. It’s pretty fundamental to world history, and it’s a great backdrop to understanding what happened in 1997.

    –shah8

  12. Orion

    Any recommendations on books, papers, articles that shed more light on 97 Asia crisis or third world debt?

  13. Anonymous

    Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy….

    Sounds to me like that was the plan all along by the chinese elite and U.S. elite. They just HATED common ordinary people getting ahead in life.

  14. Anonymous

    Other than being an indispensable aid to Robert Rubin, what has Geithner ever done for accomplishment?

  15. Anonymous

    Obama, his whole crew, and the clowns on the hill are a bunch of idiots. I love ‘em though as I made more damn money shorting the market because of these bozos then even I would have thought possible. Thanks guys keep up the good work. Cha-Ching!

  16. Glen

    Like or dislike the man and his politics, it should be remembered that Keating has first hand, inside knowledge on the machinations of reforms and recession. After all, Keating undertook major structural reforms that were not popular and then induced Australia’s last recession. I’d like to see any politician or government official do that today! I was watching an interview with Keating on the ABC (Ozz’s public broadcaster) and they asked him why he was concerned about the responses to date on the current situations. His reply; “I should know. I induced the last recession.”

  17. One Salient Oversight

    Keating – first as treasurer and then as Prime Minister – was one of the leading economic reformers in Australia during the 1980s and early 1990s.

    Although no reforms occur without pain or mistakes, Keating generally introduced neo-liberal economic policy to Australia. We floated our dollar, made our central bank independent, cut back subsidies and tariffs, privatised government corporations (Qantas used to be owned by the government) and reformed our financial sector. In fact that last one – financial sector reform – is what has allowed Australian banks to remain reasonably afloat during the current crisis. There are no Aussie Zombie banks.

    Of course Keating made mistakes. We ran up a budget deficit of 20% of GDP that ended up being reduced to Zero under Howard/Costello and Australia’s large current account deficit has its roots in Keating’s government. He was also known to be vicious and spiteful.

    Having read his treatment of this issue, though, I think he has said some very good things. The current crisis has many causes but the biggest structural problem is the US current account deficit and the huge trade imbalances with China. Thus Bernanke’s “Savings glut” can be reinterpreted as a response to Moral Hazard (IMF as insurance company, not trusted by nations who then build up savings to protect themselves).

    I’d like to see some figures, though, for the public finances of South Korea, Indonesia and others during the Asian crisis. The Washington Consensus is, I believe, an important and highly useful guideline for reforming nations that have suffered capital flight. Yet if Keating is right and public spending was forcibly reduced when it shouldn’t have been, then it was not good economic policy but more akin to Hoovernomics.

  18. One Salient Oversight

    budget deficit of 20% of GDP

    That’s a mistake. I meant to write that net government debt reached 20% of GDP.

  19. brushes9

    Y,
    Is your complaint with Geithner that he is not willing to slay the giant brands and break up the powerful monopolies that have a strangle hold on us and are stealing every last value that we own, or, ever will own?

    Obama’s “State of the Union” summarized it perfectly. It does not matter what happens in the world of finance, right now, if health care is not fixed, period. Also, we need worldwide fixes to finance, or arbitrage will just kill us again.

    I’ve listened to hours of New American Foundation and Economic Policy Institute presentations. If I were Obama, I would leave everything in the world of finance on autopilot, too, just as Bush left it. I would just keep feeding it what it is used to, and then work to change everything around it (that keeps all the whiz-kids still trapped inside their cubicles)

    Maybe, today is not the time to be writing history books. With Obama, we are operating with a higher order of intelligence. Sounds to me that you are losing faith in a man who was a nobody, and is now president. Very risky…

    If it turns out that Obama is managing chaos like a skilled craftsman, and he successfully rights our ship of state, then people looking back will be grateful that this crisis developed and took place.

    In that case, a book about the “outrages” and the “injustices” that led up to this crisis would be renedered moot.

    Take a break, but don’t break up the band. Of course, you may have other reasons but, hell, your the singer..!

  20. purple

    Shorter Keating – Asian capitalists want a bigger share of the pie and the West won’t let them have it. He is the genial intermediary, by way of Australia’s European roots. I don’t think this has a happy ending.

  21. Anonymous

    At the core IMF is about to become irrelevant. It’s merely an outfit to keep track of exchange balance.

