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
... 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
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.
What do you mean by the fundamentals?
The core problem is that the world system, led by the United States, has
pursued what is really a utopian idea. The idea that self-regulating markets,
cut free from any moderating controls and regulations, will always correct
themselves. That's a very alluring idea put out by the classical, neoclassical
History has demonstrated repeatedly over 300 or 400 years of capitalism that
it's wrong. That that's not what happens. Unregulated markets--their idea
of equilibrium may be to swing widely back and forth at extremes. Sooner or
later, they'll get caught in a period of wishful thinking or over investment,
use whatever term you like. That illusion, bubble collapses and you've got
ruin. General ruin.Then governments have to step in after the fact and say, "Well, we'll pick up
the pieces because somebody's got to put the system back together again."
That's the fallacy of the sort of liberalized system we've been pursuing. It's
centrally about the global financial system, but it also is trading rules or
the absence of trading rules. It's about labor rights. It's about social
conditions, safety nets in poorer countries, as well as wealthy countries.
There's a rather long list of things that governments ought to be addressing.
There is an argument underway. I think it's fair to say that a debate among
learned economists and government policy makers, especially outside the United
States has started. But, at least in the United States, rhetoric aside, this
government has said, "The thing works pretty well. We had some catastrophes in
Asia, but those weren't our fault. They weren't the system's fault. As soon as
we get them straightened out, we'll be back on the upward path again."
Could you go back and talk about the end of World War II, the position the
United States was in, the theories behind Bretton Woods--we had just been
through one of these moments of financial crash in a big way.
At the end of World War II, we had two rare conditions. One, most of the
industrial world, excluding the United States, was in ruin, including our
allies in Europe, and, of course, our enemies, Germany and Japan. Secondly, we
were still recovering in a sense from the depression of the '30s when a similar
catastrophe took down everything, literally shut down the global trading
system. That was a great opportunity for the United States to lead and to
sketch out the new principles that would, first of all, get international trade
going in the Marshall Plan, help rebuild Europe, similar program in Japan, help
their industries come back to life ...
It was a rather broad program, but with a very conscious understanding that you
do have to have some operating rules over this global financial system and over
trade. Ideally, they should be liberal in the sense that they're open to all
and fair, etc. But you can't just simply let the markets do it. It won't
happen. So the centerpiece of Bretton Woods was a system of stable currencies. The
stability was built around the guarantee from the United States that
everybody's currency would be in relation to the dollar. If they liked, they
could bring the currency in debt paper or whatever, and exchange it for
dollars or exchange it for gold.
That system broke down in the U.S. inflation in the early 1970s. Since then,
there hasn't been any operating regime. Currencies are on their own.
They're subject to market prices every day. We know over the last 25 years we
have had this extraordinarily destructive instability at the center of the
global system. That is, in currencies themselves. You buy a product in yen one
year and six months later it's worth 30% more compared to the dollar or 30%
less. The same with the Deutsche mark. Then all of those smaller, lighter
currencies, the gyrations are even more extreme.
So if you were going to reform a system now, you would begin probably not with
the details of how to do it, but with some broad principles. How do we want the
system? We would have to begin with some way of whether it's an institution or
simply new operating rules that guarantees people and countries and companies
that they're not going to be hostage to these wild gyrations in finance. Not
just currency values, but the sort of free flow, the sloshing back and forth of
speculative capital, of short-term lending, and all those other things. This is
hard to do. That's why nobody wants to get their head into it. But I think
present events demonstrate that if you don't tackle those problems, the
instabilities will keep swaying back and forth. One year it may be Southeast
Asia that's victimized by it and another year it's Latin America or Eastern
Europe or maybe us. It's almost not meaningful as to who the target is this
season. The question is the system itself.
Is it over-simplifying it to say that in the spirit of Bretton Woods, there
was a recognition that if we wanted capitalism to thrive, we had to build in
Yes, if you think back to the ruin following World War II, real
existing capitalism had shrunk basically almost to the United States, with
a few other outposts still alive and functioning. So part of the process of
Bretton Woods was rebuilding a capitalist system that was convincing to people
that they would actually participate in. That required some rules on the flows
of capital that each nation had at that time and also some other guarantees
about fair treatment for rich and poor. It was far from perfect, but over a
period of years it functioned brilliantly.
You can't recreate Bretton Woods in the present circumstances, because the world
is so different. But I think the idea ought to be the centerpiece now of what
people want to do. Do you want to keep a basically free flowing, free running
Or do you want to see countries just pull out and retreat to either regional or
localized trading situations and build walls and put on their own peculiar
protectionist limitations? Or do you want to keep the system whole? ...
So is the core part of this debate whether or not some rules are going to be
The debate is first whether there should be new rules, I mean, fundamental
rules like controls on capital as well as some prohibitions, some rights for
people and society, not just for businesses and financiers. But beyond that,
there's an even richer debate underway over exactly what are those new rules
that you would do. Some of them are fairly limited--like a poor country ought to
be able to put on emergency capital controls. If foreign investors are playing
this sloshing in and out game with them and they're about to collapse the
economy, a country ... ought to have the ability to say fair warning.
