Joseph Stiglitz: "Financial Hypocrisy"

Joseph Stiglitz, who was chief economist of the World Bank during the emerging markets crisis a decade ago, discusses in a Project Syndicate article (hat tip Mark Thoma) how the US is now unwilling to take the harsh medicine it prescribed back then. While this may be a revelation to some US readers, this inconsistency is well known overseas and cause for quiet consternation.

But Stiglitz takes the case of the nations subject to the tough US/World Bank requirements one step further. He argues that href=”″> the standard recommendation of financial market liberalization is wrong; it increases instability without increasing growth. It merely serves Wall Street Stiglitz quite bluntly points out what people in polite society here seem unable to admit, that the Treasury is the financial industry’s advocate. It has merely become glaringly obvious with Paulson.

This second line of thinking – that US Treasury/IMF policies are not in the best interests of the nations subject to them – is also a widely held view abroad, but too often is dismissed in policy circles as conspiracy theory. Having someone like Stiglitz, a Nobel prize winning economist who also had a seat at the table. support that view puts an entirely different coloration on it.

From Project Syndicate:

This year marks the tenth anniversary of the East Asia crisis….There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis. Indeed, Laos was among the worst-affected countries….It was the worst global crisis since the Great Depression….

Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. The fundamental problem was premature capital market liberalization. It is therefore ironic to see the US Treasury Secretary once again pushing for capital market liberalization in India – one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.

It is no accident that these countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth. (India and China have, by the same token, been the fastest-growing economies.)

Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc. In South Korea, the IMF urged the sale of the country’s banks to American investors, even though Koreans had managed their own economy impressively for four decades, with higher growth, more stability, and without the systemic scandals that have marked US financial markets with such frequency.

In some cases, US firms bought the banks, held on to them until Korea recovered, and then resold them, reaping billions in capital gains. In its rush to have westerners buy the banks, the IMF forgot one detail: to ensure that South Korea could recapture at least a fraction of those gains through taxation. Whether US investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not.

The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates.

Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation.

But lack of transparency played a central role in this past summer’s credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what.

And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem.) Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.

Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture was needed.

But, while the current system may lead to unnecessary instability, and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that ten years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world’s economies.

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  1. Alex

    Stiglitz seems to be wilfully ignoring the massive bad debt problems of less liberalized economies. South Korea’s economic performance post-1997 has been spectacular in no small part because it was forced to clean up the incest between industrial conglomerates, banks, and bureaucracies that still plagues Japan. China is the most dramatic example of all.

    But having said that, there is a large amount of commentary lasering on Treasury’s and the Fed’s complicity in depreciating the dollar to help Wall Street ease all its bad debt off its constipated books.

    I think there are very few astute finance-news consumers who are really in the dark about what is going on. The federal interventions on Wall St.’s behalf have been too frequent and high-profile to ignore.

    American media are now slaveringly obsequious to Goldman, because Goldman is the firm that has “won.” So the NYT and others are talking up Blankfein’s genius, while making no mention whatsoever of the billions Goldman’s HFs blew through, or questions surrounding who got what Fed repos in August, or insinuating anything negative about ex-Goldman CEO Hank Paulson.

  2. Yves Smith


    Agreed that Stiglitz has not parsed out the elements of his critique as well as he could have. His big beef with the Asia crisis medicine was the not-salutary opening of financial markets and the interest rate shock. His argument about transparency (and presumably about corruption too) is that we don’t walk our talk, and it is more evident with every passing day.

    Agreed also that the discussion above isn’t news to the well informed within the US, and a larger swathe outside the US. But as you point out, the press here is pretty craven.

  3. Anonymous

    Haven’t read Stiglitz’s article, so I don’t know if he includes this on his list of hypocricies, but I’m struck by the contrast between the emerging response to THIS banking crisis and the conventional wisdom heard in Washington and on Wall Street during Japan’s banking crisis of the early ’90s.

    Then, the mantra was that Japan’s Ministry of Finance had to break up the “convoy” system, force the banks to work out or liquidate their bad debts and let the market pick the winners and losers — as quickly as possible.

    Now, what are Paulson and company trying to do? Organize a convoy.

    I think what often amazes the rest of the world isn’t the level of hypocrisy in American culture and policy, but the fact that so many Americans are so stunningly blind to it.

  4. Juan

    Not to forget that neoliberal/Washington Consensus liberalizing assisted in creation of ‘the lost decade’ and generally much lower growth rates throughout the developing world ex-Asia.

    Oh, but that is exactly what Stiglitz is trying to convey yet seems unheard… Amazing(?) that demonstrably failed policies have such durability.

  5. Anonymous

    Failing to follow one’s own advice does not automatically make it bad advice.

    The way to eliminate hypocrisy would be to bite the bullet and practice what you preached, not to hop in a time machine and tell South Korea circa 1997 to go do something different.

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