    But it was so abused during Clinton-Bush era, Asia simply does not trust IMF. And we are talking about the biggest engine of growth in the past decade.

    second. IMF has no control of currency attack, they only show up after the damage is done with prescription that pretty much kill national economy. (austerity measure) Which by now, all asian economy sort of laugh, because by IMF standard, US budget should be run through “austerity measure” as well, instead of social program to replace lost private and consumer activity temporarily. (ie it’s hypocracy in the highest order. Basic racism. The brown people don’t know money and how to run their society. White people can do no wrong.)

    Remember, there is gigantic colonial era resentment in Asia. And people don’t forget that sort of stuff.

    lastly, and I think this is important. The formation of Asia monetary fund, and asia free trade. Yes the there is practical excuse such as free trade, yadda yadda… But at the heart of it is to prevent continuing dollar hegemony and policy dictated from washington DC. There is a legal framework that everybody agrees on rivaling IMF.

    This is important, because size wise. Asean + 3 (Asian monetary fund member) is already bigger than US or EU economy.

    But of course there is no centralize political control yet. But Politics in asia has different pace. So in 5 days, every government can align, or it will take 5 years to decide if there is gong to be conference on deciding a decision. (AMF agreement would be the perfect example. it was talked and talked for 10 years, noting happens. But once the crisis hit. everything signed within a month and the money doubled from original proposal.)

    So who knows. since the foundation is laid out, when China is pissed of in 2020, they will simply declare IMF has no meaning and global currency exchange rate/agreement is whatever they decide on.

    By 2020 Asean + 3 economy will be about double the size of US GDP. (I think right now collectively they are about $12T or so. US is about $14T. But growth is expected at 5%+ in the next decade vs. ~2% US)

  22. Anonymous

    Anonymous said…

    The problem here is that Geithner was somewhat blinded.

    ——-

    not blinded, but he simply doesn’t know what’s going on.

    He thinks the planet is still like 60′s-70′s-80′s where he only need to consider US internal economic indicator to predict US banking behavior.

    Unfortunately, not with global banking system, huge US trade deficit, energy price fluctuation, etc.

    basically, US economic indicator that he thinks is the major variables are not so “major” anymore.

    so that’s why the idiot in charge think they can pump money to cover CDo, buying banks asset, etc. But all those are tip of the icberg and connected to huge european banks and asian investments. There isn’t enough money in the world to pay simply pump everything. (eg. US treasury isn’t big enough to manipulate the market)

    and within 10 years, US treasury is not big enough to control US dollar exchange rate. (The dollar hegemony is eroded enough for the rest of major economy to play dollar exchange rate beyond IMF/G7 control)

    China playing with peg is just the beginning. 10 years from now, It would be Soros vs UK pounds, except it would be a giant chinese banks vs dollar.

  23. Anonymous

    This is utter nonsense: “Obama’s “State of the Union” summarized it perfectly. It does not matter what happens in the world of finance, right now, if health care is not fixed, period.”

    Actually, if the world of finance isn’t brought under control quickly, it’ll drive the economy into such a depression that most of us will be ready to roll over and die rather than be healed.

    Yes, Medicare/Medicaid needs to be fixed, and Social Security as well, but those crises are ahead of us rather than eating us alive right now. What Obama and Rahm Emmanual and the minions are trying to do is make this crisis out to be so huge that they have to get all their major programs rammed through – remember, “Never let a good crisis go to waste”

  24. Imelda Blahnik

    I have to second Anon @ 4:00 pm on a couple of points. In Asian nations like Korea and Indonesia relations between the public and private sectors were deeply intertwined, and a goverment-focused approach made some sense. Allegedly state companies (like Tommy Soeharto’s car company) were (as Anon says) “siphoning money and hiding behind the public trust…[and] there was never a way to enforce austerity on the proper people.”

    Also, Keating seems to imply that Soeharto’s exit from the political stage was a bad thing, and that absent IMF prescriptions he would have stuck around. The guy was a corrupt dictator who had been in power for 30 years. His leaving initiated a painful and imperfect but ultimately successful democratization process, and also helped facilitate East Timor independence.

  25. Jimy

    In Asia, most people considers Bush/Cheney team as sensible in crisis although incompetent in peacetime. On the contrary, Clinton and Gore team is the most incompetent and arrogant crisis management team Asia has witnessed since Pearl Harbor. The Obama team (with a Clinton as sec of state) is just a continuation of the first Clinton team, most Asians have little hope that the current crisis, which originated in America and Europe, would ever be resolved with the current generation of American and West European politicians. Someone asked Zhou, the Chinese Central Bank chief, whether China would devalue the RMB in yesterdays’ live conference (when was the last time Geuthner or Bernanke agreed to a live interview with over 100 foreign correspondents?). The answer was – ask not what China would do, for China did not originate the crisis, the solution and the problem both originated in the West. Simple wisdom that the whole world sees, but neither Bernanke nor Geithner have understood.