These rules would exist and investors would know about them in advance. Say
we're in a crisis situation. We're going to slow down, if not stop, capital
outflows for the next 18 months until we get our books straight, until we get
balance. That's a perfectly simple device. A few countries have such devices
and they work fine.
A more ambitious scheme would say that we need some international institutions
that can handle the exchange of finance and begin to build stable currency
relations again. That's a much more difficult and long-term task. But I'm among
those who think we ought to start now talking about it, at least, and arguing
over its terms. It will take, in the best set of circumstances, years to actually
create it. If you don't begin the discussion, however, you invite the regular
protectionists, even reactionary responses. Believe me, these countries that
have been hammered, those forces are unleashed at least in public opinion, if
not in the government's. You can't do this to people and not expect them to
react and to ask, "Wait a minute" ...
... So that's why I think the responsible task is to begin that difficult
debate and begin it very publicly. Because one of my recurring themes is that you
can't solve this problem with economists and bankers. It's got to be a much
broader social, political debate, not just among the developed industrialized
countries, but among the rich and poor ...
So the economic grievances become political grievances.
Yes, the economic grievances are already political grievances. That's not
something people decide. It just happens in the natural course of events.
That's why it seems to me it is so crucial for governments, especially ours, to
focus on the fallout from these crises in different countries. That is not just
the simple ones like: Are people getting enough to eat? But much more
aggressive economic measures to start-up the real economy. That is get people
back to work, get factories producing again, create markets that demand their
goods. That's the real economy where people live.
If you simply concentrate, as governments are doing now, on straightening out
the financial system and making financial investors feel secure and safe again,
and let the real economy deteriorate like that, you're even widening the
contrast in people's minds. I keep reading in the paper that Malaysia and
Indonesia and Korea have recovered. I didn't recover. None of my friends
recovered. Our country didn't recover. What are they talking about?
Mexico's a vivid example of this. Mexico got smashed ahead of the crowd in 1994
and '95. We have been reading the celebration for the last couple of years
about Mexico's great recovery. The reality is, of course, that Mexico is about
where they were two, three, four years ago, in terms of wages, in terms of
employment, etc. The financial indicators look good again, but the people are
themselves still bleeding. That is predictable, setting off really turbulent
politics in Mexico. The ruling party, which has ruled for seven or eight years,
may actually lose the presidency. That's if there's not a more violent
I mean, these are not complicated connections I'm making. History makes them
again and again. If you ignore the reality of economic pain and aspirations and
people come to realize the truth, you shouldn't be surprised if a few years
down the road you get an ugly political reaction. That's what's happening
around the world.
Yet, we, the United States, are claiming that Mexico is a great success
Well, it is if you're a banker or an investor or if you're an American
multinational or a Japanese multinational who has built a factory in the
maquiliadora zone that runs along the southern boundary of the United States.
That zone is prospering and its exports are rising. In fact, contributing to
our trade deficit here in the U.S. The banking system is still steeped in
problems. But the stock market has started rising again and the
currency looks stable. All of the little indicators of finance which reassure
investors look healthy.
Then you walk the streets of Mexico City, for instance, and its crime rate is
just out of control. Or you go out in the countryside and the peasant class
that does small-grade agriculture has been devastated. You can go through the
whole country. Small business, middle size manufacturing--they're still on
their knees. We ignore that because that doesn't show up in the macroeconomic
finance numbers. I think we ignore that at our peril ...
Let's go back to what you call ... "a poker game in the sky." Explain that
to me--who's playing, who's winning or losing?
What I call the instability of currencies fluctuating dramatically, whether
it's yen/dollar or dollar/Deutsche mark or the baht or the ruble is--makes what
I call the poker game in the sky.
Almost nobody sees it clearly. Very few people even know that it's going on.
It's played among governments, whether it's our Treasury Department and the
Federal Reserve and the Bank of Japan and the Japanese Finance Ministry or
somebody in Southeast Asia who's pegged their currency to the dollar and is
hoping that will give them stability or, in Latin America ...
Almost all of it is done in private. Partly in fairness to the players so as
not to alert the speculators that the game is even underway. The speculators
usually find out anyway. What they're trying to do is make political
understandings of "Okay, the yen is rising rapidly in value against the dollar.
If we let that continue, the Japanese economy is going to be in the tank. So
let's work out an understanding of what kind of range of relationships we'll
try to maintain."
Then both governments, or maybe there are three or four governments involved,
will do things like buy up one currency and sell another. They'll manipulate
the market, which they're perfectly entitled to do, to try to hold that
relationship. Something like stake--the stakes feed out to everybody else
because in the present situation the dollar is very strong compared to all of
those other currencies ...
That makes us more vulnerable to flows of imports, which in a sense is healthy,
because that's the way these countries are trying to get out of their
recessions. On the other hand, it wipes out a lot of American jobs in the
process, and our trade deficit and debt accumulated get bigger and bigger.
Sooner or later that becomes a crisis for us.
