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the crash will it happen again?
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Top financial analysts, policy makers and economists assess the vulnerabilities in the international financial system, whether the worst of the '98 crisis is over, and--is the U.S. in harm's way?
George Soros

He is Chairman of Soros Fund Management LCC, a private investment management firm that serves as principal advisor to the Quantum Group of Funds. He is the author of The Crisis of Global Capitalism.
When you, as an investor, as a trader, look out at the world, six months, nine months down the road, what kinds of things are you looking for?

The financial markets generally are unpredictable. So that one has to have different scenarios ... The idea that you can actually predict what's going to happen contradicts my way of looking at the market.

george sorosActually, I see tremendous imbalance in the world. A very uneven playing field, which has gotten tilted very badly. I consider it unstable. At the same time, I don't exactly see what is going to reverse it. Certainly, a slowdown in our economy would leave the world extremely vulnerable, because the U.S. economy is, today, the single engine that is driving this very big plane. So if that engine were to conk out, you'd have a very serious problem. It's a question [of]: Can you repair the other engines before this one gives out? Because even though people say that we live in a new world, and the past is not relevant ... cyclical fluctuations are not eliminated. That's my main concern.

... I just want to clarify ... that what you have is a very uneven playing field. You have excess liquidity at the center and a great deficiency of capital at the periphery. The money is still flowing from the periphery towards the center. So we ought to find a way to inject liquidity in the periphery. Instead of that, we can only inject liquidity at the center. The Federal Reserve can lower interest rates, and has done so.

What you need is a mechanism to provide capital to countries like Brazil, which is where money is fleeing. Interest rates are very high. The country is going into recession. So this is what creates a tremendous imbalance, at the moment, which is not sustainable. It could lead to ... if this engine now gives out, then you have a problem.

I mean, in fact, there is a certain danger that because of the injection of liquidity, our financial markets have become overheated. You have signs of speculation, excessive speculation in areas like Internet stocks, and so on. You could conceivably have at some point a crash that would then have negative effects on the real economy ... In this country. And then, indirectly, on the rest of the world ...
william greider

He is a Washington-based journalist who has worked in newspapers, magazines and television for over 35 years. His most recent book is One World, Ready or Not, The Manic Logic of Global Capitalism.
Many people think this crisis, that's been with us for the last 19, 20 months, is over. What's your view?

My view is nobody knows yet whether this is over or not. But I would remind people, we've had three or four false dawns in the last two years where the newspapers began reporting that recovery was in sight. Almost always those judgments were based, not on the real economies in the world, what people were doing and producing and buying, but on financial indicators.

william greiderThis present moment is very much based on some currencies in Asia that got hammered a year ago, have recovered a bit and now seem stable. Stock markets are reviving in some countries. If you look at the real economies, what's really happening to industry and commerce in those countries, they're still very negative. So I will feel like we may be coming out of this when I stop seeing unemployment rising in those countries, stop seeing so many bankruptcies increasing--indicators like that, the real health of the economy.

We have, what, 40% of the world in recession or depression still?

Yeah, and we have something like half the world in recession or depression. The German economy, which is one of the big [ones], has been contracting for two quarters now. People in Europe are very nervous about a European-wide recession. The U.S., it's true, keeps chugging along. On the other hand, we have a negative personal savings rate. People are spending more than they're earning, despite the fact that wages have been increasing. We have falling profit rates ...

If you were a person who had his or her retirement savings in the stock market, would you be worried?

Yes ... I'm among those who felt it was an inflated price bubble for a long time, several years, and it keeps going up, defying all sorts of predictions. Nevertheless, one of two things has to happen. Either the stock market will go down considerably. We hope not all at once, but dramatically ... or those people who have invested their money in the stock market are going to be disappointed by the return. Just simply by the arithmetic--if you paid an over valued price for a stock, you're going to get a smaller return than you anticipated. I don't think we can escape from one or two of those consequences.

When people discover that that's the case, that they're not really going to get that 12%, 15% appreciation in their money, maybe they will accept that maturely and simply accept it. History tells us that that's not what happens. What happens is people say, "I'm getting my money out of here, because I'm not getting what I thought I was promised by the market. So I'll put it somewhere else." If a lot of people do that at once, then you've got a financial panic and crisis.

... ultimately, the problem in the stock markets--you can argue over whose numbers you're using--but basically those stock markets are predicting a continuation of extraordinary profit levels, double digit profits from companies at the very time those profit rates are coming down and have been for a year and a half now.