  26. Harun E

    Dear Ms Imedlda Blahnik,
    Suhartoe was a crook, yes, but ask the 200 million Indonesians whether they prefer Sohartoe or Megawati/Gus Dur years of social unrest and abject poverty – the corruption, even today, at all levels of society, is even worse. At least businesses and life at large worked during Sohartoe’s time. Only the ideologocally blinded would agree that the IMF and geitner and the US of A have done the right thing. And don’t forget, the US of A considers Sohartoe a key ally during most of his 3 decades as President of Indonesia.

  27. artichoke

    Geithner isn’t qualified to be Anti-Christ. He’s just a tool.

    Obama, however, is the Manchurian Candidate. He reads from Teleprompters all the time, far more than any other important politician ever has.

    The press has made a “virtue” of the inevitable lack of eye contact, taking pictures of him as if he is “looking off into the distance.” He’s looking at the Teleprompter!

  28. Anonymous

    The Lowy Institute. As in Frank Lowy. Hank Greenberg’s partner in crime along with Silverstein. This is just some kind of perception management stunt.

  29. alex black

    Well, THIS should make Geithner even more popular – within the last hour, The Wall Street Journal has named names – the beneficiaries of the AIG bailouts. Deutsche Bank, France’s Societe Generale, Royal Bank of Scotland, HSBC…. (oh, of course, GS and MS are in the mix).

    No surprise, really, but when you see a really bad car wreck from a distance and know it’s bad, it has a more visceral punch when you actually get there and see the blood and guts and distorted bodies.

    Some smart politician will make hay out of this.

  30. Anonymous

    I don’t have time to go into this in the detail it deserves (it is covered in a book i wrote with Roubini called Bailouts and Bailins), but Keating’s account of Geithner’s views/ role in the Asian crisis is in my view inaccurate. It has a grain of truth – namely that the policy prescriptions that the IMF applied with US treasury backing were immensely unpopular in Asia and that one of the goals of China’s massive reserve accumulation has been to avoid going to the imf (tho reserve growth didn’t really start in a big way til 03, well after the crisis … ). But it misses several key facts:

    a) the IMF not the US treasury was the one initially pushing for fiscal contraction in Asia. that was a mistake and was quickly recognized as such.

    b) After mexico the US congress imposed a set of restrictions that limited the US treasury’s ability to provide bilateral financing in Asia (especially to Thailand)

    c) European countries generally believed that the IMF should be lending less not more too. The US tended to push for more financing not less, in the face of European opposition (yes, the US did believe in conditionality). The IMF is a global institution and needs broad support to operate. Many in Europe (and the US) believed the problem was that excessive IMF lending in mexico induced excessive lending in asia and that the countries/ their creditors needed to be taught a lesson not bailed out. keating it making the opposite argument, but at the time policy was based on a compromise.

    d) Thailand’s problem wasn’t that it got a small program/ a little bit of financing (counting Japan’s contribution it got a fair amount, not that much less than Mexico). Thailand’s problem was that its short-term external debt was far larger relative to GDP than almost anyone else, so the same sized bailout applied to a bigger problem wasn’t enough. Thailand was running 7-8% of GDP current account deficits prior to the crisis, almost all financed with short-term debt.

    e)The political reality in the US at the time (given a 96 campaign scandal involving a contribution from someone in indonesia) was that it was impossible to provide support for indonesia (which was corrupt under soeharto) without visible reforms. at the time those reforms were thought to inspire confidence. in retrospect, most credit exposure was to Soeharto inc — so reforms that undermined its privileged position didn’t inspire confidence (and weren’t implemented) and well, things spiraled down. a big fx mismatch on corp balance sheets didn’t help. No one involved thinks Indonesia was a success.

    f) But there was one major success — without treasury intervention (and geithner was very involved), korea would have defaulted in December 97 – and things would have been far far worse. A treausry orchestrated rollover prevented an avoidable default.

    g) Geithner should also get some credit for the successful Brazilian rescue in 2002-03.

