Globalization and its Discontents is really about how the IMF and the US Treasury made the Asian financial crisis of 1997 worse than it need have been by insisting on bailing out Western™ banks. Stiglitz advocates a more Keynesian approach to crisis management within each country, and expedited bankruptcy with the creditors taking heavy losses.

AN ALTERNATIVE STRATEGY

In response to complaints I continue to raise about the IMF-Treasury strategy, my critics have rightly asked what I would have done. This chapter has already hinted at the basic strategy: Maintain the economy as close to full employment as possible Attaining that objective, in turn entails an expansionary (or at least non contractionary) monetary and fiscal policy, the exact mix of which would depend on the country in question. I agreed with the IMF on the importance of financial restructuring—addressing the problems of weak banks—but I would have approached it totally differently, with a primary objective of maintaining the flow of finance, and a standstill on debt repayment: a debt restructuring, such as that which eventually worked for [South] Korea. Maintaining the flow of finance, in turn, would require greater efforts at restructuring existing institutions. And a key part of corporate restructuring would entail the implementation of a special bankruptcy provision aimed at the quick resolution of distress resulting from the macroeconomic disturbances that were well beyond the normal. The US bankruptcy code has provisions which allow for relatively quick reorganization of a firm (rather than liquidation), called Chapter 11. Bankruptcy induced by macroeconomic disturbances, as in East Asia, call[s] for an even faster resolution—in what I refer to as super-Chapter 11.

With or without such a provision, strong intervention of government was required. But the intervention of the government would have aimed at financial restructuring—establishing clear ownership of firms, enabling them to reenter credit markets. That would have enabled them to take full advantage of the opportunities for export that resulted from their lower exchange rate. It would have eliminated the incentive for asset stripping; it would have provided them with strong incentives to engage in any real restructuring that was required—and the new owners and managers would have been in a better position to guide this restructuring than international or domestic bureucrats, who, as the expression goes, have never met a payroll. Such financial restructuring didn't require huge bailouts. The disillusionment with the large bailout strategy is now almost universal I cannot be sure that my ideas would have worked, but there is little doubt in my mind that the chance of success with this strategy was far greater than with the IMF's plan, which failed in ways that were perfectly predictable, at huge costs.

The IMF did nor learn quickly from its failures in East Asia. With slight variants, it repretedly tried the large bailouts strategy. With the failures in Russia, Brazil and Argentina, it has become clear that an alternative strategy is required, and there is today increasing support for at least some of the key elements of the approach I have just described. Today [in 2002], five years after the onset of the crisis, the IMF and the G-7 are talking about giving greater emphasis to bankruptcy and standstills (short-term freezes on payments), and even the temporary use of capital controls. We will return to those reforms later, in Chapter 9

(Op. cit., Ch. 4: The East Asian Crisis)

Basically what happened in 1997 is that market liberalization, free flow of capital and floating exchange rates wreaked the East Asian economies when as a result of changes in global market sentiment about a country foreign investors pulled their capital, devaluing the currency and making it impossible for foreign loans to be repaid, leading to bank failures. The response of the IMF and the US Treasury was to prop up the currencies and bail out the Western™ creditors. The propped-up exchange rate allowed wealth to flee the country in favourable terms, pushing down the exchange rate back down a second time, and the bailouts did nothing to shorten the recession. In addition, the IMF imposed monetary and fiscal austerity measures which made the recession worse.

A few years on, the same global capital market liberalization and bank deregulation has wrecked the Western™ banking sector, and governments left and right are bailing out the creditors of the failing banks, and espouting the need for fiscal and monetary austerity. Will we ever learn?

In the particular case of the Credit Crunch of 2008, the creditors and debtors are both banks, but the draught in credit threatens to take down the real economy by starving it of its operating credit (let alone investment credit). What needs to be done is for banking regulators to step in, take over failing banks, guarantee deposits, dismiss management, appoint administrators, restructure the debt, (mostly) wipe out the shareholders and creditors and get the banks lending again on more stringent standards. Bailouts are protecting management, shareholders and creditors, and doing nothing to restart the flow of credit.