Somebody's got to be wrong. I don't think it's the companies. They can see what's happening ... The collapse in demand in overseas markets and the falling crisis for goods ... that put a squeeze on American companies even if they aren't big overseas exporters, because you've got all these foreign goods pouring in here. It makes it impossible for a company to raise its prices. Probably it has to cut prices. That squeezes profits. If you squeeze profits long enough, then the company's got to cut back on new investment. You see you're in a chain of bad events. That's where we are. Maybe we'll glide out of it and bottom out and things will turn around, but I wouldn't bet my mortgage on that at this point.

Looking at the global economy, you think we're at a critical moment and that we have been for the last year or half year. What is your sense? What is it based on?

The critical moment that faces the global system now is: Will governments be wise enough to learn from these catastrophic events and reform the system? That is, impose some rules on, particularly, global financial markets, but some other aspects as well. Not to shut it down, but to keep it alive and moderate its pace and help countries protect themselves against the ravages of fickle financiers running in and out of their economy.

I am gloomy at the moment because I don't see much prospect of those reforms being done seriously in a timely manner. If they're not, then it is very clear that we'll be back in crisis, whether that's six months or 18 months or two years from now, I don't know and nobody else could say. But the fundamentals are now clear and we're not acting on them ...
edward luttwak

He is a well known military strategist and consultant, and Senior Fellow at the Center for Strategic and International Studies in Washington DC. He is the author of Turbo Capitalism: Winners and Losers in the Global Economy.
Do you think the possibility of a global recession, if not depression, is a very real one right now?

As we speak, the possibility of a global recession is a very real one. On the one hand, you have the base of the world economy. You have the impoverishment that comes from very low commodity prices stretching from Wisconsin to Chile, Wisconsin pork bellies, Chile copper, everything in between, the oil in Venezuela, and so on. It affects entire countries ... Somebody should be out there pumping demand into the system. Instead of pumping demand, we have the United States running a surplus because of the politics of it.

... Now, what was avoided would be the coherent, united, harmonious, and smart intervention by the authorities. Given what happened last October when the crash took place, there were some waves and panic, and people were suddenly afraid that they wouldn't have a pension, their mutual funds would disappear. People asked themselves how much money they still had invested in the old-fashioned way, you know, just by putting it in bonds and banks.

At that moment, there was no harmonious response. It was all done by the American Federal Reserve. Alan Greenspan and the Federal Reserve acted. Everybody else talked or did nothing ... I don't think [the Federal Reserve is] going to be sufficient to prevent the [next] crash, which will come sooner or later ...

... It's like having a great ball there on the top of an incline of a slope and when accelerated down, the only thing supporting it is just the Federal Reserve, the American regulatory financial and control system, because no global mechanism has been set up; no coordination has really been set up between the American and the Europe and the Japanese economic controlling entities.

At most, there is a liaison between the central banks, but they only control monetary policy, so we have a contradiction here. We have a global economy with no global financial control mechanism. Therefore, a crash is only a question of time.
david j rothkopf

He is the former Deputy Undersecretary of the Commerce Department under the Clinton administration and is now president of an international advisory firm. He is also an adjunct professor of international and public affairs at Columbia University.
You ... [have] compared global economics to plate tectonics ...

... When you look at the global economy, one way to view it is using a plate tectonic model where there are fault lines all the way around. When there's a shift of one of these fault lines, particularly a big shift, it can be felt all the way around the world and we saw that last summer.

There was a fault line underneath the Russian economy. It shifted. The impact was on Brazil where there was another fault line which shifted and caused a problem throughout Latin America. You saw that with the Asian financial crisis where there were fault lines under a number of these economies that we reset into disequilibrium as a result of too much capital and too many foreign-denominated loans coming in while currencies were valued wrong ... Well, that fault line moved and what happened? Demand fell off enormously, and that's how the energy was passed through this system of economic plate tectonics, if you will, and it affected the countries of Latin America. Why? Because most of them export commodities--40% of Chile's exports is copper, and 40% of their exports goes to Asia. So at that time all of a sudden you've got a consequence in Chile.

david j rothkopfEven to this day there are fault lines that could shift and could set off another set of these things. Wall Street with an Internet bubble in the middle of it is a fault line. Japan with a weak financial system and uncertainty about whether the government's latest round of reforms after round of reforms over the course of the past decade, are going to work is another fault line. China, with the value of the yuan and whether they're going to devalue, is another fault line. A spreading war in Kosovo, a conflict in the Middle East near the source of oil, these are fault lines that exist out there. We have to recognize that in the global financial system right now these aren't isolated, these aren't remote from us. They can affect us and they can affect other markets in a fairly immediate way.

