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Friday 26 September 2008
Asia Ponders the Demise of Wall Street’s ‘Superior Model’
A decade ago, Alan Greenspan, then the Federal Reserve chairman, declared that Asia would realize that “market capitalism, as practiced in the West, especially in the United States, is the superior model.” PDF
Asia Ponders the Demise of Wall Street’s ‘Superior Model’
By David Chance and Yoo Choonsik
24 September 2008
KUALA LUMPUR: A decade ago, Alan Greenspan, then the Federal Reserve chairman, declared that Asia would realize that “market capitalism, as practiced in the West, especially in the United States, is the superior model.”
Asian governments never quite saw it that way. Now, policy makers in the region may feel that the collapse of Wall Street investment banks and Washington’s planned $700 billion bailout have vindicated their suspicion of freewheeling capitalism.
The implications for investors in the region are enormous. Governments may slow deregulation, rush to the rescue of troubled companies or clamp down more quickly on market ructions.
Greenspan made his comments about the “superior model” to U.S. lawmakers to justify a bailout for the collapsing Asian economies during the crisis of 1997 and 1998. He is now accused by some economists of pursuing a lax monetary policy that helped create the bubble that led to Wall Street’s implosion.
Asian policy makers have not forgotten the hectoring they got from the United States and the International Monetary Fund, which dispensed cash in exchange for raising interest rates, closing banks, curtailing spending and opening markets.
“At that time,” the IMF and U.S. officials “behaved as if they were treating an owner of a small business just about to go bankrupt,” said Chung Duck Koo, who was the chief South Korean negotiator with the IMF in 1997, when he was a deputy finance minister.
Officials in Malaysia, which spurned both the cash and the IMF’s advice by fixing the value of its currency, the ringgit, and imposing capital controls back in 1998, see Washington’s rescue efforts as proof that U.S. policy makers are adjusting their thinking.
“We are now seeing the West, particularly the U.S., ignoring the standard IMF prescriptions and implementing the same measures that Malaysia had done during the 1997 crisis,” said Nor Mohamed Yackop, a Malaysian Finance Ministry official, who in 1998 helped impose capital controls.
Ten years ago, Asia was on its knees with a financial meltdown in the region after a series of crises in Latin America that later bankrupted Russia. Despite high growth and low inflation, Asia’s so-called tiger economies succumbed because of overvalued exchange rates, persistent current account deficits, speculation in financial markets and dependence on short-term sources of capital.
Most countries applied the IMF’s bitter medicine, and subsequently South Korea’s economy shrank 7 percent in 1998, Indonesia’s contracted 13 percent and Thailand’s slumped 10.5 percent, according to IMF data.
But the region recovered quickly, amassing in the process trillions of dollars in foreign currency reserves, first as a defense against future crises and later because of windfall profits from the global commodity boom.
Much of those reserves are invested in U.S. Treasury bonds, so they are bankrolling Washington’s efforts to contain the current crisis. The latest plan is to buy toxic debt estimated at $700 billion, with the total cost of its rescue efforts estimated at as much as $1.8 trillion.
The irony is not lost on nations that took draconian steps in return for the $35 billion the IMF initially offered in 1997 to rescue Indonesia, South Korea and Thailand, later topped up with an extra $77 billion.
Critics say the “Washington consensus,” a term referring to the market liberalization pursued by the IMF and the United States, has led to the current crisis.
“It was so patronizing. First it was the lazy Latinos, then it was the corrupt Asians and their crony capitalists,” said Stephany Griffith-Jones, executive director of the Initiative for Policy Dialogue at Columbia University, and a leading authority on capital flows and developing economies.
“The lesson is: You need to regulate everything. Any deregulated market in developed and developing countries leads to these results,” Griffith-Jones said.
Others say, however, that the IMF-bashing goes too far and that the crises in Latin America and Asia were largely of their own making. They also argue that it is impossible to stanch the capital flows that finance growth in many developing economies.
“No doubt capital markets have plenty of problems; often they generate these bubbles,” said Domingo Cavallo, who was Argentina’s finance minister from 1991 to 1996. “The bubble explodes and then there is a financial crisis.”
“So far, there has been no recipe for avoiding these problems,” said Cavallo, who was the architect of the Argentine plan that fixed the dollar-peso rate at parity, a decision that crushed inflation and contributed to an increase in growth and investment.
