Two crises that never ended pose fresh danger
As pundits chew over anniversaries of catastrophes past, though, it’s wise to remember that big risks remain
Anniversaries of financial crises past tend to create their own bubble in mundane look-back stories. Editors dutifully take a crack at telling readers where we are and what we’ve learned.
Yet this year’s retrospective bubble is something very different.
That’s because we’re tackling two meltdowns that never fully ended.
The first is Asia’s 1997-98 reckoning; the other is Wall Street’s near collapse in 2008.
Asia’s experience remains fresh for many investors because of how fast the dominoes fell after Thailand’s July 1997 devaluation. But two events one year later, suggested (correctly, we now know) that markets declared victory too fast.
On 28 July 1998, for example, the International Monetary Fund (IMF) eased conditions on the $57 billion bailout it handed South Korea 237 days earlier.
In effect, the IMF gave the all-clear to the largest economy to be felled by market chaos. It was a big deal. South Korea, then, was the 11th-biggest economy. That gesture, though, coincided with Russia’s default that same month, a sign that contagion was still oozing around the globe.
East Asia, in many ways, recovered too quickly, something in stark relief today as US President Donald Trump’s trade war has South Korea, Indonesia, the Philippines, Malaysia and others on the run.
No doubt Asia has come a very long way over the last 20 years. Financial systems are stronger, governments more transparent, currencies more flexible, foreign-exchange reserve stockpiles bigger.
Yet Asia is still too reliant on exports for growth, too vulnerable to US Federal Reserve tightening, too defenceless to rising oil prices and too exposed to exogenous shocks like Trump’s tariffs.
Two decades ago, Asia harnessed American growth to rebuild economies. Now, America’s assault on China is reminding us that Asia’s foundations still need serious work.
Asia received a similar wake-up call 10 years ago, when the world’s biggest economy hit a wall. Though the crisis went global with the September 2008 collapse of Lehman Brothers, its severity became apparent in July of that year. That was when then treasury secretary Henry Paulson admitted US housing giants Fannie Mae and Freddie Mac needed bailouts. It meant the cracks in America’s foundations were spreading fast.
The resulting contagion hit Asia hard. While India was relatively insulated from the fallout, the People’s Bank of China and Bank of Japan joined the Federal Reserve and European Central Bank in a furious race to the bottom. Those aggressive easing moves, coupled with trillions of dollars of fiscal stimulus, stabilized world growth.
After bottoming in March 2009, the Dow Jones Industrial Average has surged 288%. Odd, given that Washington mostly treated the symptoms of excesses that caused 2008, as opposed to fixing the underlying causes. In fact, Trump’s Republican Party is going the other way. It rolled back post-crisis clampdowns on banks, most significantly so-called Dodd-Frank reforms.
A massive $1.5 trillion tax cut took pressure off the financial sector to raise its game and is fuelling fresh speculation. Trump is removing consumer protections against predatory lending that paced the way for 2008. Team Trump proves Washington learned exactly nothing from a global crisis of its making.
That, warns former US treasury chief Lawrence Summers, makes us even less equipped to deal with the next one. And the next one could be a direct result of Trump’s trade policies.
The problem, say long-time Asia investors like Mark Mobius of Franklin Templeton fame, is that the global economy is coming off a period of excessively cheap money, causing a “real squeeze” in markets.
The stakes are even higher because many of the forces that led to 2008 haven’t been addressed, so much as swept under the carpet. Europe, too, considering how quickly a recent political hiccup in Italy had markets reeling.
Over the last 12 months, IMF chief Christine Lagarde has been urging economies big and small to repair leaking roofs while the sun shines. Well, it’s raining again, thanks to the grenades Trump is tossing at trade flows.
But then the storm clouds from the late 90s and 2008 never really disappeared. They merely hid from view, only to re-emerge now. It doesn’t necessarily mean an even bigger meltdown is afoot.
As pundits chew over anniversaries of catastrophes past, though, it’s wise to remember that big risks remain.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
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