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Back in the spring of 1998, when Boris Yeltsin was still at Russia’s helm, I led
a group of global investors to Moscow to find out firsthand where the Russian
economy was headed. My long career with the International Monetary Fund and on
Wall Street had taken me to “emerging markets” throughout Asia, Eastern Europe
and Latin America, and I thought I’d seen it all. Yet I still recall the shock I
felt at a meeting in Russia’s dingy Ministry of Finance, where I finally
realized how a handful of young oligarchs were bringing Russia’s economy to ruin
in the pursuit of their own selfish interests, despite the supposed brilliance
of Anatoly Chubais, Russia’s economic czar at the time.
At the time, I could not imagine that anything remotely similar could happen
in the United States. Indeed, I shared the American conceit that most
emerging-market nations had poorly developed institutions and would do well to
emulate Washington and Wall Street. These days, though, I’m hardly so confident.
Many economists and analysts are worrying that the United States might go the
way of Japan, which suffered a “lost decade” after its own real estate market
fell apart in the early 1990s. But I’m more concerned that the United States is
coming to resemble Argentina, Russia and other so-called emerging markets, both
in what led us to the crisis, and in how we’re trying to fix it.
Over the past year, I’ve been getting Russia flashbacks as I witness the AIG
debacle as well as the collapse of Bear Sterns and a host of other financial
institutions. Much like the oligarchs did in Russia, a small group of traders
and executives at onetime venerable institutions have brought the U.S. and
global financial systems to their knees with their reckless risk-taking–with
other people’s money–for their personal gain.
Negotiating with Argentina’s top officials during their multiple financial
crises in the 1990s was always an ordeal, and sparring with Domingo Cavallo, the
country’s Harvard-trained finance minister at the time, was particularly trying.
One always had the sense that, despite their supreme arrogance, the country’s
leaders never had a coherent economic strategy and that major decisions were
always made on the run. I never thought that was how policy was made in the
United States–until, that is, I saw how totally at sea Treasury Secretaries
Henry Paulson and Timothy F. Geithner and Federal Reserve Chairman Ben S.
Bernanke have appeared so many times during our country’s ongoing economic and
The parallels between U.S. policymaking and what we see in emerging markets
are clearest in how we’ve mishandled the banking crisis. We delude ourselves
that our banks face liquidity problems, rather than deeper solvency problems,
and we try to fix it all on the cheap just like any run-of-the-mill emerging
market economy would try to do. And after years of lecturing Asian and Latin
American leaders about the importance of consistency and transparency in sorting
out financial crises, we fail on both counts: In March 2008, one investment
bank, Bear Stearns, is bailed out because it is thought to be too interconnected
with the rest of the banking system to fail. However, six months later, another
investment bank, Lehman Brothers–for all intents and purposes indistinguishable
from Bear Stearns in its financial market inter-connectedness–is allowed to
fail, with catastrophic effects on global financial markets.
In visits to Asian capitals during the region’s financial crisis in the late
1990s, I often heard Asian reformers such as Singapore’s Lee Kuan Yew or Japan’s
Eisuke Sakakibara complain about how the incestuous relationship between
governments and large Asian corporate conglomerates stymied real economic
change. How fortunate, I thought then, that the United States was not similarly
plagued by crony capitalism! However, watching Goldman Sachs’s seeming lock on
high-level U.S. Treasury jobs as well as the way that Republicans and Democrats
alike tiptoed around reforming Freddie Mac and Fannie Mae–among the largest
campaign contributors to Congress–made me wonder if the differences between the
United States and the Asian economies were only a matter of degree.
On Wall Street there is an old joke that the longest river in the
emerging-market economies is “de Nile.” Yet how often do U.S. leaders respond to
growing signs of economic dysfunctionality by spouting nationalistic rhetoric
that echoes the speeches of Latin American demagogues like Peru’s Alan Garcia in
the 1980s and Argentina’s Carlos Menem in the 1990s? (Even Garcia, currently in
his second go-around as Peru’s president, seems to have grown up somewhat.) But
instead of facing our problems we extol the resilience of the U.S. economy,
praise the most productive workers in the world, and go on and on about
America’s inherent ability to extricate itself from any crisis. And we ignore
our proclivity as a nation to spend, year in year out, more than we produce, to
put off dealing with long-term problems, and to engage in grandiose long-term
programs that as a nation we can ill afford.
A singular characteristic of an emerging market heading for deep trouble is a
seemingly suicidal tendency to become overly indebted to foreign creditors. That
tendency underlay the spectacular collapse of the Thai, Indonesian and Korean
currencies in 1997. It also led Russia to default on its debt in 1998 and
plunged Argentina into its economic depression in 2001. Yet we too seem to have
little difficulty becoming increasingly indebted to the tune of a few hundred
billion dollars a year. To make matters worse, we do so to countries like China,
Russia and an assortment of Middle Eastern oil producers–none of which is
particularly well disposed to us.
Like Argentina in its worst moments, we never seem to question whether it is
reasonable to expect foreigners to keep financing our extravagance, and we
forget the bad things that happen to the Argentinas or Hungarys of the world
when foreigners stop financing their excesses. So instead of laying out a
realistic plan for increasing our national savings, we choose not to face up to
the Social Security and Medicare crises that lie ahead, embarking instead on
massive spending programs that–whatever their long-run merits might be–we
simply cannot afford.
After experiencing a few emerging-market crises, I get the sense of watching
the same movie over and over. All too often, a tragic part of that movie is the
failure of the countries’ policymakers to hear the loud cries of canaries in the
coal mine. Before running up further outsized budget deficits, should we not
heed the markets that now see a 10 percent probability that the U.S. government
will default on its sovereign debt in the next five years? And should we not be
paying close attention to the Chinese central bank governor’s musings that he
does not feel comfortable with the $1 trillion of U.S. government debt that the
Chinese central bank already owns, let alone adding to those holdings?
In the twilight of my career, when I am hopefully wiser than before, I have
come to regret how the IMF and the U.S. Treasury all too often lectured leaders
in emerging markets on how to “get their house in order”–without the slightest
thought that the United States might fare no better when facing a major economic
crisis. Now, I fear time is running out for our own policymakers to mend their
ways and offer real leadership to extricate the United States from its worst
economic calamity since the 1930s. If we insist on improvising and not facing
our real problems, we might soon lose our status as a country to be emulated and
join the ranks of those nations we have patronized for so long.
Desmond Lachman is a resident fellow at AEI.
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