In an Uncertain World (42 page)

But by then the global environment was much better and the financial markets took the renewed problems in Brazil in stride. In that important sense, our bet paid off; by that point, the Fed had cut interest rates three times and the monetary easing had contributed greatly to calming financial markets. Finally letting the exchange rate go also proved a turning point for the Brazilian economy. The Brazilians' fear that a floating exchange rate would bring back inflation turned out not to be realized. This had a lot to do with Cardoso and Malan's choice of Arminio Fraga, a respected economist and experienced market trader, who arrived as central bank governor at the beginning of February. Fraga moved quickly to raise interest rates and make the central bank more credible.

In line with a growing international focus on involving the private sector—a particular concern for our European colleagues who had put their own government money forward for Brazil—the IMF and G-7 had been searching for ways to “bail in” foreign banks. By this time, global capital markets had calmed sufficiently that we weren't as concerned about prompting creditors to pull back from risk, whether in the United States or in other emerging markets. In a meeting in the New York Fed's office, Brazil's major U.S. bank creditors agreed to extend Brazil's credit while the IMF agreed to release additional support funds. A short time later, the worst of the crisis seemed to be over in Latin America and there were reassuring signs of a healthier economy around the globe.

   

BY APRIL, conditions really seemed to be getting better. In the United States, financial markets were operating normally again and the sense of fear had abated. This owed much to the Fed's swift action to provide liquidity and cut interest rates. Brazil was able to borrow in private capital markets again. Its economy actually grew in 1999, and inflation was in check. South Korea was making early repayments on its IMF loans and was also able to borrow privately. Other Asian countries were returning to a growth path.

The pattern of recovery, though different in every country, seemed to me to validate the international community's response to the crisis. Across the board, the switch to floating exchange rates, although initially painful, was now providing a basis for recovery as a surge in exports led the crisis countries back to growth. In Thailand, South Korea, and Brazil—countries that had taken ownership of the broader array of reforms—confidence was returning and substantial foreign reserves were building up. The combination of international loans and policy reform had been effective. For others, notably Indonesia and Russia, the picture was more mixed. Exchange rate declines were helping them to become more competitive and less reliant on foreign capital. But continued confusion about the direction of policy and how their debt difficulties would be worked out cast a shadow. Investors, both domestic and foreign, would be reluctant to put their money at risk until these uncertainties were resolved.

Looking back, I feel even more strongly that our approach to combating the crisis made sense. Cooperation and engagement between the IMF and World Bank with the United States and other governments helped to reverse the financial turmoil in countries that took appropriate actions. These efforts led to great improvements in economic fundamentals and growth prospects in developing countries and helped avoid a more severe global crisis that could have greatly affected the industrial countries.

That doesn't mean that even the “success stories” came out of the crisis with their problems resolved. As the sense of crisis abated, the politics of economic reform in many of those countries once again became more difficult. And the closer one looked, the clearer it became that no economy in the world had perfect policies. There was something too neat about the way many people tried to explain the faults of those countries that ran into serious trouble. No matter how sound economic policy and practices may appear, every economy falls far short of perfection—including our own.

I remember something Caroline Atkinson said about this in one of our team's many meetings. We had the whole crowd around a conference table during the Brazilian phase of the crisis. Someone was saying that Brazil had all of these strong policies and that ought to make it easier for an IMF program to work. In economic terms, it was a “good” country.

And Caroline jumped in and said, “Yeah. And if they go into default, then we'll say they were hopeless all along and look at all their horrible mistakes and bad policies.” That was an insightful comment. Every country has various unsound policies and structural problems, as well as various advantages. If the United States faced some kind of economic crisis, people would point to a whole host of problems as the reasons—our low savings rate, our large trade deficit, our high levels of consumer and corporate debt, and today I would add the deeply troubled long-term fiscal situation.

While many—particularly in the financial community—seemed to believe that financial crises were solely a function of the structural and policy problems of developing countries, I believed that the excesses of credit and investment in good times were also to blame. As Anwar noted, every bad loan had a creditor as well as a borrower. The tendency to go to financial excess seems to stem from something inherent in human nature, as does the remarkable failure to draw lessons from past experience. The collapse of the southwest real estate bubble in the United States didn't prevent investors from overinvesting in Asia. The Asian crisis didn't prevent the NASDAQ bubble from developing. The proclivity to go to excess is a phenomenon of collective psychology that seems to repeat itself again and again.

I was surprised, nonetheless, by how rapidly the crisis mentality vanished. People can forget the lessons of a painful experience very quickly, and that can lead to poor decisions. An illustration is what happened when South Korea was first able to borrow again in private markets. This was a massive step forward for the country. Borrowing privately at a reasonable rate of interest would create confidence in South Korea's postcrisis economy, underscore the credibility of the policy direction the country was pursuing under Kim Dae-jung, and promote growth.

A new South Korean finance minister was stopping in Washington on his way to New York to sign a new loan agreement. But before he came to visit us at the Treasury, our people told me that the minister wasn't going to go ahead with the loan after all because their investment bankers told him it was going to cost 25 basis points—or one quarter of 1 percent—more than he had expected.

“You've got to be kidding,” I said. Here was a country that a year earlier had been on the verge of a default that could have had vast, even calamitous consequences. And now the government wasn't going to raise money when it could because of 25 basis points? Perhaps he was under political pressure from home not to pay more than someone's idea of the right price—but I still almost didn't believe it. The chance for South Korea to reestablish itself with global financial markets through this bond issue was worth vastly more than 25 basis points.

