the immediate intervention of both international financial
institutions such as the IMF and of domestic ones in the developed
countries, such as the Federal Reserve in the USA. The danger seems to
have passed, though recent tremors in South Korea, Brazil and Taiwan
do not augur well. We may face yet another crisis of the same or a
larger magnitude momentarily.
What are the lessons that we can derive from the last crisis to avoid the next?
The first lesson, it would seem, is that short term and long term
capital flows are two disparate phenomena with very little in common.
The former is speculative and technical in nature and has very little
to do with fundamental realities. The latter is investment oriented
and committed to the increasing of the welfare and wealth of its new
domicile. It is, therefore, wrong to talk about "global capital
flows". There are investments (including even long term portfolio
investments and venture capital) - and there is speculative, "hot"
money. While "hot money" is very useful as a lubricant on the wheels
of liquid capital markets in rich countries - it can be destructive in
less liquid, immature economies or in economies in transition.
The two phenomena should be accorded a different treatment. While long
term capital flows should be completely liberalized, encouraged and
welcomed - the short term, "hot money" type should be controlled and
even discouraged. The introduction of fiscally-oriented capital
controls (as Chile has implemented) is one possibility. The less
attractive Malaysian model springs to mind. It is less attractive
because it penalizes both the short term and the long term financial
players. But it is clear that an important and integral part of the
new International Financial Architecture MUST be the control of
speculative money in pursuit of ever higher yields. There is nothing
inherently wrong with high yields - but the capital markets provide
yields connected to economic depression and to price collapses through
the mechanism of short selling and through the usage of certain
derivatives. This aspect of things must be neutered or at least
countered.
The second lesson is the important role that central banks and other
financial authorities play in the precipitation of financial crises -
or in their prolongation. Financial bubbles and asset price inflation
are the result of euphoric and irrational exuberance - said the
Chairman of the Federal Reserve Bank of the United States, the
legendary Mr. Greenspun and who can dispute this? But the question
that was delicately side-stepped was: WHO is responsible for financial
bubbles? Expansive monetary policies, well timed signals in the
interest rates markets, liquidity injections, currency interventions,
international salvage operations - are all co-ordinated by central
banks and by other central or international institutions. Official
INACTION is as conducive to the inflation of financial bubbles as is
official ACTION. By refusing to restructure the banking system, to
introduce appropriate bankruptcy procedures, corporate transparency
and good corporate governance, by engaging in protectionism and
isolationism, by avoiding the implementation of anti competition
legislation - many countries have fostered the vacuum within which
financial crises breed.
The third lesson is that international financial institutions can be
of some help - when not driven by political or geopolitical
considerations and when not married to a dogma. Unfortunately, these
are the rare cases. Most IFIs - notably the IMF and, to a lesser
extent, the World Bank - are both politicized and doctrinaire. It is
only lately and following the recent mega-crisis in Asia, that IFIs
began to "reinvent" themselves, their doctrines and their recipes.
This added conceptual and theoretical flexibility led to better
results. It is always better to tailor a solution to the needs of the
client. Perhaps this should be the biggest evolutionary step:
That IFIs will cease to regard the countries and governments within
their remit as inefficient and corrupt beggars, in constant need of
financial infusions. Rather they should regard these countries as
CLIENTS, customers in need of service. After all, this, exactly, is
the essence of the free market - and it is from IFIs that such
countries should learn the ways of the free market.
In broad outline, there are two types of emerging solutions. One type
is market oriented - and the other, interventionist. The first type
calls for free markets, specially designed financial instruments (see
the example of the Brady bonds) and a global "laissez faire"
environment to solve the issue of financial crises. The second
approach regards the free markets as the SOURCE of the problem, rather
than its solution. It calls for domestic and where necessary
international intervention and assistance in resolving financial
crises.
Both approaches have their merits and both should be applied in
varying combinations on a case by case basis.
Indeed, this is the greatest lesson of all:
There are NO magic bullets, final solutions, right ways and only
recipes. This is a a trial and error process and in war one should not
limit one's arsenal. Let us employ all the weapons at our disposal to
achieve the best results for everyone involved.
About The Author
Sam Vaknin is the author of "Malignant Self Love - Narcissism
Revisited" and "After the Rain - How the West Lost the East". He is a
columnist in "Central Europe Review", United Press International (UPI)
and ebookweb.org and the editor of mental health and Central East
Europe categories in The Open Directory, Suite101 and
searcheurope.com. Until recently, he served as the Economic Advisor to
the Government of Macedonia.
His web site: http://samvak.tripod.com
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