ASIA HAND SE Asian memo to Wall St
By Shawn W Crispin
BANGKOK - Seared into Southeast Asia's collective memory is the iconic image of
the 1997-98 Asian financial crisis, where International Monetary Fund (IMF)
chief Michel Camdessus towered with crossed arms over a bent-down Indonesian
President Suharto as he signed a sovereignty-eroding bailout agreement for his
distressed economy.
Now with Wall Street's historic collapse, many in the region eagerly anticipate
a reciprocal Kodak moment, with a US investment banker signing over his
once-prestigious financial assets to an acquiring Japanese banker, Chinese
money manager or perhaps even Singapore's champion of state-led capitalism, Lee
Kuan Yew.
If Wall Street has its nationalistic way, they will have to wait. A
decade ago, Western-led free marketeers derided Asia's lightly regulated
economic and financial models for being riddled with corruption, cronyism and
overall mismanagement. The only way out of the financial crisis, they argued,
and on what the IMF predicated its bailout packages, was greater foreign
participation and management in their economies through asset sales and
privatizations.
Governments in the region resisting IMF neo-liberal orthodox prescriptions and
market-determined asset fire sales to foreigners were widely derided in the
Western press. Many rang the "moral hazard" alarm bell, warning that unpunished
profligate borrowers would be prone to return to their risky behavior on the
expectation of future government bailouts.
Former Malaysian prime minister Mahathir Mohamad's use of his executive power
to consolidate troubled banks and slap currency controls on capital outflows
was universally criticized at the time by pro-market commentators, who asserted
endlessly that his interventionist approach was merely putting off Malaysia's
ultimate moment of financial reckoning.
Thailand's interventionist move in 2001 to establish a state-led rescue
facility for non-performing assets held at banks, known as the Thailand Asset
Management Company, was likewise derided for being too little, too late, and
ultimately a doomed-to-fail interventionist attempt to put off market-led asset
price clearing.
And when Asian countries raised the idea of establishing an Asian Monetary
Fund, to rival the IMF and stave off future regional financial crises without
the perceived pro-Western conditions imposed by IMF-led bailouts, the US balked
at the concept and lobbied against it until it was finally scrapped.
Ultimately Southeast Asia emerged stronger from its financial collapse, seen
today in its low sovereign and corporate debt profiles, high levels of foreign
reserves and reformed and recapitalized banks. That restoration was led mainly
through market-driven depreciated currencies, improved terms of trade and
eventually renewed capital inflows.
Now many of the same pro-market stalwarts who criticized Asia's half-market,
half-interventionist response to the 1997-98 financial crisis are among the
strongest proponents of the US government's proposed US$810 billion Wall Street
bailout package, which the Senate passed on Wednesday - after $110 billion in
tax breaks was tacked on to the initial $700 billion plan to lure votes from
both parties. The House of Representatives is scheduled to consider the plan on
Friday.
Rather than advocating for a market-price clearing of distressed assets and
foreign buyouts of homegrown assets, as they did for Asia, many Western
commentators have taken Wall Street's side in its plea for a government bailout
of banks and bankers on the grounds that the US is simply to large too fail and
without government intervention the entire US - if not global - economy is at
risk.
That's obviously debatable, even as Asian government leaders, whose central
banks are flush with US dollar-denominated assets, called earlier this week for
the US government to intervene. What is clearer is that global investors have
finally lost faith in the US's debt-binged financial status quo and that a new,
less US-centric era of global capitalism is dawning.
The hard truth America is now so desperately trying to avoid is that US
economic, financial and human resources - once considered the cream of the
global capitalist crop - are in the new market reality worth a fraction of what
they were previously priced. US policymakers deliberating the proposed
interventionist bailout would be wise to revisit their economics text books and
the historically overlooked but now highly relevant factor-price equalization
(FPE) theorem.
Simply put, as the world economy becomes more integrated, free trade and
capital flows tend to equalize relative prices and real wages across the world.
Astronomically high US asset prices and wage levels have long represented the
biggest pricing distortion in the global economy, one that until now has
allowed Americans to consume a far greater percentage of the world's resources
than their Asian counterparts.
Towards equalization
Much of the differential was theoretically explained by the US's supposedly
superior workforce, epitomized by the technologically sophisticated finance
industry. Nowhere was that global wage differential more glaringly apparent
than on Wall Street. At the dizzying height, a top flight Wall Street
investment banking industry analyst could earn well over US$20 million per year
for making market calls; their similarly US-educated counterparts at Southeast
Asia's largest commercial bank, Bangkok Bank, earn on average less than
US$20,000.