Chung, of South Korea, said that wealthy nations might tighten regulation and intervene more in markets, but that developing countries could ill afford to revert to pre-1997 policies.
“In developing or underdeveloped countries, in which each government has the mission to improve overall welfare and overall income level, there is no choice for them but to continue to accept and pursue globalization,” he said.
By Tom Ferraro and Richard Cowan 26 September 2008
WASHINGTON (Reuters) – A rescue for the U.S. financial system unraveled on Thursday amid accusations Republican presidential candidate John McCain scuppered the deal, and Washington Mutual was closed by U.S. authorities and its assets sold in America's biggest ever bank failure.
As negotiations over an unprecedented $700 billion bailout to restore credit markets degenerated into chaos, the largest U.S. savings and loan bank was taken over by authorities and its deposits auctioned off. U.S. stock futures fell by more than 1 percent.
The third-largest U.S. bank JPMorgan Chase & Co said it bought the deposits of Washington Mutual Inc, which has seen its stock price virtually wiped out because of massive amounts of bad mortgages. The government said there would be no impact on WaMu's depositors and customers. JPMorgan said it would be business as usual on Friday morning.
Had a bailout deal been reached in Congress, it may have helped the savings and loan, founded in Seattle in 1889. Efforts to find a suitor to buy WaMu faltered in recent days over concerns about whether the government would reach a deal to buy its toxic mortgages.
Earlier on Thursday, U.S. lawmakers had appeared close to a final agreement on the bailout, lifting world stock markets and sending the dollar higher. But things spun off course during an emergency White House meeting between Congressional leaders with U.S. President George W. Bush.
In advance of that meeting, which included the two men battling to succeed him, Democrat Barack Obama and McCain, a compromise bipartisan deal seemed imminent.
After the session, Congressional leaders said an agreement could take until the weekend or longer.
Republican U.S. Sen. Richard Shelby bluntly told reporters, "I don't believe we have an agreement." He later said the deal was in "limbo."
A group of conservative Republican lawmakers proposed an alternative mortgage insurance plan, eschewing the Bush administration's Wall Street bailout just weeks before the November 4 election as many lawmakers try to hold on to their seats.
Democrats said McCain had scuppered the anticipated agreement by throwing his support behind that scheme.
"Sen. McCain has sided with the House Republicans who want to start with a completely different approach and reject what President Bush put forward," said Rep. Henry Waxman, chairman of the House Committee on Oversight and Government Reform.
"It's hard to imagine where we go from here," he said.
The conservative group's plan calls for the U.S. government to offer insurance coverage for the roughly half of all mortgage-backed securities that it does not already insure.
The architects of the original plan, U.S. Treasury Secretary Henry Paulson and U.S. Federal Reserve Chairman Ben Bernanke, rushed to Capitol Hill for late night meetings to urge House Republicans to get back on track.
"It is critical that this legislation get done quickly," White House spokesman Tony Fratto said. "We have serious concerns about the state of our credit markets."
U.S. Senate Banking Committee Chairman Christopher Dodd said a deal could take beyond Friday to reach and took a firm swipe at McCain, who returned from his presidential campaign to try to broker a deal.
"What this looked like to me was a rescue plan for John McCain for two hours," Dodd told CNN. "To be distracted for two to three hours for political theater doesn't help."
INJECTION OF POLITICS
Also speaking to CNN, Obama said of McCain's involvement, "The concern that I have ... is that when you start injecting presidential politics into delicate negotiations then you can actually create more problems rather than less."
Earlier, news that a deal was near stabilized beleaguered money markets, frozen by a reluctance by banks to lend. The rate on one-month U.S. Treasury bills shot higher as traders unwound safe-haven trades.
Still, officials from France to China voiced alarm.
"A crisis of confidence without precedent is shaking the global economy," French President Nicolas Sarkozy said in a speech in Toulon, France.
As Thursday's meeting began, Bush warned, "We're in a serious economic crisis in the country if we don't pass a piece of legislation."
U.S. Rep. Barney Frank, the powerful Democratic chairman of the House Financial Services Committee, said before the Bush meeting that the deal would give the money to the U.S. Treasury in installments rather than a $700 billion lump sum the Bush administration wanted.
The enormity of the deal, which would cost every man, woman and child in the United States about $2,300, led many lawmakers to ask Paulson during two days of rancorous hearings this week to take the cash in installments.
