08 Mar 2009

Australian PM Blames Geithner for Directly Messing Up Indonesia, and Indirectly for Contributing to Housing Boom

All Posts No Comments

Tokyo Tom passed along this very interesting piece describing the accusations. (EPJ has two follow ups here and here.)

I’ll boil down the essentials here:

In a speech…[former Australian PM] 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.”

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.”

Now I’m not necessarily endorsing Keating’s analysis. For one thing, it sounds like he’s saying that everything was chugging along nicely, until Indonesia cut its government spending. Obviously I don’t endorse that.

However, it wouldn’t surprise me in the least if the IMF “austerity” measures messed up the region. When compassionate leftists complain that the cold-hearted IMF foists “market reforms” on beleaguered countries, my eyebrow shoots up. For one thing, I went to school with people who were going to work for the IMF, and believe me, they did not have dog-eared copies of Free to Choose lying around.

As I explained in the PIG to Capitalism (link is on the left margin if you’re curious), the IMF and World Bank austerity measures would–yes–involve things like lowering tariffs, but that sometimes include tax hikes to close budget deficits. Remember that the financial press described the Bush years as extreme deregulation, the next time you read that the IMF foists capitalism on socialist dictators.

Anyway, even though I came out strongly against the “global savings glut” explanation for the housing boom, in some conversations with Bill Barnett and Tom Woods, I came around to the position that the Bank of China’s actions could have exacerbated Greenspan’s ridiculous interest rates in the early to mid-2000s.

Think of it like this: Greenspan flooded the market with a bunch of new credit after the dot-com crash and 9/11 attacks. Now if the US were just a regular old country, the result would have been a decline in the foreign exchange value of the dollar, and hence a rise in the price of imports into the US. In other words, Greenspan’s money pumping would have led to domestic price inflation, and he would have had to back off.

But because the Chinese central bank had pegged the yuan (or renminbi) to the dollar, this in effect meant the Chinese were committed to sopping up as many US assets (mostly Treasury debt) as they had to, to prevent Greenspan’s inflation from causing the dollar to depreciate against the yuan. So I’m not sure if that would be reflected in the figures of “global savings rate,” but surely it didn’t help things.

Comments are closed.