It's still unclear whether Wall Street's collapse will undermine the
credibility and pricing power of other high-end US advisory services, including
the top flight management consultants Asian corporations and governments pay
extraordinary fees for ever-shifting organizational, managerial and marketing
strategy advice from high-priced Westerners who have often never worked in the
fields on which they counsel.
One Bangkok-based banking analyst likens the revelations surrounding Wall
Street's collapse to the Japanese invasion of Southeast Asia in the 1940s and
its consequent demystification of the long-ruling Western colonials the Asian
invaders jailed and humiliated. Similarly, Wall Street's dramatic demise raises
questions about the supposed superiority of high end US labor.
With the more efficient markets that global trade and financial integration
have engendered in recent years, the US's comparatively high real wages and
prices will inevitably decline relative to currently depressed and capital-rich
Asian countries, according to the FPE theorem.
Financial services were perhaps the US economy's chief value-added comparative
advantage in the global economy and with their demise the US's overall terms of
trade will inexorably decline. Regardless of how much good money the US
Congress eventually throws after bad to restore confidence, Wall Street's
debt-driven meltdown will inevitably lead to a lower US standard of living.
That spiral will intensify if and when Asian and Arab investors opt for
suddenly safer investment options closer to home rather than committing their
capital to underwrite US government-propped, artificially high-priced US
assets. A debt-ridden US can also expect to lose out to cash-rich China and
others in the mounting global competition for the scarce natural resources and
commodities needed to fuel and feed their domestic economies.
The Asian urge to commit those assets elsewhere will rise as the $810 billion
bailout package stokes US inflation, artificially props overvalued US asset
prices and further undermines the value of the dollar. Underscoring market
perceptions of the bailout's inflationary risks, global gold prices surged
around 3% in a single day earlier this week on expectations that the original
$700 billion package would pass its first vote.
Market orthodoxy says selling distressed US assets at market clearing prices to
cash-rich Asian and Arab investors represents the best hope for a US
turnaround. Asia's de-leveraged banks, corporations and governments are
indicative of the hard, belt-tightening lessons learned from the 1997-98
financial crisis, including gut-wrenching setbacks to previous gains in poverty
alleviation. These are the market lessons the US now clearly wants to avoid.
To be sure, there have been a handful of hopeful examples, including
debt-distressed Morgan Stanley's decision last week to sell a 20% stake to
Japan's Mitsubishi UFJ Financial Group and the sale by Lehman Brothers of its
Asian, European and Middle Eastern divisions to Japanese broker Nomura. Earlier
stakes have also been taken in capital-starved Western investment banks by
China's and Singapore's sovereign wealth funds.
But the overall trend has been towards market-defying economic nationalism, by
keeping distressed financial assets in local hands through mergers with bigger
US banks or helpful infusions from the likes of US investor guru Warren Buffet.
Congress's bailout package will likely consolidate that nationalistic response,
even if it means establishing a less market friendly duopoly of two or three
massive banks, led by Citibank and JPMorgan Chase.
Whether the US can actually afford to keep more Asian investors at bay will
eventually be seen in the value of the US dollar and performance of the
economy. It struck at least one Thai banker as "financial karma" that Lehman
was among the first US dominoes to tumble. After the 1997-98 financial crisis,
Lehman became notorious for advising on both sides of fire-sale asset actions
in Thailand, effectively allowing the investment bank to dictate the prices it
paid for financially distressed assets.
Others, reflecting on past Western criticism of Asian crony capitalism, wonder
why the US media has not asked harder questions about a potential conflict of
interest in former Goldman Sachs investment banker turned US Treasury Secretary
Henry Paulson's lead role in devising a bailout package for his former Wall
Street associates. They suspect it could be partially explained by much of the
US media's reliance on investment banks for their advertising revenues.
With Wall Street's collapse, the global capitalist order has reached a
watershed moment, one that will fundamentally affect how the US engages with
Asia. US trade policies that previously promoted, above all else, opening
markets for US banks and financial institutions in Asia's developing markets
will now shift in a new and potentially more protectionist direction.
That the US is opting to bail out its bankers rather than allowing the market
forces it championed during the Asian financial crisis to determine the value
of its debt-ridden assets represents more than an extreme case of moral hazard.
Rather, it undermines global faith in the capitalist model the US once
promoted, and from a Southeast Asian perspective, marks the end of what now
seems a highly hypocritical US-led era.
Shawn W Crispin is Asia Times Online's Southeast Asia Editor. He may be
reached at swcrispin@atimes.com
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