Date: Sun, 1 Feb 98 14:16:49 CST
From: Bob Olsen <email@example.com>
Subject: Socializing Bank Losses, part I
Date: Sun, 11 Jan 98 00:54:38 CST
Asian panic set to travel
By Terence Corcoran, Toronto Globe and Mail
Saturday 10 January 1998
INTERNATIONAL Monetary Fund chief Michel Camdessus flies to Indonesia
early next week, where presumably he will explain to the panicky
people of that country -- indeed, the people of all Asia -- why they
are being forced by the IMF to bear the burden of a financial collapse
that is not their doing. The major cause of public unease in Indonesia
is the IMF-orchestrated devaluation of the rupiah, now 60 per cent
since November. The devaluation, in turn, is the product of a
collapsed credit bubble that fed a vast network of corporate interests
associated with the Suharto dictatorship.
...it is the people of Indonesia who are being forced by
the IMF to pay the cost, a process Canadian currency
specialist Albert Friedberg calls "socializing the losses."
In Korea, the government was not running a big deficit. It was
the private sector that had all the debt. Now the IMF is...
saying the government is going to have to guarantee the debt of
the private companies in order to obtain more financing.
...the taxpayers of Korea will be paying now for losses on bad
investments made by Citibank and Chase.
It is these networks, and the banks that supported them, that were
major beneficiaries of the decade-long boom in Indonesia. But it is
the people of Indonesia who are being forced by the IMF to pay the
cost, a process Canadian currency specialist Albert Friedberg calls
"socializing the losses." The same distribution of losses among all
taxpayers is taking place in South Korea and the other Asian countries
where the IMF, backed by the United States, is moving in with programs
that can only exacerbate the Asian economic crisis.
Mr. Friedberg heads Friedberg Mercantile Group of Toronto and writes
unconventional commentaries on currencies that appear in the
company's monthly newsletter. From Mr. Friedberg's free-market
perspective, grounded in Austrian School economic theory, the Asian
crisis has its origins in overexpansion of credit by the U.S. Federal
Reserve that will, in time, come back to haunt the U.S. economy.
How are losses being socialized?
"In the end, the IMF is pushing these countries to socialize the
losses, where the losses to be taken are really the losses of 30
corporations," Mr. Friedberg said in an interview yesterday.
"Suddenly, now the whole country is going to be shouldering those
losses. Aside from a few things that the IMF did that are good --
things like opening up markets, supporting deregulation and
transparency -- the rest of what they're doing is incorrect. They're
pushing the countries into a tremendous contraction. In Korea, the
government was not running a big deficit. It was the private sector
that had all the debt. Now the IMF is coming in and saying the
government is going to have to guarantee the debt of the private
companies in order to obtain more financing. In effect, the taxpayers
of Korea will be paying now for losses on bad investments made by
Citibank and Chase. The intelligent thing to have done would be to
say to the banks: 'You lent the money to these Korean private
companies. If they can't pay, they can't pay. They declare
bankruptcy, you lose money.' "
Would Asian currencies be stronger without the IMF plan?
"If the IMF had let the companies declare bankruptcy and let Chase and
Citibank worry about that, then the currencies would not have gone
down as much as they have -- by far. The reason you have a sense of
panic is because there's a feeling that you have to cover the value of
that foreign debt, even if you're broke. These companies are broke.
Why are they buying dollars to pay back debt? You would have had much
less pressure on the foreign exchange market than you have at the
moment. The pressure is to buy back the dollars, and so everybody's
panicking. So the Indonesia rupiah yesterday went below 11,000 rupiah
to the U.S. dollar, which is a decline of 50 per cent in three days."
How did the Federal Reserve cause this?
"The U.S. central bank restarted the credit expansion process (in
early 1990s) all too successfully. They got a huge increase in
consumer credit, they aided an enormous increase in speculation in
credit markets and securities markets. And they exported credit
abroad, with U.S. banks becoming big lenders of money to all kinds of
emerging countries, and investors became convinced the growth rate in
these countries was much better than it was in the United States.
Unfortunately, this credit expansion did not create inflation -- I say
unfortunately, because price inflation might have stopped the credit
expansion in its tracks."
But if there's no price inflation, why worry?
"Here's where we have to separate the definitions of inflation.
Inflation is not just a rise in prices. It's a state of affairs that
says credit is too easy. Easy credit will inevitably lead to rising
prices, but over a longer period of time. But easy credit surely
leads to a process of excess credit creation where people borrow
money to go into all kinds of speculative ventures. These credit
cycles are really the causes of trade depressions. So you're right -
- there's no price inflation, and some people are even worried about
price deflation. We don't believe that's possible with the rate of
monetary expansion we have now. But what we could get -- and this is
the real danger -- is debt deflation."
What's the effect of debt deflation?
"If the central bank stopped injecting credit, you get a situation
where creditors start to demand repayment from debtors who can't pay.
Debt deflation can cause a depression."
So what's next?
"The crisis will widen. It will travel from Asia to Russia, Greece,
Brazil. Eventually it will come back to the United States. It will
not be a repeat of the 1970s, because the monetary expansion isn't
as great. But the liquidity is in the system and we believe the United
States is going to go into a very large trade deficit in the next few
years. Then the U.S. dollar will come under pressure and you will
start getting price inflation. The whole world is resting on the
United States' shoulders right now, because the U.S. economy is still
strong, and everybody needs the United States to be strong because
everybody else is going to try to export their way out of their
Copyright 1998, The Globe and Mail Company
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