The bailout exceeds total lending by the International Monetary Fund since its inception after World War II. The IMF has loaned $506.7 billion since 1947 to countries in crisis as far flung as Argentina, Britain, Turkey and South Korea.
Frank also said the deal would allow the government to take part-ownership of banks and ban companies that sell toxic assets to the government from paying massive "golden parachutes" to executives being fired.
Reflecting that the current crisis appears to be the most serious since the Great Depression of the 1930s, fresh Federal Reserve data showed U.S. banks and money managers have borrowed a record $188 billion daily in recent days from the Fed -- a daily amount roughly equal to Argentina's annual economic output.
"This looks like the balance sheet of a central bank that is keeping the financial system on life support," said Michael Feroli, U.S. economist with JPMorgan in New York.
The swirl of political theater and meetings in Washington followed fresh turbulence in the world economy.
Orders for costly U.S. manufactured goods plunged in August, new-home sales hit a 17-year low, while new claims for jobless benefits shot up last week. ID:nN25327565
Top U.S. industrial conglomerate General Electric Co, widely seen as a bellwether of the U.S. economy, issued a profit warning, citing "unprecedented weakness and volatility" in the financial services market. ID:nN25394000
The crisis reverberated in Amsterdam and Brussels, where Fortis NV, the Belgian-Dutch financial services group, denied a rumor the Dutch Central Bank had asked a Fortis rival to support the company's liquidity position. Fortis shares sank as much as 21 percent to 14-year lows.
In Asia, hundreds of people lined up outside the Hong Kong branches of the Bank of East Asia Ltd, some sleeping there overnight, to withdraw their savings.
China's banking regulator sought to reassure jittery financial markets, denying a report that it had told local banks to stop lending to U.S. banks.
INTENSE BAILOUT TALKS
The crisis comes after a month of turbulence marked by the government's takeover of mortgage companies Fannie Mae and Freddie Mac, the bailout of insurer American International Group Inc, and the bankruptcy filing of investment bank Lehman Brothers Holdings Inc.
Concern lingered that even with a bailout, the United States may stumble, prompting a global slowdown.
German Finance Minister Peer Steinbrueck said one outcome of the crisis would be a less dominant role for the United States in the global financial system.
"The United States will lose its superpower status in the world financial system. The world financial system will become more multipolar," he said.
2 comments:
Asia Ponders the Demise of Wall Street’s ‘Superior Model’
By David Chance and Yoo Choonsik
24 September 2008
KUALA LUMPUR: A decade ago, Alan Greenspan, then the Federal Reserve chairman, declared that Asia would realize that “market capitalism, as practiced in the West, especially in the United States, is the superior model.”
Asian governments never quite saw it that way. Now, policy makers in the region may feel that the collapse of Wall Street investment banks and Washington’s planned $700 billion bailout have vindicated their suspicion of freewheeling capitalism.
The implications for investors in the region are enormous. Governments may slow deregulation, rush to the rescue of troubled companies or clamp down more quickly on market ructions.
Greenspan made his comments about the “superior model” to U.S. lawmakers to justify a bailout for the collapsing Asian economies during the crisis of 1997 and 1998. He is now accused by some economists of pursuing a lax monetary policy that helped create the bubble that led to Wall Street’s implosion.
Asian policy makers have not forgotten the hectoring they got from the United States and the International Monetary Fund, which dispensed cash in exchange for raising interest rates, closing banks, curtailing spending and opening markets.
“At that time,” the IMF and U.S. officials “behaved as if they were treating an owner of a small business just about to go bankrupt,” said Chung Duck Koo, who was the chief South Korean negotiator with the IMF in 1997, when he was a deputy finance minister.
Officials in Malaysia, which spurned both the cash and the IMF’s advice by fixing the value of its currency, the ringgit, and imposing capital controls back in 1998, see Washington’s rescue efforts as proof that U.S. policy makers are adjusting their thinking.
“We are now seeing the West, particularly the U.S., ignoring the standard IMF prescriptions and implementing the same measures that Malaysia had done during the 1997 crisis,” said Nor Mohamed Yackop, a Malaysian Finance Ministry official, who in 1998 helped impose capital controls.
Ten years ago, Asia was on its knees with a financial meltdown in the region after a series of crises in Latin America that later bankrupted Russia. Despite high growth and low inflation, Asia’s so-called tiger economies succumbed because of overvalued exchange rates, persistent current account deficits, speculation in financial markets and dependence on short-term sources of capital.