In another situation, we may have an oblivious attitude toward those countries
in Asia, for instance, or some in Latin America, that decided, "Well, we can't
play in that big poker game in the sky. So we'll just attach our currency to
the dollar. Whether it goes up or down in relative value to others, we will
promise investors that we're going to stick with the dollar. That's basically a
guarantee to U.S. investors if you send our capital to our country, you won't
be burned by a sudden change in currencies."
The problem with that common agreement, of course, is that as the dollar
appreciates, those countries' currencies have to ride with that, too, whether
it's the Thai baht or a peso in Mexico or whatever. That's when they break up.
I mean, that's typical when they turn into a crisis situation because they
can't sustain the reserves. Their economic strength doesn't justify the overvalued currency.
It makes their exports more? ...
It makes their exports more expensive and they get priced out of other markets,
competing maybe not with the U.S., but with China or Vietnam or a dozen other
producers of a similar status. When you talk about the poker game and its sort
of smoky secretive qualities.
I see that as part of the fundamental problem in the global system. I'm not
criticizing the Fed chairman or the Treasury secretary for doing their part in
the game. They have to. They have no choice. But it leaves everybody else kind
of guessing and wondering what's going to happen to the currency six months or
a year or two years from now. It invites this constant attack from
The George Soros's and the hedge funds and big banks make a regular profitable
practice of looking at that poker game and saying, "I think they got it wrong.
They can't keep that relationship that's developed between the baht and the
dollar or between the yen and the Deutsche mark or whatever. So I'm going to
play off that imbalance that they're stuck with and wait for them to collapse
or wait for them to quit the game and let the currency fall, whichever."
In this great global crisis that we're in now, that was the linchpin that
set off everything else. But it goes on all the time. Soros doesn't just
challenge poor countries. He challenges the Bank of England. He challenges the
Deutsche mark and the French franc and others. I'm not suggesting that's an
illegitimate practice. Given the currency system we have, in which nobody
guarantees anything and there is no long term stability, of course, there will
be speculators playing on the margins. That's the nature of the instability.
Why not make a profit?
What is the "Washington consensus?"
The Washington consensus is a phrase that either the World Bank or the IMF
concocted not that long ago, a decade ago, to describe the world finally coming
to agreement that the Washington idea--that is the American idea of how the
world ought to change as one of--if not unanimity, at least an
The Washington idea is trade liberalization. That is, doing away with barriers
and tariffs and all of that stuff. These big trade agreements, the GATT
agreements that come along every few years. But also liberalizing financial
systems, breaking open each nation's banking system, capital markets, stock
markets, bond markets, the whole smear, to foreign investment without any
barriers or rules or whatever, and basically to harmonize the whole world in
its national financial system rules.
Along with that comes an economic component, which is a very conservative,
finance driven economic policy and orthodoxy which says, "You have to balance
your budget ... You can't have an industrial policy for development. Basically,
you've got to give up your sovereign government powers to this global system
and trust the global system to lift you out of poverty."
The U.S. government and the IMF and the World Bank were wildly premature in
suggesting that the rest of the world bought into the so-called "Washington
consensus." It's true that Mexico and Latin American debtors and a lot of
others, because they were in these desperate debt default situations, agreed
under duress to do a lot of what the Washington consensus wanted. Mexico led
the way in that and so did Brazil and some others. In Asia, there was more of
a desire to cooperate with the Washington model of how things ought to work.
But they were not so keen on surrendering their governing controls over economy
and governing policy over which way the economy ought to go.
In any case, this laissez faire--in the rest of the world, it's called the
neo-liberalism of the United States--has now met its great crisis because it
demonstrably led to the present moment in which not only are countries
collapsing, but the IMF itself doesn't have a very good idea of what to do about
it. In fact, there are some destructive things in the pursuit of maintaining
its orthodoxy, the Washington consensus. So one element of the debate underway
now is surely it doesn't make sense for the entire world to play out of one
playbook designed out of a particular history and culture called the United
States, that surely there ought to be room for some variation ...
But take the Washington consensus ... the U.S. has been the lead preacher
and this administration particularly so?
This administration is unique because it's a Democratic administration that
totally embraced from the beginning not only the model of the Washington
consensus and its principles, but the major constituencies for the Washington
consensus--which are banking and finance, that is brokerages and so forth, and
the multinational companies of the U.S., the Business Roundtable, the Fortune
I think partly to demonstrate its sincerity, Bill Clinton and his Treasury
secretary and his Commerce secretary and the whole bloody government were like
cheerleaders at a football game as the booming Asian countries and others
became targets for their policies.
I can't think of a single instance, of any importance anyway, in which the
Clinton administration went against the desires of the private sector that it
was trying to woo as constituents. That is, bankers, Wall Street finance, the
Motorolas, Boeings and AT&Ts, and long list of major American
multinationals. That was its trade policy. That was its global economic policy
and in some ways, still is, despite the setbacks.