So you don't think that this rolling crisis is over?

... Personally, I'm a little worried because I think there is a bubble in the middle of the Wall Street economy. No one should have any confidence in the Japanese ability to fix their problems, because they haven't been able to do it so far and they haven't taken sufficiently dramatic steps, although they may. The Chinese could be spooked by a variety of other things and need exports to produce hard currency ... We are still in an era or period in which confidence is not restored, and until it is restored, until there is a deep sense that we're back on the upward track, we stand vulnerable to upsets like the upsets we've seen in the past year.

Is there a danger that the wrong lessons are being drawn from the crisis of the last year and a half, two years?

... Not only is there a danger, there's a certainty that the wrong lessons are being drawn by some people. By most of the people at the center of the international financial system, are the wrong lessons being drawn? I don't know. I don't see the IMF being highly responsive to this. I don't see it having learned its lessons. I see that lending $5 billion more to Russia seems to me to be at best an accounting transaction, at worst another waste of money. I see still an absence to be able to address questions of social equity in an effective way, and so these things will take a while to formulate, but the general trend within the markets is to be fairly thoughtful about this at the highest levels, and there is a general movement toward understanding things better ...

Part of the problem is that in emerging markets, just as some of them are not highly liquid financial markets, they are not highly liquid information markets, and as a result a little bad information can cause quite an upset just as an inflow of too much money or an outflow of too much money can cause quite an upset of these markets.

So they're still volatile? They're still erratic?

Volatility is the toughest issue to deal with because the pipelines are getting bigger and bigger through which money goes. It allows it to go in quickly. It allows it to go out quickly. The amount of information people have allows them to make decisions very quickly. The mentality of a lot of these investors is not a long-term mentality in terms of the portfolio investors, and volatility is a big risk for a lot of these places. That's why you'll see some kind of modified capital controls in a lot of these countries growing even though that has not been for a long time the policy of international financial institutions.

It's just inevitable in a medium- and a small-sized country that they want to protect themselves against that kind of disequilibrium. You will always see greed and self-interest drive markets to places that reason wouldn't.
rob johnson

He was a top portfolio manager for George Soros's Quantum Fund, a private investment fund, from 1992 to 1995. He left the money management business in 1996.
It's like we're talking about some chess game in the sky. Most of us don't even have any idea ... that this game is going on.

Yes, I think that's partially true. The nature of the abstract thinking that's going on in the investment community is sometimes discernible through comments you see in the financial pages. But the way in which all of these prices that affect employment and how goods are bought and sold and what countries experience boom and which countries are in stagnation, I don't think that that connection between how the investor-trader world is setting prices and then the real consequences is well established.

Or well known to ordinary folks ...

... We're seeing Russia, much of Latin America, most of Asia, go through episodes in their economies, in their economic life, that are as deep and damaging and painful and profound as the Great Depression was in the United States. At the same time, the United States is an economy which is characterized by its proportionately smaller exposure to international trade and international influences, and our stock market's at an all-time high. We're at a time when people are almost religious in their worship of markets. The market is now our master. If you espouse a social goal in America today, someone will say to you, "No, the market won't support that."

rob johnsonThe market is a tool. We should have a political and social consensus on what our objectives are as a society and use markets to facilitate that. But now the servant's the master. It's almost as if the market is a religious icon. I see that mirrored in the very, very high valuation of the United States stock market and the tremendous conviction that citizens have throughout the country that the United States is good, is right. The free market is great, and the stock market is where you put your money.

People used to put their bank balances into gold or bank accounts or CDs, so-called safe things. The stock market was considered risky. Now the stock market is where everybody puts their money 'cause that's considered safe and lucrative. That's a bothersome notion to me. As I mentioned earlier, making money is about changes in perception. Our society has such conviction now that the stock market is a good place. That perception is reflected in prices. The change in perception that's going to make stocks go up further is becoming even more optimistic.

... The ability for perception to change and change valuation in the stock market seems to me approaching the time when the only news that will be meaningful is bad news. That will change your perception. That will make my dentist stop lecturing me about how I have to be in the stock market with all of my wealth because, four out of five years, it's better than bonds. We're at a dangerous point with regard to equities in the United States, and I mentioned it's a little bit like fiddling while Rome burns 'cause the world is struggling all around us right now. And if the United States runs into a downward spiral, declining stock prices ...

