Financial Turmoil in SE Asia Jude Wanniski August 20, 1997

Memo To: David Sanger, NYTimes
From: Jude Wanniski
Re: Your August 3, Sunday piece on SE Asian growth

[David Sanger, who covers Treasury for the Times, is in the top tier of the financial press corps, whose reporting and writing skills I’ve long admired. Alas, hanging around the Treasury crowd has not been good for his perspective. I wrote him the following memo on August 5, not planning it as a memo on the margin, but the continuing financial turmoil in SE Asia -- with now the Hong Kong dollar under attack -- makes the memo relevant again. Also, if you have the time, look in on Paul Krugman’s essay in the current issue of Microsoft’s Slate at <www.slate.com>, which says a lot of silly things about currencies and gold exchange rates.]

The piece needed to be done, but your effort came up well short. To see you quote Clyde Prestowitz, who knows less than nothing about global capital markets, was a tipoff that the piece would be superficial. It is a little too simple to ridicule Malaysian Prime Minister Mahathir Mohamad’s conspiracy theory, blaming George Soros for causing the currency devaluation. What goes on here, David, is that international currency traders are constantly on the lookout for weaknesses that they can exploit. The weakness in Bangkok began showing up immediately after Paul Krugman showed up there, warning the government against the inflow of “hot money,” i.e., equity instead of debt. This is the kind of ad hoc silly stuff that followed the collapse of the Mexican peso, with the same nudniks who helped scare away equity capital by promoting a peso devaluation now blaming the outflow on the original equity investments. The Bangkok government actually tightened up on control of capital flows, buying into his warning. That weakness was widened in the last eight months by the dollar’s 15% rise against gold, a powerful deflationary force in Thailand, which you fail to note in your piece. In any case, Krugman is a menace to the world, much worse than Prestowitz, worse than Deputy Treasury Larry Summers, who does not seem to have bought into the idea that equity capital is inferior to debt capital in emerging markets. Summers’s quote in your piece was at least sensible: “In almost every case, major financial disturbances almost always have deeper causes than a few speculators. And it’s important to remember that you can’t attack ‘speculation’ without also undermining the flow of capital that can finance productive investment.”

Your line about Summers having “designed the Mexican bailout” is hysterically funny, David. Summers was among those who helped push Mexico into that unnecessary devaluation, which took place against the backdrop of an increase in the dollar/gold price. To inflate on top of an inflation was an awful idea, but Summers went along with the idea as acting Treasury Secretary. The IMF’s Stan Fisher was directly involved in pushing the devaluation, as was Ted Truman at the Fed. Their pals on Wall Street at the big banks were shorting the peso big time, helping with the push. The idea was a 10% devaluation would be enough, but it got away from them, turning into a 50% devaluation. Instead of taking Summers at his word that he saved Mexico, you should look into it yourself. If he ever gets nominated to a high post in this administration, you can be sure it will come up.

One thing you will discover for sure is that Summers did not design the bailout. His design was so unpopular that the White House knew it could not put it in front of the Congress, for it would have been voted down 2-to-1. It was Sen. Bennett of Utah, who Bob Dole had appointed as his “Mr. Mexico,” who recommended to the administration the use of the exchange-stabilization fund, which allowed the Treasury to skirt the Congress. As an outside advisor to Dole and Bennett, I was the guy who told them about the exchange-stabilization fund as the only vehicle that would work politically. The idea was given to me by David Malpass, the chief international economist at Bear Stearns, who had been deputy assistant SecState for Latin America in the Bush years, and a former assistant to Dick Darman in the Treasury Department. You need only call Malpass to get a bead on what happened then, and ask Senator Bennett, too.

What did we think we were getting out of our support to pull the administration’s chestnuts out of the fire? We thought Treasury would help Mexico pull the peso out of the fire and get it back to the 3.5% exchange rate. Summers told Bennett that would be the case, and Bennett told Dole. As soon as the idea was announced, though, any thought of helping Mexico revalue its currency to avoid a massive inflation and recession was conveniently forgotten by Summers and his new boss, Bob Rubin. The other problem was that at the same time, Jack Kemp announced he would not run for the White House, and Dole lost interest in Mexico. A year later, when Summers needed to get confirmation for the Deputy job, he told Bennett that well, yes, maybe they should have tried to get the peso revalued. At the time, I predicted the recession would get so bad that a million Mexicans would swarm north, which of course they did. The administration lied about the population outflow, saying there was no noticeable increase. Sen. Kay Bailey Hutchinson had someone call all the border posts and they reported back an unprecedented cascade of illegals.

By the way, Alan Greenspan also followed all these events. I was actually in his office the day the peso was devalued, and he agreed that it could be revalued if there were quick action. The fix was in, though. Too many people on Wall Street were going to make a bundle with their peso shorts.

This is the way the Establishment works, David. It makes a big mess, causes incredible suffering in the lives of tens of millions of people, makes a lot of money in the process, and then takes credit for cleaning up the mess -- and gets its photo on P.1 of the NYTimes with a lead editorial hailing the genius of those Clinton folk who had cleverly designed the bailout of our friends South of the Border. Someone should write a book.