    No one got all aspects of Asia’s crisis right. And in retrospect way more attention should have been paid to the risk that the crisis would lead countries to over-insure (at the time there was more concern that countries/ creditors woudl rely too heavily on the imf for bailouts). But Keatings account enormously oversimplifies.

    glad I got that off my chest. Again, if you want a lot of detail — and a lot of data — see bailouts and bailins. And full disclosure: I worked at the Treasury at the time, so no doubt am compromised in some way.

    bsetser

  31. One Salient Oversight

    Brad.

    Is Keating correct when he argues that these Asian nations weren’t running large public debts at the time?

  32. Anonymous

    Sy Krass said…

    I know I’ve been pooh-poohed on this theory before, but all of what we have seen since 1990 is a series of multi-governemnt, uncoordinated attempts to forestall a natural K-wave deflation. Push the world system in one direction a problem pops up in another. You can blame anyone you want. Each move has been in response to the last crisis, which was a result of the previous gov’t manipulation.

  33. Anonymous

    One salient oversight —

    On that point keating is correct. asia’s crisis //s Eastern Europe’s crisis; the big pre-crisis “deficits”/ borrowing needs in Asia were found in the private not the public sector.

    p.s. Keating is now affliated with CDB, which presumably gives him a potentially lucrative in with China. The same skepticism about Geithner’s motives (Geithner is a career public servant incidentally) should be applied to Mr. Keating.

    bsetser

  34. Anonymous

    One salient oversight,

    There are no Aussie Zombie banks… YET.

    You are delusional if you think NAB or ANZ won’t be holding their fat, greedy hands out for taxpayer handouts in the near future.

    The deleveraging in Australia has not yet even begun.

  35. Anonymous

    Anon3:00AM said…There are no Aussie Zombie banks… YET.

    ….

    Storm/CBA was the first shoe to hit the floor[?]

    We’ll see how firm the Aussie banks are when commodity prices are renegotiated, China’s second largest steel manufacture is asking for 50% reduction in iron ore price, with that, the cash flow from mining through the banks will look like the Murray river.

    The entire Aussie mining sector just got completely blindsided (expansion projects every where) and the common person will be totally unprepared for the wave, when it hits.

    Skippy…lot of good people around here going to get hurt, that had nothing to do with it.

  36. Anonymous

    Keating’s original speech can be heard at: http://lowyinstitute.richmedia-server.com/sound/Towards_the_London_Summit.mp3

    If you follow the introductory remarks, it is clear that Keating was commenting on the forthcoming G20 meeting at the request of the British High Commissioner.

    Contrary to the comment from Anonymous, March 6th, 3:56PM, during his term in office, Keating was recognized, both domestically and internationally, as a supreme economic pragmatist.
    He introduced compulsory Superannuation (retirement savings) in Australia – currently 9% of wages. That puts a very different complexion on the debt situation in Australia, and, even though we may have a debt/GDP ratio at an uncomfortable 165%, it will help to avoid the destructive debt-deflation spiral that is now under way in the USA and UK. Much of the Australian Financial policy and regulation, including the Four (six?) Pillars policy, has helped to keep Australia clear of the most destructive aspects of the Global Financial Crisis.
    Given this, it is no surprise that Gordon Brown would solicit Keating’s comments.

    Since leaving Office, Keating has kept a very low profile. This speech was made to a closed audience, although Journo’s were admitted.

    The way I heard Keatings’ remarks, Geithner was not specifically targeted in the speech, but his role in the Asian Crisis was raised as an issue which could inhibit China’s participation in the G20, and the resolution of the GFC. That seems to me to be a valid concern, a concern which the Diplomats should insure does not impede the work of the G20.

    Perhaps Keating’s strongest point is his insistence on Obama attending the G20, since he believes that only then will the G20 have the authority to draw in China, and achieve anything meaningful.

    Otherwise the scenario painted by Anonymous March 6th 7:02PM is the most likely outcome – which leaves the West entirely up sh** creek without a paddle – a fate Asia probably considers appropriate.

  37. Anonymous

    So let’s see…..the ’97 IMF solution was to raise interest rates, try to strengthen the currency and current account, have banks come clean on their bad debts (condos, golf courses, office buildings), and have the governments enact an austerity policy.

    At that time, all of the bailout countries were running large current account deficits. Each of the countries were back to positive growth within eighteen months.

    Malaysia went its own way, and took almost three years to settle the ship.

    In contrast, Japan (in its post-Bubble period) lowered rates to zero, enacted at least fifty emergency supplemental budgets which decimated the GoJ budget, did everything possible to hide bank bad debts, and (initially) weakened the yen. Japan subsequently had its “Lost Decade”.

