In the last frames of Frank Capra's
It's a Wonderful Life
, tearful townspeople rush to add deposits to a local savings and loan that is rumored to be failing. The whole town shows up to make big heart-warming speeches and to chip in every last dime of their savings. According to David Sanger's story in today's
New York Times
, that is practically what the
was thinking would happen when it ordered
to close down some of its busted banks.
Surprise, surprise! It turns out that depositors actually run away from -- not toward -- a financial system that is on the rocks! Sanger's story is based on a confidential IMF internal report that is critical of how the Indonesian rescue was conducted. This revelation is even more damaging than the previous leak that indicated the IMF had grossly misunderstood the
situation -- just one month ahead of that nation's economic collapse. (Click
here to look at that story in
The new memo shows that the IMF originally figured that it could restore confidence in the Indonesian banking system by ordering the closures. A subtle but devastating miscalculation. The plan backfired -- investors reacted by fleeing from not just the "bad banks" but
the banks. This in turn aggravated the crisis and created new weakness in the currency. Of course this was greatly exacerbated when one "family owned" bank was re-opened and when
gave his defiant speech with 24% spending hikes.
Clearly, things are getting worse for the IMF. This memo is going to be a big problem even though it puts the blame correctly on the Suharto government. But critics are going to point accusing fingers at the fund. The memo gives more ammunition to its enemies in Congress who want to obstruct the IMF's funding proposals. Just today, Democratic representative
joined the pack of IMF attack dogs -- he says he is opposed to bailouts for "banks, speculators and dictators."
How about independent counsels, or are we off that topic now? I do take some umbrage at the speculator crack. Go read
testimony on that, Mr. Congressman -- the speculators didn't bring down Asia and they don't need the IMF's or anyone else's help. Next, Bonior showed his true colors when he declared he was against any package that "hurts Asian workers." Translation: I'm with Gephardt -- let's lower the boom on these guys before they steal good American jobs.
On another plane, the Southeast Asian countries might decide to use the report to cry foul. They could claim that the IMF, with its painful austerity program, should not be trusted, given that it botched the Indonesian recovery.
* * * * *
Austerity: The Road to Prosperity?
Cut government spending, shrink domestic demand and cancel big capital investment projects -- that's what the IMF, with the full endorsement of the United States, has mandated for Korea,
and Indonesia. It recommends the same for the rest of Southeast Asia. Meanwhile, the American Treasury wants
to escape its eight-year recession by pouring on the economic stimulus. Does this make sense?
Looking at a country like Thailand or Indonesia, one might suppose that the best thing to do would be to go for fiscal stimulus. Why not, as they are in a slump. No dice. You do that and the value of the currency will crash and burn (even more than it already has). The reason is that these countries are so discredited in financial circles that they have no capital account viability.
In the old days, Asia was the darling of the investment world. It was no problem to find foreign investors to bridge the gap between the high level of imports and the relatively smaller level of exports. For example, at the start of this year, when
was forecast to run a huge current-account deficit, larger than 8% of GDP, nobody had the slightest concern. Capital was pouring into the place. The only worry out of Kuala Lumpur was that the ringgit was too strong! Now the tables have turned.
The whole process by which they mounted up these tremendous foreign exchange debts is working in reverse. But now money is leaving. It would help if exports would rise, but that might take time to amount to anything meaningful. Imports have to drop or the currency will get crushed. How do you slow down imports? You restrict domestic demand and cut back on big government projects. Barring that, the currency of each of these countries is doomed. It looks like the IMF is right. Austerity is the only ticket, I am afraid.
But Not for Japan
Interestingly enough, exactly the opposite advice is being told to the Japanese. They are being instructed in the virtues of cutting taxes and increasing spending. Most of all, they are being told to stimulate domestic demand. The big consumption tax hike that
supported has turned into a bust. Every economic indicator for Japan is pointed south.
How could fiscal stimulus be good for Japan but bad for the rest of Asia? The difference is that Japan is a current-account-surplus nation. They export far more than they import so they don't need foreign investment. In fact, you can forget this silly idea that they will sell all their U.S. Treasury bonds -- with a current-account surplus the size of a whale, the Japanese can be counted on to buy bonds for a long time. So listen up, MoF: Stimulate away! And tell the BoJ to goose the money supply while you are at it, gentlemen.