Most countries applied the IMF’s bitter medicine, and subsequently South Korea’s economy shrank 7 percent in 1998, Indonesia’s contracted 13 percent and Thailand’s slumped 10.5 percent, according to IMF data.
But the region recovered quickly, amassing in the process trillions of dollars in foreign currency reserves, first as a defense against future crises and later because of windfall profits from the global commodity boom.
Much of those reserves are invested in U.S. Treasury bonds, so they are bankrolling Washington’s efforts to contain the current crisis. The latest plan is to buy toxic debt estimated at $700 billion, with the total cost of its rescue efforts estimated at as much as $1.8 trillion.
The irony is not lost on nations that took draconian steps in return for the $35 billion the IMF initially offered in 1997 to rescue Indonesia, South Korea and Thailand, later topped up with an extra $77 billion.
Critics say the “Washington consensus,” a term referring to the market liberalization pursued by the IMF and the United States, has led to the current crisis.
“It was so patronizing. First it was the lazy Latinos, then it was the corrupt Asians and their crony capitalists,” said Stephany Griffith-Jones, executive director of the Initiative for Policy Dialogue at Columbia University, and a leading authority on capital flows and developing economies.
“The lesson is: You need to regulate everything. Any deregulated market in developed and developing countries leads to these results,” Griffith-Jones said.
Others say, however, that the IMF-bashing goes too far and that the crises in Latin America and Asia were largely of their own making. They also argue that it is impossible to stanch the capital flows that finance growth in many developing economies.
“No doubt capital markets have plenty of problems; often they generate these bubbles,” said Domingo Cavallo, who was Argentina’s finance minister from 1991 to 1996. “The bubble explodes and then there is a financial crisis.”
“So far, there has been no recipe for avoiding these problems,” said Cavallo, who was the architect of the Argentine plan that fixed the dollar-peso rate at parity, a decision that crushed inflation and contributed to an increase in growth and investment.
Chung, of South Korea, said that wealthy nations might tighten regulation and intervene more in markets, but that developing countries could ill afford to revert to pre-1997 policies.
“In developing or underdeveloped countries, in which each government has the mission to improve overall welfare and overall income level, there is no choice for them but to continue to accept and pursue globalization,” he said.
U.S. bailout in chaos, government seizes WaMu
By Tom Ferraro and Richard Cowan
26 September 2008
WASHINGTON (Reuters) – A rescue for the U.S. financial system unraveled on Thursday amid accusations Republican presidential candidate John McCain scuppered the deal, and Washington Mutual was closed by U.S. authorities and its assets sold in America's biggest ever bank failure.
As negotiations over an unprecedented $700 billion bailout to restore credit markets degenerated into chaos, the largest U.S. savings and loan bank was taken over by authorities and its deposits auctioned off. U.S. stock futures fell by more than 1 percent.
The third-largest U.S. bank JPMorgan Chase & Co said it bought the deposits of Washington Mutual Inc, which has seen its stock price virtually wiped out because of massive amounts of bad mortgages. The government said there would be no impact on WaMu's depositors and customers. JPMorgan said it would be business as usual on Friday morning.
Had a bailout deal been reached in Congress, it may have helped the savings and loan, founded in Seattle in 1889. Efforts to find a suitor to buy WaMu faltered in recent days over concerns about whether the government would reach a deal to buy its toxic mortgages.
Earlier on Thursday, U.S. lawmakers had appeared close to a final agreement on the bailout, lifting world stock markets and sending the dollar higher. But things spun off course during an emergency White House meeting between Congressional leaders with U.S. President George W. Bush.
In advance of that meeting, which included the two men battling to succeed him, Democrat Barack Obama and McCain, a compromise bipartisan deal seemed imminent.
After the session, Congressional leaders said an agreement could take until the weekend or longer.
Republican U.S. Sen. Richard Shelby bluntly told reporters, "I don't believe we have an agreement." He later said the deal was in "limbo."
A group of conservative Republican lawmakers proposed an alternative mortgage insurance plan, eschewing the Bush administration's Wall Street bailout just weeks before the November 4 election as many lawmakers try to hold on to their seats.
Democrats said McCain had scuppered the anticipated agreement by throwing his support behind that scheme.
