Today, the NYTimes printed the first of a four part series examining the global financial crisis. The teaser from their website:

"The first article in a series on the worldwide financial crisis that over the last 20 months has toppled some governments and hobbled others. The crisis illustrates how globalization increasingly stitches lives all over the world into a single economic quilt."

http://www.nytimes.com/library/world/global/021599global-econ.html

February 15, 1999

Who Sank, or Swam, in Choppy Currents of a World Cash Ocean

By NICHOLAS D. KRISTOF with EDWARD WYATT

(Today's article focuses on Mary Jo and George Paoni, a couple from Cantrall Ill. She says - "I wouldn't invest in Asia...investing in Asia frightens me." However, money they have in money-market and retirement accounts is invested in Asia, whether they know it or not. The other focus is on Mr. Salamet, a Rickshaw driver in Jakarta, Indonesia. The article describes how he was not able to afford to pay $2 a day for painkillers for his mother dying of cancer, he may not be able to afford to continue to send his son to school or pay off the loan for his rickshaw, due to a drop in fares.

Naturally, there is no mention of Y2K in this piece, but here are a few salient snips for those who still have not grasped the interconnectedness of the global economy - )

. . . The worldwide financial crisis over the last 20 months has toppled some governments and hobbled others. The crisis has turned Salamet's life upside down without affecting Mrs. Paoni at all -- but it illustrates how globalization increasingly stitches lives all over the world into a single economic quilt.

In the new economic landscape that has emerged in recent years, the pool of international investments has grown to dwarf the sums that governments can muster, and money zips around the globe far faster than ever before. The result is a world more prosperous, but also perhaps more wobbly.

"More and more people are asking whether the international financial system as it has operated for most of the 1990s is basically unstable," Ian McFarlane, governor of Australia's central bank, said at a recent conference in Singapore. "And I think by now the majority of observers have come to the conclusion that it is . . ."

. . . The initial impulse in the United States as the crisis erupted was to see the problems as an outgrowth of Asian corruption and cronyism. These probably made the situation worse, but a growing body of evidence suggests that there was nothing uniquely Asian about these countries' problems, and that the catastrophe was worsened by folly and hubris in the United States and Europe.

It was bankers and investors in Moscow and the Thai capital, Bangkok, who speculated wildly on stocks and real estate and thus built up catastrophic bubble economies. But it was U.S. officials who pushed for the financial liberalization that nurtured the speculation (even if developing nations themselves welcomed it).

And it was U.S. bankers and money managers who poured billions of dollars into those emerging markets. Then, when the crisis hit, U.S. officials insisted on tough measures like budget cuts and high interest rates, which many economists argue made things worse . . .

. . . Resentment at U.S. policies -- and perhaps at the United States' economic success -- has also led to a sense in many countries that the global economy is at an ideological turning point. In particular, there is a growing backlash against what some nations regard as an American model of laissez-faire capitalism, which rescues Connecticut hedge funds but sacrifices Indonesian children.

Particularly in Tokyo and Paris, where markets have always been regarded as something like ornery oxen -- best when firmly yoked and even then prone to leave messes -- there is talk of sturdier harnesses to guide capital flows, speculators and markets themselves.

What does all this portend? And how can it be that, as David Hale, chief economist of the Zurich Group, describes the financial upheaval of the last year and a half, "a real-estate crisis in Bangkok set in motion something that has no parallel in human history"? . . .

. . . In 1980 less than 1 percent of pension-fund assets in the United States was invested abroad, but by 1997 that figure had risen to 17 percent. And so, as part of the process bandied about as "globalization," Mrs. Paoni has tiny financial stakes in dozens of countries around the world.

One reason Americans like her and her pension-fund managers used to be unwilling to invest in places like Indonesia was the description "Third World markets," which had an ominous ring. In the mid-1980s the International Finance Corp. of the World Bank was trying to drum up support for a Third World investment fund, when one listener complained about the terminology.

"No one wants to put money into the Third World investment fund," the man protested. "You'd better come up with something better."

So in just a few days officials dreamed up an alternative -- "emerging markets" -- and it proved a winner. The first emerging-markets fund came out in 1986, and the craze was born . . .

. . . Thai officials were furious that U.S. hedge funds and banks were investing billions of dollars in a bid to destabilize their country, and they worried about the consequences of such speculative battles on all of Asia. In May 1997 Mr. Rerngchai, the central bank chief, sent a secret letter of complaint to Alan Greenspan, the chairman of the Federal Reserve Board, urging him to rein in U.S. hedge funds and other financial institutions.

Rerngchai warned that the attack on Thailand "could have far-reaching implications on the economy both of Thailand and the Asian region" and "threatens to jeopardize the stability of international financial markets . . ."

. . . The correspondence, made available by a Thai central bank official and confirmed by another government official, shows that the Fed's response came not from Greenspan but from an aide, Edwin Truman. He blandly acknowledged that "large financial firms" can disrupt markets of countries like Thailand but added that these matters were best left to the markets.

Greenspan declined to comment. "All communications with other central banks are private," said Lynn Fox, spokeswoman for the Federal Reserve in Washington.

There was another opportunity for the leading countries to confront the problems before the crisis erupted. In late June 1997, the seven leading industrialized nations held their summit meeting in Denver, and aides say that in the confidential discussion among leaders, the Japanese prime minister at the time, Ryutaro Hashimoto, called for the industrial countries to discuss the financial instability in Thailand.

Japanese officials were expectant, waiting for President Clinton and other leaders to take up the matter. But according to one U.S. official who was there, Hashimoto was typically understated, tentative and vague (as is considered polite in Japan), and did not call for any specific action.

So President Clinton and the other world leaders paid no attention . . .

. . . The foreign banks and hedge funds had won, and Thailand had lost. Since Thailand had run out of money, it would have to drop the peg with the dollar and let the baht float at whatever rate the market set. It was a foreshadowing of what would happen in Brazil 18 months later.

"I said I didn't see any choice in dealing with the situation," Thanong ( Thai Finance Minister) recalled . . .

. . . The global crisis had just detonated.

Tuesday:

How the United States, seeking freer capitol flow, knocked on the poorer nation's doors and got a warm welcome.

Wednesday:

From Asia to Russia to Brazil, markets intertwined in sometimes dangerous ways.

Thursday:

The autopsy of a world crisis, and what it tells some experts about avoiding future ills.

-- pshannon (pshannon@inch.com), February 15, 1999

Answers

Thanks pshannon,

Please, if you would, post Tuesday through Thursdays pieces too.

May Gods Will Be Done

Mike

-- flierdude (mkessler0101@sprynet.com), February 15, 1999.

wow, ps... thanks.

Once confidence is lost I suppose there wont be any bottom to this pit we're gonna fall into, huh?

Mike =====================================================================

-- Michael Taylor (mtdesign3@aol.com), February 15, 1999.

Thanks pshannon - I've read your posts in another time and another place (nytimes - y2k). Great Post and if you read InfoMagic you see how it all fits together.

-- Steve (onchange@earthlink.XOUT.nte), February 15, 1999.

The Denver Post is carrying it too - interesting, very interesting glasshoppa...

-- Andy (2000EOD@prodigy.net), February 15, 1999.

One point worth adding to this is that, if you study Charles Kindleberger's classic "Manias, Panics & Crashes," he points out that financial crises have historically not remained limited to one country or region, but have normally spread around the world. We are seeing this happen now. Most people don't realize that Brazil's problems have implications back into Asia as well. And the UK may be sliding into recession as well.

-- Drew Parkhill/CBN News (y2k@cbn.org), February 15, 1999.