More blather from AG's petting zoo

Lisa & Ian Murray seamus at
Sat Aug 26 23:19:55 PDT 2000


August 27, 2000 ECONOMIC VIEW Economic View: Global Calm Prevails, but Is It Deceptive?

By RICHARD W. STEVENSON JACKSON HOLE, Wyo. -- When central bankers and economists from around the world gathered here two years ago for the annual conference sponsored by the Federal Reserve Bank of Kansas City, the worldwide economic outlook was bleak. Russia's finances were melting down. Asia was in a tailspin. Latin America's stability was at risk. Though no one had yet noticed, one of the world's biggest hedge funds was imploding. Even the ever-resilient American economy was under threat.

In many ways, the atmosphere here over the last several days at this year's Fed conference on global economic integration could not have been more different. The global financial crisis of a few years ago has given way to general stability and renewed growth. With the partial exception of Japan, the big industrial nations are prosperous. Most of the developing world is rebounding. Financial markets, while still bearing the scars of 1998, are healthy if not robust.

Yet there was an undercurrent of nervousness in much of the discussion here, and not because of the forest fires burning just a few miles away from this scenic resort. It seemed driven by a sense that while the last crisis had passed without much permanent harm, another might well be on the way, and that there was still no clear prescription for dealing with it.

Paul Krugman of Princeton University presented a paper to the conference saying that economists were suffering from "persistent if low-grade anxiety" about the world economy, and said that one of the byproducts of increased economic integration among countries would be more frequent financial crises.

Michael Mussa, director of research at the International Monetary Fund, felt compelled to ask whether the world was about to lapse back into isolationism and nationalism. And although his answer was no, the very fact that he raised the question suggested that policy makers had been shaken by the widespread protests in the last year over free trade and the threat it posed to labor and environmental standards.

When Alan Greenspan, the Fed chairman, bemoaned the lack of progress in breaking down the remaining trade barriers among nations, and warned that support for globalization could erode the next time the economy hits a rough patch.

It was certainly not news to anyone here, including Mr. Greenspan, that globalization carries risks and costs as well as undeniable advantages. The issue is what we have learned from the experience of recent years about how to minimize the chances of a problem erupting or to deal with it effectively once it has.

Mr. Krugman, who also writes an Op-Ed Page column for The New York Times, told the meeting that economists have not even come to any consensus about what caused the troubles that began in Asia in 1997, much less worked out a new global financial architecture or crisis-response playbook.

Most economists and policy makers here agree that high levels of short-term borrowings in foreign currencies by companies contributed greatly to the travails in Asian nations like Thailand. When local currencies collapsed, the repayment terms of these loans rapidly became prohibitive. Companies went bankrupt and economies spiraled downward in defiance of the beneficial effects that a cheaper currency is usually expected to have on exports. With the economy deteriorating, capital took flight, particularly as foreign lenders refused to roll over loans and took their money home.

Why not try to block this kind of death spiral in the future by restricting capital flight? The policy makers and economists gathered here, by and large an avidly free-market bunch, could not quite swallow their distaste for limiting the mobility of money across borders, although Charles Goodhart of the London School of Economics suggested that there might be an ideologically acceptable compromise in using bank regulation, rather than outright capital controls, as a brake on the rapid withdrawal of funds from an economy.

In any case, the last crisis may not hold any lessons for the next crisis, whatever it might be.

A paper by Maurice Obstfeld of the University of California at Berkeley and Kenneth Rogoff of Harvard suggested that the next big international economic problem could arise close to home.

They studied the large and rising current account deficit in the United States -- 4.3 percent of gross domestic product this year, up from an average of 1.7 percent from 1992 to 1998.

They concluded that a reversal of the current account position, a development they said was inevitable within the next 5 to 10 years, would entail a drastic change in the relative value of the dollar, forcing a depreciation of as much as 45 percent if the turnabout was abrupt or 12 percent if the turnabout proved more orderly.

But the somewhat disconcerting sense among the economic elite gathered here was that they are even less able to foresee the future than to understand and draw lessons from the past. As Mr. Greenspan put it, "our past endeavors at long-term forecasting afford us little confidence in being able to anticipate seminal changes in global economics and finance."

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