Economics Update (January-March 1998)

Learning the Right Lessons
From the Asian Crisis

I f the U.S. trade deficit worsens this year — and Jack Guynn, president and chief executive officer of the Federal Reserve Bank of Atlanta, believes that it will — then the United States may learn all the wrong lessons and forget the right ones that should be drawn from the Asian financial crisis. Guynn shared his insights into the crisis in his annual speech on the state of the economy.

The Wrong Lessons

Referring to the wrong lessons of the Asian crisis, Guynn said, "The widening trade gap won't affect GDP significantly, but its effects will be more acute for particular industries and regions. I am concerned that the voices of discontent and the voices that shouted down Fast Track will become a protectionist chorus."

While acknowledging that "no one is suggesting a return to the protectionist Smoot-Hawley era," a reference to the 1930 U.S. tariff law that is widely believed to have contributed to the Great Depression, Guynn expressed concern about protectionist influences that appeared last year. Referring to Congress's failure to extend the Fast Track trade negotiating authority of the president and refusal to negotiate a trade agreement with Chile, Guynn stated, "It's one thing to reject a trade agreement because it concedes too much. But it's quite another to refuse to sit down at the negotiating table." He noted that Chile's economy is less than 1 percent the size of the U.S. economy.

Citing U.S. initiation of the Marshall plan, GATT and the global intellectual property protection regime, Guynn asked, "Does anyone really think we're worse off for our economic leadership?"

The Right Lessons

The right lessons are to be drawn from understanding the Asian crisis. During late 1997 and continuing into 1998, stock markets in Hong Kong, Japan, Malaysia, the Philippines, South Korea and Thailand experienced considerable declines. To make matters worse, there were significant currency declines versus the dollar in Indonesia, Malaysia, South Korea and Thailand.

What triggered this turmoil? According to Guynn, the crisis was the result of unsustainable government-directed policies, including government-directed investment and currency pegging. He added, "the market couldn't be fooled forever. Foreign lenders eventually got worried about exchange rates and did not renew some loans. When countries appeared unable to pay foreign debts, local currencies were dumped in the scramble for solid assets. When currencies fell, real estate and stocks followed. And when that happened, banks collapsed too."

As for Japan's situation, which he termed different and more complex, he said its policies "allowed banks to make some staggeringly bad loans." Japan then attempted to defy the market by keeping "banks and brokerage houses afloat in the hopes that an expanding economy and recovering asset prices would finally bail them out." Noting that this bailout did not happen, Guynn added, "I'm encouraged that in recent months Japan has finally allowed some financial institutions to close."

"The lesson for the future, is that 'today's international economic markets will not long tolerate government-directed policies.'"
The lesson for the future, said Guynn, is that "today's international economic markets will not long tolerate government-directed policies. A secondary lesson is that obfuscation — keeping information from the market — only delays and exacerbates the inevitable."

What does all this mean for the United States? Fortunately, according to Guynn, the United States has not really embraced industrial policy except — arguably — at the state level. More broadly, he said, the United States learned from its own S&L crisis about the dangers of inadequate financial supervision and lack of transparency. "We've significantly reformed the way U.S. financial institutions are regulated, and we're making progress toward ensuring that market information is available to the markets."

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