Tue Feb 26th, 2008 at 01:13:48 PM EST
In "Financial Hypocrisy", a recent article published in "The Economists' Voice", Joseph Stiglitz compares the current financial crisis with the East-Asia crisis which occurred ten years ago (see his book "Globalization and Its Discontents") and shows that the main actors (in that case IMF and the US Treasury) are promoting totally different policies. Have they learned from the East Asia crisis, or are they hypocritical?
Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. (snip) The fundamental problem was premature capital market liberalization.
It is no accident that the very countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth. (India and China, who have not liberalized capital markets, have been the fastest-growing economies.)
Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc.
The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. In the current crisis, the U.S. Federal Reserve and the European Central Bank cut interest rates, fearing the collapse that high interest rates could cause.
The countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation. But lack of transparency played a central role in this past summer's credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what. Yet, there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem). Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.
Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture was needed. Why has nothing been done? Look no further than the fact that while the current system leads to unnecessary instability and imposes huge costs on developing countries, the current system serves the profit interests of many well. It is not surprising, then, that ten years later, there has been no fundamental reform. Nor, that the world is once again facing a period of global financial instability, with uncertain outcomes for the world's economies.
So, when we notice the fact that Anglo Disease promoters like Martin Wolf and Wolfgang Munchau seem to suddenly discover the nature of the crisis, should we rejoice or should we see it as a show of hypocrisy?