turning point?

Doug Henwood dhenwood at panix.com
Fri Aug 21 19:12:18 PDT 1998


[Richard Medley's column in TheStreet.com]

Richard Medley: Tipping Point for Capitalism

By Richard Medley Special to TheStreet.com

Last week we wrote that if you liked chaos and collapse, you would love a Russian devaluation. This week, we've got both. Brazil, Venezuela, Argentina, the Czech Republic -- all hitting new lows on the back of Russia's collapse. I call my office to ask what's up and they say, "Oh nothing ... you know, Russia's down 5% or so [Friday]." I shrug and hang up.

We are at an inflection point in the post-Cold War era. The driving forces since Communism's collapse have been free markets and a massive advantage for capital over labor. But the cascading crises in Asia, Central Europe and now Latin America threaten to reverse those forces and have already seriously undercut the notion that the U.S., the IMF or the G7 have anything to offer developing countries.

Instead of more belt-tightening and free-market rigor, Asian nations, led by Hong Kong -- not Malaysia -- and Russia are experimenting with ways to fight speculators and slow capital flows. There is open talk of setting up an Asiawide government-controlled "hedge fund" to fight back against speculators in the futures and currency forward markets. Hong Kong, Taiwan and Malaysia all set out to do that on their own this week and the result was significant losses for traders who were short the stock markets in those countries. That success will breed more attention around the developing world and will help direct the discussions about rewriting the world's financial architecture.

Russia is even more directly threatening to turn away from free markets. Along with the devaluation -- which came only after the U.S. and IMF had aggressively and forcefully rejected repeated phone-call pleas from Chubais, Gaidar and Dubinin for more aid last weekend -- the Russian government is "rescheduling" its outstanding short-term debt. Rescheduling is polite talk for default and the combined effect on foreign investors in Russia is brutal. Russian leaders were outraged by the American refusal to help and set about crafting a rescheduling plan that discriminated harshly against foreign capital in favor of domestic investors and domestic banks. The U.S. and IMF managed to pull the plug on that plan at the last second, but all that did was leave investors knowing they were about to be socked, but not knowing when, how or how hard.

In the meantime the nationalist backlash in Russia is gaining steam. The Duma filed articles of impeachment against Yeltsin Friday and the only reason Prime Minister Kiriyenko is still in office is because he agreed to bail out the oligarch's banks in return for saving his skin. We fully expect to see Russia adding new capital controls when the final debt-restructuring package is announced next week, and as the shock wave of this new crisis makes its way through the Russian system it could be enough to make the country turn away from the West one more time. Four times in the past 300 years Russia has embarked on a Westernization drive -- and each time it failed as reforms did not take hold and Westernizing leaders were chased out of office. The past is prologue.

As should be obvious from all of the above, the world's post-Cold War embrace of capitalism is coming under intense scrutiny. The good times and free money are over for half the globe, and now they have to decide whether pure free markets make sense or not. Sure, they make sense for America and Britain. Germany and France are a little less certain. Japan has never really trusted them. And now there is every developing country to think about. Do they take the huge volatility risks imbedded in real free markets? Are Asian and Central European governments willing to put up with capital flows that destroy confidence in the sovereignty of national governments?

I don't know. But I do know from talking to people in those regions that they're not exactly sure themselves that the tradeoffs are worth it anymore. And I do know that this is a crucial time when American leaders should be fanned out around the globe pitching in with these governments to help them put their societies and their economies back together again. We should be there with people, with money and with sympathy.

Instead, we sit in Washington or Edgartown and launch lectures, scolding and cruise missiles. We are not present in the way these regions need us to be. We are not doing what it takes to seal the victory of the Cold War and if these countries choose to turn against full free markets and fully articulated capitalism toward a yet undefined "third way," it will be this moment that sealed their choice.

The IMF is out of money and without a shred of authority. Instead of working with the Russian government through this crisis and rushing new tranches of money in to stabilize the decision-making process, IMF Managing Director Camdessus reportedly holds screaming matches with the Russian leaders, threatens to throw them out of the IMF and then dashes off a note referring to Russia as "fubar" (a World War II phrase meaning f***ed up beyond all recognition). The G7 is a hopeless squabble-fest in which the winners crow about their success and heap scorn on the losers (does anyone even remember that Russia is "officially" part of the G-7?). Meanwhile, the U.S., despite some real effort by Treasury officials, remains paralyzed by a presidential scandal and a general sense that events are beyond its control.

So, the shaky governments across the developing markets will have to forge their own way through this crisis. It is unlikely to result in capitalist orthodoxy, and we will look back at this moment as a massive missed opportunity. Whether we are sinking into a true global depression or not is impossible to tell. The precursors are there, but it takes massive policy mistakes on top of that to tank the world. What we are seeing this month are massive policy mistakes of omission. If they trigger a backlash from the developing world (as they did in 1928), we will be holding our breath to see if they become mistakes of commission next year.

That way we can end the millennium with a bang, not a whimper.

*****

Richard Medley is managing partner of Medley Global Advisors, a New York-based firm that provides political and economic advice to hedge funds and investment banks.



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