The Clinton administration coincided roughly with the end of the Cold War
There's a longer history that really starts 15 or 20 years ago, but what
happened is the Clinton administration came to power, is that the fruits of
breaking down financial controls in other countries, liberalizing some markets
and lots of things, convinced Wall Street and global investors generally that
this is the moment and we have to get into those developing countries ... and
seize the opportunity.
So that sets off this huge flow of overseas investment. It's doubled, tripled
in a matter of four, five years. The banks and the hedge funds and all the
others are going the same way. This is just beginning as Bill Clinton comes to
power. I don't know the inside discussion, but I read it as those people
saying, "Here's the wave of our time. Let's get aboard and we'll ride and we'll
transform not only the U.S. position in the world, but we'll also transform
maybe domestic politics. We'll have a whole lot of supporters the Democratic
Party didn't use to have."So it's a little bit opportunistic and it's probably also quite sincere and
idealistic in that they thought this was the answer that they were going to
The assumption or the claim, right or wrong, that capitalism had in fact
defeated communism ...
The investment boom, actually, was going to happen anyway in Asia. But it did
coincide with the collapse of the Berlin Wall and the break up of the Soviet
Union. This sort of big banner that everybody in the world could see, "State
centralized communism is over." I actually think it had been over for some
years as a functioning economy, but nevertheless that was the banner.So that you could look around the world and say, "Well, what's next?" What's
next is pumping up these emerging markets and planting the U.S. flag and
getting our American factories over there in China and doing whatever we can to
advance that globalization process as the best, virtuous opening that
capitalism has had for really 60, 80 years. That was the sort of historical
motivation for a lot of enthusiasms that were quite shallow in terms of their
understanding of what the rest of the world was like and what they were setting
What's an emerging market?
Emerging market is just Wall Street buzz talk. That's all it is. I mean
... you could argue whether there were 8 or 10 or 15 of them. It really only
meant a financial market that was opened up enough so that you could go over
there with a mutual fund or a brokerage and put some money down and have a fair
prospect of a good return and that the money wouldn't somehow be confiscated.
That the real economies in those countries were in gross patterns that looked
very promising. They were going to be building all the roads, telephone
systems, new factories, water systems, railroads. So that's all the emerging
market means is a very poor country that's in the take-off stages of
But it did become the buzz word in the ...
Well, it was a buzz word among financial investors, mutual funds, before it was
embraced by Wall Street. But what happened is, government policy makers always
have to put it in capital letters. So the Clinton administration, one of the
first things they did, and it seems ludicrous now, was to create a list of
BEMs (big emerging markets). This came out of the Commerce Department. I
remember wading through the stacks of papers ... in which they were convincing
themselves that this was the strategy of the future, the big emerging markets.
They had 10 at first. You can look back nostalgically at that list, because I
don't know how many of them are now gone blooie. The first one Mexico, then
Brazil or Indonesia. India's still upright. Russia was on the list. I'm
forgetting some. China is still standing, but wobbly.
So it's probably now, at best, five BEMs instead of 10. But not to make light
of their purposes, they had all of this documentation, some of which was
undoubtedly true, about the prospects for sales in those countries ... It was
that energy that the Clinton administration picked up on and crystallized in
their own strategy, which was simply a strategy of we'll do whatever it takes
to help the multinationals and the brokerages and investors and banks get into
those countries and make hay while the sun was shining.
[Mexico] was one of the early darlings of the financial markets. What was
the simple basis of the financial boom there?
The explosion in Mexico of economic boom as it was called--the Mexico miracle,
remember that? [It] was not exactly total fiction, but it was never quite what
[was] described by financial cheerleaders, including a lot of the media. There
was certainly a surge in foreign investment. That is, our financiers sending
money to Mexico. Mexico, it was true, had liberalized. That is, it accepted the
rules of the global economy, partly to get out from under its debt problems in
the late '80s. Then we were negotiating NAFTA, which was really not as much
about trade as about financial rules. It was opening Mexico to American banks
and American brokers, investors with some guarantees.
So you've got this run-up of financial crisis in their markets and fabulous
returns for two or three years to mutual funds. If you parked some money in a
mutual fund in 1989 and took it out in 1992, you might get an enormous return,
30%, 40%, 50% maybe. So that was real. Underneath it, however, was a very
antiquated, disorganized, not modern economy. Anybody who knew anything about
Mexico understood that. So governed by a one-party political system, full of
corruption, in which drugs were only the latest variation, the political mix
with the companies and the banks, was and is quite intense. That's the way
Mexico operated ...
So into this stew comes this American enthusiasm. A lot of Mexicans bought into
it, too. But when you look back, it didn't take a lot of hindsight. And smart
financial people understood it when it was happening. The real fuel for that
boom was a very simple reality in global finance, which is called interest rate
arbitrage. We had at that moment in the early '90s lower, relatively low
interest rates in the United States because the Fed was still trying to help
banks get out of their troubles, our banks, and also get the economy going
again. So if you borrowed money in New York at 3% and took it to Mexico and
invested it in stocks or bonds or even directly in companies, you could expect
a return of at least 8%, 10%, and maybe 20% or 30% if you hit the right bells.