Soros has said if things don't change, there is the real danger and possibility that we are headed for a worldwide recession, if not depression.


Do you share that fear?

I think that George is accurate. There's an old saying by a now deceased journalist, American, named Christopher Lash, and he said, "Meritocracies are only stable if a large number of people are winners. Otherwise they change the rules."

In the economic outcome, if the United States is successful and the rest of the world goes through the kind of transitions and violence that they have in recent years, and that persists, and for instance, if the U.S. slows down, we've talked about it, and it amplifies the pain in other areas, they will not view themselves as bad performers in this system. They will try to change the system.

The nature of the trading system in the world and commerce is at risk in the current time, because large number of people are suffering; large numbers of people have had their lives disrupted and had their expectations about the continuity for growth and progress and employment and wealth accumulation shaken to its foundation. And that sows the seeds of political dissent and the impetus to a change in the way the world is organized.
paul krugman

He is the Ford International Professor of International Economics at MIT. He specializes in international trade and finance and his most recent book is The Return of Depression Economics.
What is the biggest question in your mind today?

Oh, the biggest question is what about the big advanced countries? This is an enormous human tragedy. But so far, it's only affected people who didn't have that much money to begin with. So in dollars and cents terms, it doesn't really matter that much. The question is: Can this thing spread to us? By us, I mean, basically, all the advanced countries, all of the rich, stable, democratic countries of the first world.

So far, mostly it hasn't, but there are some scary things out there. The Japanese are fairly close to entering into a deflationary spiral. The United States had one heck of a scare in the fall when the bond market froze. I remember a Fed official in a private meeting, when people asked him what are we going to do about this, [he] said, "Pray," which was not very encouraging. We got out of that. We don't quite know how. So the scary question, the big question is: How immune are the big advanced economies? I'd give you 10 to one odds that it's not the 1930s over again for those economies, but those are not the kinds of odds I'd like to be hearing.

Aren't we already seeing [people] in the oil industry, steel industry, in this country beginning to feel the effects?

Yes. Clearly some groups are hurt, because they are dependent on those markets, or one way or another are directly in the path of this storm. On the whole, the United States' economy remains astonishingly prosperous in the face of what's going on there. There's no necessary reason why that can't continue. But then, there was no necessary reason for any of this to happen. So you've got to be concerned. The great revelation here is that we don't know what we're doing as well as we thought we did. Problems we thought were solved are not solved. Economic analysts like me, economic managers like the people at Treasury, hopefully know something, but don't know as much as we thought we did. That means that problems that we thought were impossible may turn out to be quite real in the modern world.

In your Foreign Affairs article, you talked about whether or not governments would take enough steps to stimulate demand at this moment ...

If you look at two of the three great centers in the advanced world, Japan, first and foremost, and then also Europe, you start to wonder, what are they thinking? Look at Japan right now. It's an economy that's been shrinking for the past two years. Prices are falling. Wages are falling, which never happens. You say, "Well, they must be moving heaven and earth to get that economy moving again." The answer is, they aren't. They're spending a lot of money on public works, but they're not printing a lot of money. When the yen surged in value for complicated market reasons, which is a terrible thing for an economy that's on the verge of a deflationary spiral, the Japanese actually seem to be proud of it.

So that's scary. That's making me wonder, is it really possible that here in the modern world, there are people who don't understand even that much and are prepared to take those kinds of risks with a big economy? If you look at Europe, where they talk about price stability and are sitting there again on the edge of deflation, you wonder, are they prepared to do what's necessary?

Meaning, spend money?

Well, in particular, print money. You print money, and you spend money. Print money is the easier alternative and the preferred one, if you can do it. Again, the Europeans start to talk about the virtues of the strong Euro, which is the last thing they need right now. What worries me about Japan and Europe is the people in charge seem to be like the old line about French generals, prepared to fight the last war. They remember very well the inflation of the 1970s and early 1980s. They remember the excesses of speculation in their markets during the bubbly economy in Japan during the 1980s. Here, they are in a world which is that world turned upside down, where the clear and present danger is deflation, not inflation; where the problem is crashing asset prices, not overvalued ones. They don't seem to be prepared to make the mental shift. And when they do, it might be too late.

Add into that mix the U.S. economy running a [budget] surplus. Isn't that a problem at this moment in time?