    Geithner is now following the Japan plan. Maybe he was right the first time and Paul Keating is wrong?

  38. Anonymous

    Keating has a fundamental misunderstanding of world politics.

    The purpose of the IMF is to destroy economies when they might challenge US hegemony. Therefore, Geithner succeded like gangbusters.

    Likewise, whenever there is a domestic crisis the US must always blame foreigners, no matter how much they themselves are at fault. This is an absolutely core principle of politics that has been maintained for centuries if not eternally.

    Just to test your understanding of the crisis, in 100 words or less connect the following dots: 1.) greenspan’s interest rate policy, 2.) the lack of lending standards, 3.) derivatives trading of “vanilla” and “exotics”, 4.) corruption of the ratings agencies, 5.) collaboration with European banks, 6.) repeal of glass-stegal and its consequences, 7.) utter failure and capture of the SEC, 8.) corruption of real estate assessors, 9.) lobbyists for real estate developers, 10.) mismanagement of Fannie and Freddie, 11.) repeal of usury laws, 12.) unfair mortgage contracts, 13.) fraud and missrepresentation, 14.) follow on effects of the dot com bubble, 15.) failure to make other economic progress, 16.) stagnant wages and ubitquitous home equity loans and credit card debt, 17.) financing of unnecessary resource wars… the list is really endless, but this should you give a start. Now try to figure out how much of this was caused foisted on the US by China and other Asian countries.

  39. Anonymous

    What we (Australia) really need is for Costello & Keating to put aside their petty political differences and team up, creating an economic coalition dedicated to running for election upon the platform of creating the greatest, most intelligent and sophisticated, diverse, economic team in Australia, whose chief and only purpose shall be to head off the extreme repercussions of this disaster…to mitigate these to as great an extent as is possible? Am I dreaming? Yes. But only dreams can fix this problem.

  40. Anonymous

    Anonymous said…

    So let’s see…..the ’97 IMF solution was to raise interest rates, try to strengthen the currency and current account, have banks come clean on their bad debts (condos, golf courses, office buildings), and have the governments enact an austerity policy.

    At that time, all of the bailout countries were running large current account deficits. Each of the countries were back to positive growth within eighteen months.

    Malaysia went its own way, and took almost three years to settle the ship.

    ————–

    - austerity plan = cut government spending and balance it in the blink of an eye.

    - privatize everything (neo-liberal game)

    - increase interest rate. (volker vietnam era gambit)

    in Thailand, Indonesia, philipine the GDP crashed 10-20% annually. And the economic growth didn’t return until nearly a decade later. unemployment was unbelievable, everything thrown into chaos.

    Let’s just say if geitner dares to do that “austherity plan” bullshit. We have to cut the budget by $1 trillion, instead of $1.3T deficit. California has to fire every single workers and close all state service.

    I’d be drug dealer, cause that’s the only thing making money with geitner austherity plan.

    but rest assure, the entire asia did say FU big time to IMF after 97. So, right now everybody has very small debt and live of reserve pile. By next year, if most asian budget going positive, things are going to be miserable for US money flow, because asia will enter high growth recovery phase. Money is going to flood into asia.

  41. VoiceFromTheWilderness

    Without disputing — because I have no basis for doing so — the claim in the article, in my view it misses the point. By focusing on ‘bad’ individuals, we miss the systemic nature of what is going on. It has become deeply entrenched in this culture to look for scapegoats, to pin guilt on a few individuals while the system of corrupt self-interest dominating group problems continues unabated. Thus for example a few people at Enron are prosecuted, while hundreds to thousands of equally corrupt traders who actually did the work go unpunished.

    The reality is that to get ahead in this modern world, one needs to say and do what the powers that be want you to. So Geithner delivered up a ‘solution’ that was exactly the same as what the system always delivers. Gee what a surprise. If Geithner hadn’t done it, they would have found someone else to play ball, and now we’d be reading articles about how ‘incompetent’ that guy was. The adulation and fanfare over geithner from establishment quarters is not indicative of his skill at matters financial, it is indicative of his ‘skill’ at providing what his masters want him to provide — his obedience.

    Outrage directed at individuals will change nothing.

  42. Anonymous

    @ Voice from the Wilderness

    I agree entirely the problem is systemic at the IMF, World Bank and Treasury. Poor education among the staff and principals, the misguided direction of free market economics over the last three decades, unworldly experience of academic economists and misalignment of goals of these institutions and the developing countries consistently lead to wrong-headed policies. Don’t take my word on this see Joseph Stieglitz’s book on the IMF. Though he gives the World Bank, where he was Chief Economist, a pass the message that it was the same there seems to comet through. Anyway that certainly represents my experience. Obama has his work cut out reforming our institutions. Fortunately or not the crisis is going to give him a lot of help.