The finance minister came in with his interpreters, and they all sat down at the table in my conference room. We started talking, and I said, “I understand you're going to raise this money and there's a little problem because you think it's twenty-five basis points too high. What difference are twenty-five basis points, or one hundred basis points, when reestablishing yourself is so important?”

The finance minister said, well, 25 basis points are 25 basis points. We shouldn't have to pay so much. I told him I'd been around markets a long time and my advice was to take the money while they could get it—circumstances can change very quickly in markets. If the issue went well, South Korea could borrow more and probably would see some rate improvement. But pulling out could raise doubts again in investors' minds. But our debate continued, and after a while I began to lose my patience a bit. “You know something?” I said. “I don't really care what you do. It's your country, not mine.” Everyone in the meeting looked at me as if I'd taken leave of my senses. And perhaps I had, momentarily. South Korea's government and the South Korean people had done a remarkable job. But I was reacting to the spectacle of intelligent people behaving shortsightedly with respect to financial markets. I'd seen this kind of behavior many times at Goldman Sachs, on the part of both traders and clients. Someone who has gotten into trouble is offered what might be a brief opportunity to escape. And often the person's response is to forget the mess of a few days earlier and resume quibbling over a quarter point.

By the summer of 1999, I'd been in Washington for six and a half years, and I was ready to leave. Sandy Berger once said about working in government that as time goes on, the positives provide less reinforcement and the negatives feel more onerous. For me, the lines had clearly crossed. I felt I wanted to be free of the weight I'd been carrying. And now, with the impeachment battle finished and the Asian crisis ebbing, there was a moment when I could go. I wasn't abandoning a President under fire. And should new economic problems develop, the administration would have strong leadership with Larry at Treasury and Gene in the White House. I wasn't going to press my luck holding out for another quarter point.

As for the Asian crisis, critics argued that a categorical position of one kind or another would have worked better than our pragmatic approach to restoring confidence and addressing policy problems. But these conceptual views, which often came with important insights, didn't take into account all the complexities of responding to an actual crisis. Dealing with crises was messy because the reality was messy. At one point, aiding Russia made sense. At a later stage, it didn't. As much as one might have wished for one, there was no categorical response or absolutist position that could definitively solve these problems. In hindsight, there were some elements of the programs that could have been done better. But, having said that, the people of these countries were far better off as a result of our engagement than they would have been otherwise. Dwelling on the mistakes tends to obscure the larger point, which is that a market-based approach—of IMF loans combined with essential reforms—led to relatively rapid recovery in countries that took a reasonable degree of ownership of reform and avoided the real risk of much more severe global disruption. Perhaps the best testimonial to the market-based approach—as opposed to trying to solve these problems through additional regulation, capital market controls, and trade restrictions—comes from decisions taken by emerging-market governments themselves, including some with an electoral mandate from the disadvantaged in their societies. Both Kim Dae-jung in South Korea and, more recently, President Luiz Inácio Lula da Silva in Brazil had come to power on populist platforms. Both chose to embrace global integration and policy regimes designed to engender market confidence as a part of fulfilling their mandates to reduce poverty and raise living standards.

At the same time, the entire Asia experience left me with the view that future financial crises are almost surely inevitable and could be even more severe. The markets are getting bigger, information is moving faster, flows are larger, and trade and capital markets have continued to integrate. So it's imperative to focus on how to minimize the frequency and severity of such crises and how best to respond if and when they do occur. It's also important to point out that no one can predict in what area—real estate, emerging markets, or wherever else—the next crisis will occur. I remember something John Whitehead said to me at Goldman Sachs at the time of the Penn Central bankruptcy. “Now we'll put in all sorts of new processes to deal with commercial paper,” he said. “But the next crisis will come from a direction nobody is focused on now.”

The global economic crisis also left me deeply concerned about the politics of globalization. For many people, the Asia crisis highlighted the potential hazards and shortcomings of globalization for the first time. These problems appear against the backdrop of benefits that on balance are far greater but are often inadequately recognized. In the midst of the Asia crisis, Congress failed to renew President Clinton's fast-track authority to negotiate international trade agreements. As I prepared to leave Washington—some months before protestors took to the streets in Seattle to demonstrate against the World Trade Organization—I could already see that maintaining support for market-based policies and trade liberalization was becoming a far greater political problem around the world.

Sometime later, sitting at my breakfast table in New York, I read some comments in the paper by President Bush's newly appointed Treasury Secretary, Paul O'Neill. O'Neill was highly critical of the way we'd handled the Asia crisis. He called me the “chief of the fire department” and said that our theory of interconnected markets was a passing fashion that needed to be retired like the “hula hoop.” O'Neill's view of crisis response was that the new administration could avoid the moral-hazard problem simply by letting poorly managed emerging-market economies fail.

I liked Paul. I didn't even mind him calling me the chief of the fire department. But as I read the story, I said to myself:
They say they won't intervene. But they will.

And they did. When Turkey erupted in early 2001, the Bush administration got involved because of the country's strategic importance. When Argentina got into trouble that same year, the administration supported another large IMF program, before refusing to do so again at the end of 2001. The following year, it provided direct U.S. money through the Exchange Stabilization Fund to Uruguay and supported a very large IMF program in Brazil. Whether the administration was philosophically in favor of support programs or against them, it was bound to end up doing them, because U.S. self-interest was so much involved, geopolitically and economically. A lot of people begin their analysis with a priori constructs. But the orderly view from one's armchair is not the perspective you have when you're facing the messy reality of a global financial crisis.