October 11, 1998

IMF Reforms Might Help Forestall A Global Recession

Alan Greenspan, chairman of the Federal Reserve System, is trying to tell us that the stock market is trying to tell us something.

It’s time to listen up.

Two things drive stock markets -- fear and greed. Greenspan says these emotions are “irrational,” but there it is.

Every day in the United States, four million stockholders ponder economic news. Then they buy or sell on the basis of what they think will happen six months in the future -- when they can take profit (greed) with reduced tax penalty -- or at least avoid loss (fear).

Stock markets have little effect on a nation’s economy, but they are more accurate in predicting the economic near-future than a gaggle of bankers.

Thus, Greenspan’s remarks this week that the global economy has “weakened measurably” give investors the willies. Last week, the Fed cut loan rates to banks. These events have forced policy makers to face up to the possibility of -- dare we say it? -- recession.

The New York City investment firm of J.P. Morgan, now flatly forecasts a “recession next year.” The firm is quoted in the New York Times as expecting no national growth in the first quarter of 1999 and finishing the year at slightly more than an average one percent.

Chase Securities of New York, voices a similar sentiment: “Recession risks have risen dramatically.”

All of this is blamed on the fearful flight of entrepreneurial investors from Asian buildings, factories and businesses into lower-return but safer assets elsewhere. U.S. Treasury bonds are a favorite.

Investors in high-flying Asian enterprises began withdrawing their money when banks there teetered on bankruptcy from bad loans. The Japanese were early victims -- having advanced cash to buy New York City office buildings, California golf courses and Hawaiian hotels. Rents didn’t even pay maintenance costs, much less produce profits.

Investor panic engulfed Russia. Brazil and Mexico are threatened. If confidence (read that greed) cannot be restored soon, the U.S. and Europe also could be drastically affected.

Americans already are feeling the pinch. The unemployment rate jumped last month from 2 to 4 percent. Farmers are hurting because overseas customers have no money with which to buy grain and other foodstuffs. Manufacturers of automobiles and steel are having to compete with below-cost products from foreign companies in distress.

Hurting nations have turned to the International Monetary Fund (IMF) for relief. However, it is tapped out -- having pumped $18 billion into Thailand where the financial flu started, $43 billion for Indonesia, $57 billion for South Korea and $23 billion for Russia. Brazil has asked for $30 billion.

These are “loans” technically. Yet, they have no due dates and the rates of interest are way below market rates -- ranging from one-half percent to 4 percent. Russia has defaulted on its bonds. Other countries might do the same?

In order to complete the Brazil loan, and others expected, the IMF has asked its financial bakers to pony up $90 billion for future calls. The U.S. share of this new pot is $18 billion.

President Clinton and Treasury Secretary Robert Rubin are lobbying Congress strenuously for additional IMF funding. The Senate has approved the $18 billion, but the House has offered only $3.4 billion.

Many House members contend too much tax money already has been put at risk, and that the IMF has worsened the crisis by insisting recipient countries raise taxes and bail out poorly managed banks. In addition, conservatives insist that any bail-out should prohibit abortions in client nations.

House Speaker Newt Gingrich indicated this week that he would support “much more” than the $3.4 billion offered so far by Republicans -- provided the IMP institute major reforms recommended by economists.

Among reforms suggested are a cut in taxes to stimulate moribund economies, more realistic loan rates and one-year maturity dates.

More importantly is a demand for “transparency” called for by all economists -- that is, publication of American-style financial information and establishment of deposit insurance.

This is likely to drive marginal banks into bankruptcy and disrupt the buddy networks -- as tough measures cleaned up the sloppy U.S. savings and loan industry in 1988. That cost American taxpayers $50 billion, but it forestalled panic flight of capital.

It is likely, that the House will get some IMF reforms and drop the extraneous anti-abortion clause. It also is possible that some of the IMF loans will be shorted or canceled -- losses that will have to be absorbed by American taxpayers.

However, equal or greater harm probably would occur if the U.S. refuses to ante up. It is better to be dammed for doing than dammed for inaction.

Like it or not, we must live with a global economy. If capitalism/democracy is to flourish, it must have some universal measures to curb the financial excesses of greed and fear.

By Lindsey Williams, columnist for Sun Coast Media Group newspapers