    SS

  43. Anonymous

    VoiceFromTheWilderness has it exactly right- he is offering solutions that reflect the conventional thinking of mainstream economists. While left and right economists disagree on the nuances they agree on the broad thrust of economics of the last 30years- for most their entire adult life. That model has broken but they can’t admit it because it would mean repudiating their life’s work. It is a difficult thing for anybody to do. If there is any single individual who is to blame it is President Obama- who not being an inside has failed to see what all of us on the outside have i.e the basic model is broke and this is the time for non conventional or consensus solutions.

    I am afraid that the US economy will have to go through the WW1 equivalent of massed infantry attacks against machine guns.

  44. Capricorn

    VoicefromtheWilderness: I agree wholeheartedly with the need to keep our focus on fixing the system, rather than punishing the guilty.

    Journalistic license and sensationalism by the SMH reported Keating’s speech as focussing on Geithner. The focus of Keating’s speech was fixing the system at the International level, as you can confirm for yourself by listening to: http://lowyinstitute.richmedia-server.com/sound/Towards_the_London_Summit.mp3

    bsetser: In general, your comments are well worth reading. So I was really surprised to see your suggestion that Keating’s remarks may have been coloured by his association with the China Development Bank. His association is as a member of the Banks’ International Advisory Board, which adds to his credibility in this case, since it gives him the opportunity to know how China views the situation. I think some evidence is required before you suggest that Keating is self-serving in any of this. Is there any?

  45. One Salient Oversight

    I happen to believe that Austerity measures are essential and that the Washington Consensus (the background to the IMF’s dealings with nations suffering capital flight) are actually sound.

    Having said that, it seems rather obvious that Asia in 97 didn’t need cuts in government spending because, as Brad Setser has pointed out, public finances were not the problem. The Austerity measures therefore were not appropriate to the situation.

    I have to say, however, that with public debt in the US now climbing around 50 basis points per week, that Austerity is the solution for the US.

    Had this economic collapse occurred at the same time as public debt levels were low, Keynesian stimulus packages like the ones Bush and Obama have just passed would be fine. But with public debt already soaring to uncomfortable levels, the chances are that the combined result of such stimulus packages will be even greater suffering over the long run.

    The only real solution I can see is for continued stimulus spending in Japan and China. US Economic recovery can’t depend upon stimulating its own demand, but upon external demand.

  46. Juan

    asian crisis did not _begin_ in the financial sphere but in the real economies where, depending on country, corp earnings had begun to fall well before the ‘currency crisis’, where export competition had heated up, where there had been over-investment from auto production to chips to real estate…

    thailand’s finance minister could, e.g., in ’96, claim there had been “zero growth in exports” in what had been transformed into an export dependent economy. same year also marked a pronounced slowing of growth and if i recall, a large drop in the set.

    there were, throughout the region, no shortage of ‘advance warnings’

    the later imf/treasury program, as a typical adjustment, was very wrong-headed though i guess one can argue a delinking of such ideologically intertwined institutions.

    financial contagion grew out of regional overproduction crisis, nothing new but apparently missed by so-called ptb. other hand, i’ve very vague recollection of imf having issued warnings in ’96 and perhaps ’95.

    context – the larger, more global, slowing which began from early 1970s and the sequence of policy responses thereafter.

    orion, you might want to look at james crotty, david harvey, martin hart-landsburg, robinson rojas, samir amin, james petras,, there are many others.

  47. Anonymous

    There is a slight untruth in regard to Malaysia performance during the Asian crisis being propagated. After imposing currency control, Malaysia’s GDP contraction is 7%, compared to 11% for Thailand and 13.7% for Indonesia. More importantly, Malaysia didn’t need a bailout from the IMF.

    Paul Keating’s speech is a warning to the Obama administration. During the 1987 stockmarket crash, Japan was asked to bail the world out – with disastrous consequence for the Japanese. China will not let themselves as a ‘piggy bank’ to fund the global rescue.

    Tim Geithner had a bad start to his job by Jawboning China in public about the yuan. It enraged the Chinese government, and they pushed the Yuan down for the next few days just to prove a point. US has lost it’s right to lecture other countries on how to run their economy. We need a new approach.

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