... Well, so far that's not a problem, because U.S. consumers are making up for it. What happened is the U.S. government has gone from heavy dissaving to substantial saving. But U.S. consumers decided to stop saving altogether at the same time, so it hasn't created a problem.

I'm less worried about the U.S. I don't think that we are a contractionary force in the world now, or are likely to be. And in Greenspan I trust--not really, but the fact is, that the U.S., whatever criticisms you can make about its policies and for the rest of the world, our domestic policies are more flexible, more open minded, than that of anyplace else. That is one of our great strengths ...

If Asia heads into depression and Europe is in a deflationary cycle, how long do we think that we are protected?

Oh, we have to move fast. The world is not all that integrated. It is possible to have prosperity in the U.S. while the rest of the world is in trouble. It's possible in principle, but we'll have to move fast. If there is a slump that spreads to the first world oustside the U.S., then we have got to cut interest rates, start spending that budget surplus ... The Great Depression would have been easy to stop in 1930. It was very hard to get out of by 1935. The point is, that the time to act would be quickly. I think Washington understands that. Famous last words?
jeffrey d. sachs

He is the Galen L. Stone Professor of International Trade at Harvard University and the Director of the Center for International Development. He has served as an economic advisor to governments in Latin American, Eastern Europe, Russia, Asia and Africa.
A growing number of observers have pointed out similarities in certain trends in the 1990s that were also trends in the 1930s. You've written some about that yourself ...

There's a question whether 1999 is 1929. We had a booming stock market in 1929 and then went into the world's greatest depression. We have a booming stock market in 1999. Will the bubble somehow burst, and then we enter depression? Well, some things are not different. The volatility of international capital played a big role in the onset of the Great Depression. The volatility of international capital is obviously destabilizing markets today.

jeffrey d. sachsThere is, in my view, one fundamental difference, though. I think it really is so fundamental that the analogy doesn't hold in the end. In 1929, the world was on a gold standard. That meant that every major currency in the world was linking the value of its currency to gold ... with the price of the currency set to gold, you couldn't really do very much in terms of expanding the money supply in a depression, and so on. We only got out of the Great Depression as countries got off the gold standard, which was a long, arduous, tumultuous and, eventually, tragic process.

The good news for 1999 is, we are not on a gold standard. We have independent national currencies or regional currencies, in the case of the euro. If we did go into a recession, something that's always possible for the U.S. or Europe, we could lower interest rates and expand the money supply without worrying about the price of gold.

If the whole world went into recession, all the major central banks could cut interest rates and expand the money supply. Indeed, last summer in 1998, when there was an intense moment of fear after the Russian default of a worldwide credit crunch, the Federal Reserve Board cut interest rates several times and successfully overcame that fear. I think that was important to a good monetary policy. So this is the big difference in my view. Could it happen again? It would take absolutely horrendous policy mistakes. The system itself is a lot safer right now, because we are not bound by the straight jacket of the gold standard.

Do you think that the stock market bubble, but more, the sense of American prosperity, is ever going to be affected by what is happening in the rest of the world?

The U.S. is in a bit of a euphoric mood. Euphorias come to an end. We hope they don't come to an end with a recession, much less a crash. There's a lot of strength in the U.S., but there's a lot of froth also. The froth will blow off. We're going to have to face up to some realities that we're not fully facing up to right now.

Ten years ago, there was a lot of euphoria about Japan ... [and] fear in the U.S., that we're about to be taken over or fully owned by Japan. Well, this was a lot of hysterical market misunderstanding. Opinions in markets just bounce off of each other. We see it happening again.

The U.S. has a sound economy. It also has a cyclical economy. It also has stock market values right now that are hard to explain on historical norms. While it's always possible that everything can be based on the new economy, it's also quite possible that we're doing a little bit of exaggeration in just how wonderful things are.

Do you have any sense that Washington policy makers are reconsidering some of the policies? ...

I think within a limited range of issues, they're thinking, "What about exchange rate recommendations? What about short term capital flows?" There is some discussion of some real issues. The broader issue of the real role of the U.S., the foreign assistance aspect of that, who's going to pay for the security of a global economy? No, we are not doing any broad rethinking right now. This is the end of an administration. That's usually a pretty terrible time for any real ambitious thinking.

Does that worry you?

I've been worried all through this decade. I'm more worried at the end of the decade than I am at the beginning of the decade, because you have so many of the poor countries of the world in utter crisis right now. I don't see that crisis getting better. I don't see much real and serious attention. By serious, I mean something that might cost us something.

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