So, of course, people did that. The more they did that, the more Mexico
When did the boom begin to break up? In 1994, when the Federal Reserve started
raising U.S. interest rates. As the 3% rate became 4%, then 5%, then higher,
that profitable gap for investors simply disappeared. By the end of the year,
it was virtually gone. It took some months for that to happen. When it was
gone, people said, "I think the bloom is off the boom." At that point, the peso
collapses. It tried to devalue it a little bit and it collapsed a lot because
everybody wants out of Mexico.
I'm not suggesting that every investor was conscious in a rational way of the
dynamics underneath their investments. Of course, they weren't, or they would
have been wiser about it. But that was the driving fuel for the whole episode
So the American investors, financiers, basically they're not making these
huge profits that they were making. So they just start looking around for
someplace else to go.
Yeah, what happens when you lose that free ride of interest rate differences
around the world, it begins to evaporate on you, you simply look around for
better opportunities. Sooner or later, somewhere you find one. So you pull out
of Mexico, or you stop sending more money to Mexico.
Fundamentally at that point, Mexico, both government and private enterprise,
had built up this huge accumulation of debt, especially short-term debt, on the
belief that this will last forever and there will be more money coming from
Washington or New York, wherever. So when the flow turns into a trickle,
they've got big problems. That's essentially the trigger for the collapse of
the peso and all of the other economic ruin which followed.
The trigger had nothing to do with Mexico. It was a financial adjustment in
the United States.
You know, if Mexico were a different kind of government and the banking system
were more diverse and honest, to be blunt, they would have had more sense of
what was happening and probably been more prudent, but they weren't. They had
this big guarantor who stood by them for the last 20 years and protected them
and bailed them out a couple of times called the U.S. government.
So I can't blame them for being euphoric about their situation. They were going
to ride it as long as they could. I mean, in fairness, the Mexican government
did see this coming. They thought, "Well, we'll wait until after the 1994
election and then we'll devalue it," sort of tell the truth to the folks a
little bit at a time.
What happens then is that the Wall Street investors, including some very big
brokerages and banks, who don't understand what's going on, who think this
really is a new age, suddenly wake up and see their investments in Mexico cut
in half or 20% or 30% overnight and they want out. So they're all running for
the door, pulling their money out. That really collapses the peso and the
At that point, who enters but the U.S. government and the Federal Reserve
through the good offices of IMF to rescue Mexican financial markets and their
currency. Really, I have to say bluntly, [it was] for the benefit of those U.S.
investors so they can get their money home without horrendous losses. Mexico
was a pretty good model for everything else that's followed in the last three
The only thing that's different is that because investors got out of Mexico
safely and the Treasury and the White House congratulated themselves on their
sound management of this crisis--it sounds so unreal now--but they literally
convinced themselves that, "Well, we're the managers of the world and we're
doing a pretty good job. So we've taken care of that. That won't happen again."
When, in fact, the message was the opposite. If you're going to step in and
bail these guys out who made bad bets in overseas investing, you simply
encourage them to do it again.That is the predicate that leads to the breakdown of Southeast Asia in 1997 and
that spread throughout the world and in some ways it's still spreading.
Explain how the bailout allows the investor to go scot-free or get their
Every case is a little bit different. So it's hard to know who got home
scot-free and who lost some money. But it's very clear that if the U.S. and its
agency, the International Monetary Fund, hadn't intervened with lots of big
loans to Mexico, most all of those investors would not have been able to get
out at all.
The reason for that is when you're going from, say a U.S. investment to, say a
Mexico investment, you're basically changing dollars for pesos. So you've got
that money parked in Mexico City as pesos. It loses half of its value relative
to the dollar. So when you want to take it out, you lost 50% of your original
In a crisis like that, however, the Mexico ... government has reserves which
facilitate that transaction and make good on it ...
That's what we lent to, principally, was to the reserve funds in Mexico so that
they could ease people's way out the door. Also build enough confidence in
financial markets worldwide so that the peso would (a) stop falling and (b)
come up not all the way to whole, but at least some of it up ...
So there's a little bit of truth to that objective, right? If the governments
do nothing, the system could indeed unwind and just freeze up and stop
functioning all together. On the other hand, the government doesn't say that
about anybody else in this society. It doesn't say that factory workers who are
laid off or farmers. It doesn't say that to small businesses that go down.
So as a political system, it is very one-sided. These high flyers from Wall
Street go around the world sniffing out hot prospects, make their money. Then
if they're wrong, if they get burned for any reason, our government, the
Federal Reserve, the IMF feel a responsibility to help them out of their
That, of course, is one of the things that's got to be reformed. You can't go
on like this. As long as these big banks and other major investors feel that, in
the end, they're going to be covered by not just the U.S. taxpayers, but the
German taxpayers and the Japanese taxpayers, pooling their money, they will
continue to do reckless things because they're not taking the full price of
Who ends up having to pay back this loan, which we have so generously
organized for the Mexican government?
