HOT MONEY

November 16, 1998
		Asian economic leaders are gathered in Malaysia for the annual Asian-Pacific Economic Forum (APEC). Their greatest challenge: finding a way to tame the wild market swings that caused the region's recent economic crisis.

Oct. 9, 1998: A discussion on the world economic crisis. Oct. 8, 1998: The president of the World Bank discusses the world financil crisis. July 24, 1998: Keizo Obuchi becomes Japan's new prime minister. May 21, 1998: B.J. Habibie becomes Indonesia's new president. Feb. 3, 1998: Exploring the impact of Asia's economic woes. Jan. 19, 1998: A discussion on the IMF's handling of Asia's economic crisis. Nov. 26, 1997: APEC's annual conference concludes. Nov. 25, 1997: Asia's leaders look for answers at the APEC annual conference. Browse the NewsHour's coverage of Asia and Economic issues     Asia-Pacific Economic Cooperation International Mondetary Fund	JEFFREY KAYE: In a Los Angeles warehouse, Jeffrey Tedja and his brother Nelson recently helped pack goods to ship to their native Indonesia. The brothers used to export high-tech satellite equipment there. Now the businessmen are packing food for a relief operation. NELSON TEDJA: Since the food shortage over there, the price on the food is about four or five times more higher than regular price. And some food like rice or cooking oil, it's very hard to find them.
	APEC considers boom-bust cycles.
	JEFFREY KAYE: The charity effort provides a small window on the Asian financial crisis. The food will be shipped out on what would have been an empty cargo container. These days, most Asia-bound crates are empty since Asians can no longer afford to buy as many U.S. exports as they could in the past. That's just one effect of the economic tidal wave that started a year ago and continues to unfold throughout much of East Asia. The region faces increasing poverty, unemployment and food prices -- a stark contrast to the prosperous years of the early 90's when a massive influx of foreign capital fueled high growth and a tremendous building boom. How to handle those boom-bust cycles is a prime topic for leaders of the Asia Pacific Economic Forum, or APEC, meeting in Malaysia, according to economist Richard Feinberg. RICHARD FEINBERG: The Asian countries, themselves, are going to want to talk about this financial crisis, which has left some of their economies very depressed and very devastated. And they will be arguing that there should be some changes made in the international financial system, as well as in their own domestic financial markets. JEFFREY KAYE: Last year's APEC meeting came in the midst of the crisis as investors were withdrawing billions in foreign funds. Malaysian Prime Minister Mahathir Mohamed triggered an international debate when he advocated controls on the flow of foreign capital - regulations he subsequently imposed two months ago. MAHATHIR MOHAMED: It would be wrong for a government to abdicate and leave all to the private sector. This is because left to itself, the private sector will not give sufficient consideration to the needs of the public. They tend to focus only on their profits to cut costs and maximize returns.
	Debate over capital flow.
	JEFFREY KAYE: While the Malaysian prime minister represents one side of the debate, the chairman of the U.S. Federal Reserve, Alan Greenspan, represents the other. Earlier this month, he called for better banking practices in Asia, rather than capital controls, which he said discourage foreign investment.
	ALAN GREENSPAN: Capital controls, which worked in part to contain international flows earlier in this post war period, are unlikely to be effective over the longer run. They would cut off capital investment inflow to an economy, and the higher level of technology and standards of living that normally accompany access to such flows. JEFFREY KAYE: Leaders on both sides of the Pacific agree on the need to encourage long-term investments in factories and businesses and to minimize the boom and bust effects of so-called "hot money." That's the term for funds from investment companies, banks, and currency traders - seeking a high rate of return on a short-term commitment. Hot money can be pulled out quickly if a better deal comes along. RICHARD FEINBERG: By hot money, they mean speculative money; money invested for the short-term. It can go in rapidly; try to make a quick killing; rapid rate of return. But it can also move very quickly, and it's hot like a potato. You had, in the two years prior to the bubble bursting in the developing countries of Asia, some two hundred billion dollars flowed into the region; massive amounts of money. During the crisis, you had actually money flowing out. JEFFREY KAYE: Globalization of commerce has turned the financial markets into international, 24-hour-a-day bazaars where fortunes change hands at the click of a computer keyboard. TRACEY WARSON: Well, we trade about 8 billion a month. JEFFREY KAYE: That's 8 billion U.S. dollars in foreign currency trading at Wells Fargo Bank in San Francisco. That figure, according to bank vice-president Tracey Brophy Warson, is a small fraction of the currency traded daily worldwide. TRACEY WARSON: Worldwide -- over a trillion dollars a day. And it's a twenty-four hour market. It's an unregulated market, which is very interesting. So that basically means there's a lot of participants. There's banks, there's corporations, there's brokers, there's investment houses, but it's a completely unregulated market. JEFFREY KAYE: A market which traders track minute to minute, taking advantage of volatile rates. TERRY HAGGERTY: In 30 seconds, you can make or lose thousands of dollars. It moves very quickly.
