Does Wall St. bailout show US double standards?
Agence France-Presse
First Posted 11:57:00 09/19/2008
Filed Under: Economy, Business & Finance
WASHINGTON -- The United States criticized Asian economies for attempting to bail out cash-starved companies during a regional financial crisis a decade ago -- yet now throws a lifeline to its own companies ravaged by a credit crisis, a move experts say smacks of double standards.
In a bid to avert bankruptcy, the US Federal Reserve, the country's central bank, pumped $85 billion to bail out America's largest insurer AIG on Tuesday, sending global markets in a tailspin that continues to reverberate Thursday.
Earlier, Americans saw up to a $200-billion federal rescue of financially-stricken mortgage giants Fannie Mae and Freddie Mac, and a nearly $30-billion injection to prevent a default by investment bank Bear Stearns.
The moves to rescue them, some economists say, contrasted with the approach the United States and the International Monetary Fund took during the 1997-98 Asian financial crisis, when the region was told to let inefficient corporation bleed to death.
"I guess some of the pundits in Washington arguing against government money being used (to bail out local companies) in Asia at that time are now basically calling for various government intervention," noted Raghuram Rajan, the chief economist at the International Monetary Fund between 2003 and 2006.
"Well, it's when it hits you that you realize what other countries were experiencing," he told AFP in a telephone interview from the University of Chicago, where he resumed teaching after the IMF stint.
"It's all very well to say, 'Let the financial system go, let it find its equilibrium,'" he said. "But when it is in the face of speculative attacks and prices are being hammered and it looks like the larger institutions are going to collapse, it is pretty natural for the government to step in and say, 'We can't let this happen.'"
When the IMF pledged $20 billion to help South Korea survive the Asian crisis, it was on condition that Seoul allowed ailing banks and other companies to collapse rather than bail them out, economist Yung Chul Park, who was deeply involved in the talks with the IMF, was quoted saying in the New York Times on Thursday.
Now a professor of economics at Korea University in Seoul, he said that while the US crisis was different -- it is global rather than restricted to one region like Asia -- "Washington is following a different script this time."
Unlike the US crisis, which was triggered largely by a rapidly inflated real estate, the Asian turmoil stemmed from a collapse of currencies of several economies, whose banks had taken enormous risk financing investments using foreign currency-denominated loans.
Indonesia, Thailand and South Korea used the bulk of their currency reserves attempting to prop up their exchange rates after investors fled. More than $100 billion of loans were arranged by the IMF for them to cover their foreign exchange denominated debt.
But some experts defended the US bailout, saying it was inevitable to save the global financial system.
"I think the United States has done a tremendous service to the rest of the world in preventing the collapse of AIG because the main losers in an AIG collapse would have been European banks," said Nicholas Lardy, an Asian expert at the Washington-based Peterson Institute for International Economics.
"You are looking at institutions that lie at the heart of the global financial system," he said, comparing the crisis to the Asian turmoil.
The US Treasury, he said, did not pursue a blanket bailout policy, noting that it had allowed Lehman Brothers, America’s fourth-largest securities firm, to file for bankruptcy -- a move that produced the worst day on Wall Street in seven years sending global markets in a tailspin.
Some US experts also doubted the perception that Washington was against Asian governments stepping in to save their companies during the regional turmoil.
"Although there was a debate inside the US government and the IMF how best to do those kinds of interventions, I don't think there was ever a position that there was never a need for a government to stand by its domestic banks," said Brad Setser, who was at the US Treasury during the crisis.
He cited the "large recapitalization" then of domestic financial systems using public resources in Thailand, South Korea and Indonesia.
The IMF bailouts were also backed by the United States, a principal contributor to the Fund's capital, said Setser, now with the Council on Foreign Relations, a think tank in New York.
Washington, he said, may have pushed Asian governments against cutting "special favour deals" and to make sure that the bailouts were based on more explicit deposit insurance and in ways where equity investors took losses.
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