By my lights, the biggest injustice, the cruelest injustice of the present
system is not to the U.S. taxpayer. Americans are relatively pretty wealthy. It's
to the people in those developing countries. They're the ones who pay the price
for all this. Indirectly, to be sure, because their factories are closed, their
wages have fallen because of the devaluation, their economy goes into a
recession or maybe worse. They take years to get back to where they were before
this bubble burst ...
In the other sense, the IMF comes in and makes it even worse by telling these
governments, "In order to get back in the good graces of the global financial
markets, you've got to do the following things. Lay off more workers, close
down more social programs, cut off government spending for things we don't
regard as worthwhile." That, of course, just spills the pain deeper on the
people, but also on the economy. It just guarantees that the economic recession
that was probably now baked in the cake anyway will now go much deeper.
In the present crisis, the IMF has demonstrably deepened the pain and the
economic loss, real loss, accountable losses, for all of these developing
countries than was probably necessary. It did that because it was following the
Washington consensus, notions of how do you balance financial accounts? How do
you get things right so that the bankers will trust you again?
If that were the only thing that mattered in the world, as they pretend, you
could accept their logic maybe. But, of course, it's not. What happens is they
hammer the economies down further than was really called for. Leave aside the
pain and suffering of people, real people, because of that, you have now made it
harder for that country to get back to a viable, balanced financial system
Who does the IMF represent? You have this phrase that they're the "bankruptcy
The IMF, in theory, is responsive to all of the economies of the world, and
especially, of course, the wealthier economies like ours, which fund it. The
U.S. is the biggest funder. In reality, it really has worked for the last 25
years as a kind of bankruptcy cop for investors from the wealthiest countries,
the U.S. and Europe and to a lesser extent Japan.
A country gets into trouble, whether it's deficits or inflation or debt or a
currency that's devalued, and the IMF comes in with its program and says we'll
lend you money if you'll do the following things. Very much like a bankruptcy
judge who says to the debtor who's filed for Chapter 11, "You can keep your
business open" or "We're not going to take away your house, but you've got to
do the following things." Those rules are to get the money back for the
creditors. That's exactly what the IMF does. Except it then lends a big batch
of money and enforces these rules by doling the money out a bit at a time.
So that it becomes this, I think, quite lopsided and perverse relationship
where the IMF officials fly in every couple of weeks, or if not more often, and
check the books and check the country and say, "You're not doing this right.
Close those banks. Close these companies." Very kind of imperial relationship
really [between] Western capital, including the U.S., and these poor developing
countries. Believe me, that's the way it's seen in a lot of these countries.
What is the relationship between the IMF, the United States and the United
Well, the Treasury and the White House always, of course, deny this, but the
reality that everybody understands in this field of global finance, is that the
IMF takes instruction from the U.S. Treasury secretary. That is because we were
the founder of the institution 50 years ago with Bretton Woods and because we
are the principle financier, not the only one that funds it. Because this
relationship accompanied the Cold War for so many years. Others deferred to the
U.S. view of things ...
Nothing the IMF does of any importance happens without Robert Rubin checking
off and saying, "Yes, I accept that or I don't," or whatever. Of course, that
often ends up at the White House as a decision of the President, because the
U.S. government, especially Bill Clinton, but his predecessors as well, are so
committed to this laissez faire orthodoxy for the world, the Washington
consensus and the notion that we all win if we just keep taking rules off of
the table and let the market solve these things. Because we, as a country, are
the promoters for that idea, the IMF almost never strays from it as well.I can't read minds at the IMF, but it's conceivable that some people there
really do want to do it a bit differently, but that nothing will change until
the U.S. government says, okay. That's part of the impasse worldwide. A good
many other governments have now started public discussions of, "How should we
reform this system?" They have a variety of ideas, some modest, some grand. The
U.S. has basically given the back of the hand to all of them.
So we're defending the orthodoxy.
We're defending the status quo, even as it doesn't work ...
What is the attitude in other countries about the Washington consensus?
Well, it's very complicated because there is a sort of love/hate, at least I've
found, around the world of people, not just poor people in countries wishing to
become less poor, but also in the wealthier countries, France, Britain--not
Russia, but Germany and other Europeans, Japan.
The love/hate has a deep ambivalence attached to it. It's admiration on the one
hand for the country and its accomplishments and inventiveness and openness and
all of the qualities that we value. On the other hand, in many places they
would say, "We don't want to become like the United States. We know how your
system works. We know the deep inequalities and the fact that you just ignore a
lot of social problems and public values. We're not going to become like
... It's probably a general feeling among others that we are arrogant towards
the rest of the world. I think that's right. We have a kind of virtuous
self-congratulatory assumption that we figured out all these things. So,
therefore, the other countries will get wealthy and be like us as soon as they
start behaving as we tell them to do. I don't think Americans generally feel
that way, but I think the people at the Treasury Department and the Federal
Reserve and the White House feel that way.
Back up for a second and talk about how these countries become vulnerable
because they want into the club, into the system ...
Well, I think typically, not just in the last 10 years, but even the decade
preceding, the U.S. has very effectively used the leverage of a creditor to pry
open countries that were deeply in debt for whatever reason--Mexico's the best
example of that--and say, "If you want to get well, here are the rules you've
got to play by." It's done slightly more diplomatically than that, but that's
the essence of the transaction.