	The Vegas mentality.
	JEFFREY KAYE: Traders like Peter Connolly continually take the pulse of markets, buying and selling at will. PETER CONNOLLY: If you're very, very good, you might be in front of the trend, but at the very least, you want to be with the trend. You don't want to be contra trend. JEFFREY KAYE: That mentality among international traders is not unlike the thinking that drives casino gamblers. That's the view of economist Feinberg who spelled it out for us in America's monument to wishful thinking, Las Vegas.
	RICHARD FEINBERG: Well, there are a lot of similarities between casino and private capital markets. People in both cases hope to place down their money and to win; and if they win they'll put down more money and they'll keep winning until maybe at some point the bubble bursts. JEFFREY KAYE: And that, says Feinberg, is exactly what happened in East Asia. In a casino, Feinberg spotted another phenomenon common to global financiers and Las Vegas gamblers. RICHARD FEINBERG: Psychology is so much a part of the movement of capital flows just as it is part of the decision of each and everyone of these gamblers to bet or not to bet. Is there a herd mentality? People move in where they see a lot of optimism, where it's positively contagious. But suddenly, for a certain table that looked like people were winning, a couple of bad rolls, they say: Well, this table is going dead. Let's quickly get out. Let's pull out our money. JEFFREY KAYE: Like this table; this table's crowded. RICHARD FEINBERG: This table right now is hot; this is Asia before the crisis. People were coming in; they felt optimistic; they saw other people winning; they herded in. They wanted to be part of the action. And it's, in that sense, a self-fulfilling prophecy. Animal spirits produce that optimism, that spontaneous urge to invest, and prices rise.
	Bad luck?
	JEFFREY KAYE: So in this analogy, the pull out of Asia would be akin to these guys here deciding that their luck has run out. RICHARD FEINBERG: If the table suddenly goes cold, a couple of bad rolls, people then decide this place is going down the tubes. I don't want to bet here anymore; I'm going to pull my money out; I'm going to go to another table, another country, another market. JEFFREY KAYE: And that's what happened? RICHARD FEINBERG: And that's what happened in Asia.
	THOMAS TUTTLE: The herd mentality, particularly in the Asian markets, the herd mentality was almost a self-fulfilling prophecy. JEFFREY KAYE: Fund manager Thomas Tuttle was among the first to pull out of the most troubled Asian economies in early '97. His Newport Tiger Fund specializes in Asian stock. But where he once invested in nine countries, he is now down to three. Tuttle says restrictions on capital flow tie his hands. He refuses to reinvest in Malaysia, which has curbed currency trading and requires foreign investors to keep their funds in the country for at least a year. THOMAS TUTTLE: We have to have the ability to be able to move our capital freely, country to country. And that's how we make our decisions. So, by implementing capital controls with no prior warning and freezing foreign public investors for a year, then he's basically put us out of the market. We can't legitimately take our money and go into Malaysia at this point.
	Stemming the flow.
	JEFFREY KAYE: Thailand has rejected the Malaysia model. But Foreign Minister Surin Pitsuwan says Thailand must also stem short-term flows. In a recent speech, he suggested his country had been too easily seduced by the allure of hot money. SURIN PITSUWAN: Henry Kissinger asked earlier this year in Bangkok -- we were all intoxicated by prosperity -- but guess who supplied the alcohol? JEFFREY KAYE: In order to control capital flow, Pitsuwan wants nations to act together, rather than unilaterally, as Malaysia did. SURIN PITSUWAN: Incentives will have to be given for long-term investments, for meaningful investment in the country. JEFFREY KAYE: And disincentives for short-term?
	SURIN PITSUWAN: Somehow. I think they are thinking now in the international community to tax or to give some period of control, rather than coming in and going out in the next day or right away after making profits. Some will have to be kept inside the country. And these are the things that will have to be discussed. JEFFREY KAYE: Feinberg says a tax on hot money would increase economic stability. RICHARD FEINBERG: For example, a lender could be told: Well if you want to, you can lend short-term to country X, but we're going to put a tax on that short-term transaction. He can still make that transaction if he wants; it's still a free market, but he'll be less likely to do so. That can reduce the volatility, therefore, of short-term flows. JEFFREY KAYE: But many investors, particularly currency traders, oppose measures that would reduce volatility, because they often profit from market swings. PETER CONNOLLY: Every minute it changes, so the volatility as mentioned before, enables us to go into the market and take positions where we think we can make some quick turnaround as far as the value of the dollar. JEFFREY KAYE: The challenge now facing the APEC leaders is how to temper the volatility in global markets without discouraging investors.