"Sen. McCain has sided with the House Republicans who want to start with a completely different approach and reject what President Bush put forward," said Rep. Henry Waxman, chairman of the House Committee on Oversight and Government Reform.
"It's hard to imagine where we go from here," he said.
The conservative group's plan calls for the U.S. government to offer insurance coverage for the roughly half of all mortgage-backed securities that it does not already insure.
The architects of the original plan, U.S. Treasury Secretary Henry Paulson and U.S. Federal Reserve Chairman Ben Bernanke, rushed to Capitol Hill for late night meetings to urge House Republicans to get back on track.
"It is critical that this legislation get done quickly," White House spokesman Tony Fratto said. "We have serious concerns about the state of our credit markets."
U.S. Senate Banking Committee Chairman Christopher Dodd said a deal could take beyond Friday to reach and took a firm swipe at McCain, who returned from his presidential campaign to try to broker a deal.
"What this looked like to me was a rescue plan for John McCain for two hours," Dodd told CNN. "To be distracted for two to three hours for political theater doesn't help."
INJECTION OF POLITICS
Also speaking to CNN, Obama said of McCain's involvement, "The concern that I have ... is that when you start injecting presidential politics into delicate negotiations then you can actually create more problems rather than less."
Earlier, news that a deal was near stabilized beleaguered money markets, frozen by a reluctance by banks to lend. The rate on one-month U.S. Treasury bills shot higher as traders unwound safe-haven trades.
Still, officials from France to China voiced alarm.
"A crisis of confidence without precedent is shaking the global economy," French President Nicolas Sarkozy said in a speech in Toulon, France.
As Thursday's meeting began, Bush warned, "We're in a serious economic crisis in the country if we don't pass a piece of legislation."
U.S. Rep. Barney Frank, the powerful Democratic chairman of the House Financial Services Committee, said before the Bush meeting that the deal would give the money to the U.S. Treasury in installments rather than a $700 billion lump sum the Bush administration wanted.
The enormity of the deal, which would cost every man, woman and child in the United States about $2,300, led many lawmakers to ask Paulson during two days of rancorous hearings this week to take the cash in installments.
The bailout exceeds total lending by the International Monetary Fund since its inception after World War II. The IMF has loaned $506.7 billion since 1947 to countries in crisis as far flung as Argentina, Britain, Turkey and South Korea.
Frank also said the deal would allow the government to take part-ownership of banks and ban companies that sell toxic assets to the government from paying massive "golden parachutes" to executives being fired.
Reflecting that the current crisis appears to be the most serious since the Great Depression of the 1930s, fresh Federal Reserve data showed U.S. banks and money managers have borrowed a record $188 billion daily in recent days from the Fed -- a daily amount roughly equal to Argentina's annual economic output.
"This looks like the balance sheet of a central bank that is keeping the financial system on life support," said Michael Feroli, U.S. economist with JPMorgan in New York.
The swirl of political theater and meetings in Washington followed fresh turbulence in the world economy.
Orders for costly U.S. manufactured goods plunged in August, new-home sales hit a 17-year low, while new claims for jobless benefits shot up last week. ID:nN25327565
Top U.S. industrial conglomerate General Electric Co, widely seen as a bellwether of the U.S. economy, issued a profit warning, citing "unprecedented weakness and volatility" in the financial services market. ID:nN25394000
The crisis reverberated in Amsterdam and Brussels, where Fortis NV, the Belgian-Dutch financial services group, denied a rumor the Dutch Central Bank had asked a Fortis rival to support the company's liquidity position. Fortis shares sank as much as 21 percent to 14-year lows.
In Asia, hundreds of people lined up outside the Hong Kong branches of the Bank of East Asia Ltd, some sleeping there overnight, to withdraw their savings.
China's banking regulator sought to reassure jittery financial markets, denying a report that it had told local banks to stop lending to U.S. banks.
INTENSE BAILOUT TALKS
The crisis comes after a month of turbulence marked by the government's takeover of mortgage companies Fannie Mae and Freddie Mac, the bailout of insurer American International Group Inc, and the bankruptcy filing of investment bank Lehman Brothers Holdings Inc.
Concern lingered that even with a bailout, the United States may stumble, prompting a global slowdown.
German Finance Minister Peer Steinbrueck said one outcome of the crisis would be a less dominant role for the United States in the global financial system.
"The United States will lose its superpower status in the world financial system. The world financial system will become more multipolar," he said.
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