Likewise in Asia, we have been hammering on a number of countries for years to
take our rules, and some of them have resisted for years. What was different in
the '90s was that in this investment boom, any of those Asian countries,
whether it was Malaysia or Korea or whoever, could look around and say, "Wait a
minute. This is really different now. We're really getting flows of foreign
capital. If we don't play by the rules, they'll just go to Indonesia or India
or Vietnam or China."
So there was a kind of competitive pressure there, which we then exploited as a
government. The U.S. government in numerous situations played hardball and
said, "Hey, if you want to stay in the club, you better liberalize your banking
system along the terms that we say. You better remove your capital controls so
that we can go in and out on our terms, not your terms." A lot of other complex
changes. That happened in Indonesia, in Malaysia, Thailand, Korea and to some
extent in Japan ... But this is a complicated story and you can't lay cause and
effect neatly on the table as A caused B, because it's always more complicated
But the fact is, South Korea would have been far, far better off and would have
undoubtedly not have had an economic crisis if it had not taken the American
demands to open up its capital markets as it did in the 1990s. South Korea's
motive was pretty obvious and well understood ... They wanted to be treated
like a big boy in the world. They wanted to get membership in the OECD
organization of industrialized countries. The price was set for them. "If you
want to be one of the big boys, here's what you've got to do" ... So they paid
that price. That was the predicate for their financial collapse. It literally
made them vulnerable to global financial flows in a way they hadn't been
before. There were similar less dramatic transactions in Thailand and Malaysia,
very much like that ...
So when the contagion begins to move through the Asian countries, there's
Korea wide open.
Yeah. You know, nobody walks away utterly innocent. You can say in Korea's
case, well, they borrowed too much money. Yeah, of course. But what gets left
out of that discussion is who lent them too much money? There the culpability
was international. It wasn't just the U.S. It was Japan. It was Europe, some
others. For every failed debtor who was operating on half-baked illusions,
there's a banker who was operating on the same half-baked illusions.
Only the way this world works, the U.S. government, the Federal Reserve, the
IMF and others step forward and say, "Well, we have to help this banker get
over his pain and suffering. Because if we don't, he won't lend money again and
become a player again the way he was." That seems to me utterly illogical as a
way to run the world, not to mention unjust, because we don't say to the
debtor, "Let's help him."
Part of helping the banker in these situations is, we punish the debtor further.
I mean that literally. We then increase the pain for him. Whether that's
removing government spending and social subsidies or driving his industry into
deeper bankruptcy ...That's the reality that we're seeing around the world now,
that you're literally punishing innocent bystanders who didn't borrow the
money, who didn't make the deals, who are just trying to make a living in a
society that's already not very rich and quite poor, you're punishing them
further in order to make global capitalists whole so that they will keep on
being global capitalists. There's got to be a better way.
Let's go back, specifically to Thailand ... and how this thing gets started
If you look across the '90s, you see this extraordinary boom in lending and
investing in these so-called emerging markets. Plus development in the U.S. and
Europe and Japan and new production. Some people, myself included, said, "Well
before this crisis began, something is going to break down here. This system
can't go on like this because they're building too many factories, hotels and
office buildings, etc."
In early 1997, investors like George Soros and the hedge funds, who have a
sharp eye for instabilities building in the system, focus on Thailand and begin
betting that Thailand is going to have to devalue its currency, because it's
borrowing too much money. Its exports are falling because its currency is
overvalued. Therefore, it's losing market share to Japan or China or
So they start betting that there's going to be a currency devaluation, at
least, if not a collapse. Of course, the fact that the big money starts betting
against the currency often has the effect of fulfilling the prediction because
it does weaken the currency. The Thai government has to then spend more of its
reserves to prop the currency up and eventually it reaches a point of
exhaustion and then you get a crisis of collapse. That was the trigger for all
of the events that followed. But it wasn't Thailand's fault. It simply happened
to be in the crosshairs first.
Soros doesn't act alone ... Soros is shrewd and powerful, but he can't move the
system by himself ... his power is amplified because all of
these major banks, the ones in Wall Street, the ones in London, Frankfurt, even
Tokyo, are putting chips down on his bet.
The system of speculation, in fact, is not just hedge fund rogues. It's the
biggest financial institutions in the world. They all make money on it. If you
look at the balance sheet of Citigroup or Chase Manhattan, you will see huge
profits from speculative play. So they're all in the same world.
So then the run starts on the Thai currency, essentially. What happened?
What happens when a currency like Thailand cracks is that everybody who didn't
see it coming suddenly turns white with fear and runs for the door. I mean that
almost literally. Their first impulse is to get out. Because they're all trying
to do that at once, that drives the currency or the stock market or whatever
down even further, more dramatically, and very quickly, in matters of hours or
In the case of Thailand, their crisis spreads like a contagion only because
these same panicky investors then look around and say to themselves belatedly,
"Well, where else do I have some money where this might happen to me?" So they
see Malaysia and Indonesia have at least the outlines of similar problems. If
not as severe, there are at least questions you could ask. So they just cover
themselves. They say, "Well, let's get out of Malaysia and Indonesia." Then
they look at Korea. At some point, this is not necessarily a rational
calculation. It's simply, "I don't know who's going to be in trouble next. I'm
going to get out of all of these developing countries." Or, "I'm just going to
reduce my position there until I see where this storm goes next" ...
Are you optimistic or pessimistic in terms of ... the part of our decision
I'm deeply ambivalent about our leaders. Especially the policy debate, because
some things I wrote in a book two or three years ago were widely, if not
universally, dismissed and disparaged at the time by economists, are now the
grist for this debate and get talked about in very conventional places.
On the other hand, America, especially because of the peculiar way we have
flourished amid everybody else's trouble, is in danger of its own hubris of
getting lost in this sort of self congratulation that, "We're right and
everybody else is wrong; therefore, we don't have to worry about this anymore.
It's their problem. They'll have to be like us or they'll just suffer." I think
that is so wrong, not to mention cruel, way to look at the situation. But it's
an easy out for powerful people.
I mean, if you go back to how our government and Wall Street reacted to the
crisis that unfolded first in Asia, they plucked a lot of good cover stories to
explain this to the American people and to explain it to themselves. They said,
"This is crony capitalism. It's because their banking system doesn't have good
rules like our banking system. It's because their stock markets are full of
fraudulent values, whereas ours is full of sound values," and so forth. The
whole argument was, "It's not our fault. It's their fault. We'll just go on
without them if they don't want to get with us."
First of all, you can't have been watching American politics for the last 15 or
20 years without recognizing that crony capitalism is very much part of the
American system. I'm talking about the close, intimate and financial connection
between Wall Street, for instance, and our government. Not just the fact that
the Treasury secretary used to run Goldman Sachs, but the fact that the
Congress and this president, especially, have been financed in large ways by Wall
Street and it shows in their policies. Favors are awarded through the federal
government all the time, not to mention state and local governments, to
particular industries and sectors. That looks very much like crony capitalism
The second part of that is that it allowed people not to face any of the bigger
questions, to say, "Wait a minute. There's something wrong here. Let's start
having a serious discussion about what's wrong and argue over how to fix it."
The establishment in America, and there is an establishment, has pretty much
evaded that debate in public.
Now, it's true that in private some of those people are wringing their hands and
worrying sincerely about what has to be done. But I don't think you should
reform this system in the back room. It's got to involve not just the American
public, but the Europeans and the Japanese and all of those poorer countries
that have been dragged down. I don't think we can solve this with a few
conferences and discussions in Washington and New York.
But you're not seeing much of admission of our culpability in any of
With a couple of eccentric voices excepted, I don't think any of the elite in
America, whether they're academic or government or financial or business, have
been willing to face the deep implication that in some ways, despite our good
intentions and our beliefs, we helped cause this crisis. By that I mean we pushed
the Washington consensus on countries that weren't ready for it. We
promoted the stern medicine. We promoted the illusions of these booming
emerging markets that were going to make everybody rich if we just got in.
In this new global system, who has the power? Who's in charge?
Once national governments have retreated from exercising power--that is,
repealed their controls on capital flows in and out of their economies--the
markets are in charge. That started gradually in the early 1980s and then
accelerated so that by the time we got to the '90s, it was the big reality. The
easy way to see this is the central banks, the biggest ones, are allegedly in
control of things and that's the popular mythology.
In the early '80s, the Federal Reserve and the BundesBank and three or four
other major central banks had reserve assets ready to deploy to protect
currencies or do whatever they had to do. There were probably two times, three
times larger than the daily market, financial market activity around the
By the early 1990s, the relationship is reversed. The financial activity has
grown so ferociously and fast, whether it's currencies or international bonds
or lending or whatever, that it now dwarfs those central banks. So that one
financial expert said to me, "It's like people going out with a pea shooter to
hunt elephants." The central banks have to pretend like the pea shooter is
going to hurt.
But, in certain circumstances, the markets will roll over everybody, including
even the Federal Reserve. That's yet another reason why we've got to put some
moderating controls on this system. Because I think what events have
demonstrated clearly is that, by their nature, financial markets are both
unstable, that is they're prone to change this way and that.
But also they're not going to make any more political decisions for the rest of
us. They can't. Again, that's not what they do. That means you've got to have a
government presence, some rules, some operating rules, which at least moderate
their excesses and punish them for their recklessness.
So when they all decide to act ... if everybody's in on the same bet
Yeah. I mean, George Soros can't topple governments by himself and Citibank
can't and Barclay's can't. But what happens when they're all playing in the
same direction, betting against a major currency, for instance, they can even
overwhelm central banks and even the Federal Reserve in the right
circumstances. Because they can literally deploy more investment capital going
in one direction than the major central banks have to counter them, that's an
unreal situation when all the leading governments of the world have agreed to
not exercise their power and turn it over to unregulated financial markets,
which is essentially what's happened.