The troubles of Indonesia, Malaysia, South Korea, and Thailand may not have brought down the rest of the world, but they dampened the mood at a financial industry economic symposium last week.
At the financial structure conference of the Jerome Levy Economics Institute, an annual event at the upstate New York campus of Bard College, there was nary a peep about the recent megamerger news, nor was much said about the health of the domestic economy and its continued uplifting of bank profits.
An international group of financial industry economists and policymakers stuck faithfully and with some ardor to a less sanguine agenda centering on the Asian financial crisis and "the fragility of the international financial system."
They were not a cheery bunch. If an economic slowdown is imminent, about 120 people heard about it here first.
On the other hand, no one went out on a limb to define how soon is imminent, or any other specific timing.
The mood was so bearish that Albert Fishlow, a veteran economics scholar and expert on Latin America, was accused of being "Pollyannish" in saying the United States can relatively easily absorb the Asian shocks.
Mr. Fishlow is the Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations in New York. He endorsed what this group would call conventional wisdom: that U.S. output growth would be hurt by 0.5% to 1% because of the Asian crisis.
Allowing for differences between the troubled Asian countries-he sees "a fairly rapid recovery" in Korea, one less rapid in Thailand, and a need for fundamental government reforms in Indonesia-Mr. Fishlow concluded, "The Asian crisis is exactly that, a crisis of rather temporary magnitude."
The "Pollyanna" accuser was Walker Todd, a Cleveland-based lawyer, economic consultant, and former Federal Reserve Bank counsel and research officer. He maintained it would take a few years for the workout processes to take full effect. In the meantime, the "1% adjustment" could fall harshly on some parts of the United States.
"Who absorbs that adjustment?" he said. "It won't be distributed evenly. If you are at a Caterpillar plant in Peoria it may hit you hard, maybe minus 5%, but New York City may be fine, plus 3%."
Wynne Godley, a Levy Institute distinguished scholar and retired Cambridge University professor, challenged the more optimistic assumptions about the ability of the U.S. and world economies to come through the Asian shocks.
He said recent International Monetary Fund projections "didn't add up," and of many U.S. income, consumption, and debt trends said, "It cannot continue forever."
"It doesn't really make sense to say the consequences of the Asian crisis are just 0.5% or 1%," Mr. Godley said. "If we are talking about a fully independent system and the falls in output (that my model projects) are anywhere near correct, their effects around the world would be substantially greater than those projected by the IMF."
In the United States, he said, "the private sector is borrowing on an unprecedented scale.
"Household indebtedness does not look unreasonable relative to assets, and the same is true for businesses"-as long as stock prices are as high as they are. "Even if this looks all right today, I can't say for how long, but it cannot go on indefinitely."
Mr. Godley's critique of the International Monetary Fund's economic statistics was mild compared with the thrashing that the institution took from others in the crowd.
The IMF has become the bete noire of an unusual coalition of right- and left-leaning political interests that are feverishly trying to prevent Congress from passing an $18 billion funding allocation.
Critics at the Levy symposium tried to cast their opposition in a mainstream light as they accused the IMF of "mission creep" and of being less than effective in orchestrating the response to Asia.
James K. Glassman, a one-time Washington editor and publisher who holds an endowed chair at the American Enterprise Institute, said bad banking was the root cause of the 1997 collapse and the IMF is contributing to "moral hazard" by propping up existing lenders.
"IMF cash is repaying terrible, terrible loans," Mr. Glassman said. The fund's intervention may have "staved off a rolling crisis," he said, "but at what cost?"
"There is more to this than isolationist yahooism," said Mr. Todd, who quoted liberally from John Maynard Keynes in arguing his own brief against the IMF. Keynes' ideas strongly influenced the post-World War II diplomacy that created the IMF and World Bank. Mr. Todd said they were corrupted early and the IMF's "multilateral" achievements have been less distinguished and more costly than those of the Marshall Plan, an example of U.S.-mandated bilateralism.
Keynes viewed the IMF's role as strictly "short-term adjustment finance" to keep developed countries' currencies in line with the Bretton Woods rate parities, Mr. Todd said. Development finance fell to the World Bank, but it and the IMF each "poached on the other's turf."
"Keynes steadfastly opposed ... the use of publicly funded institutions to bail out private lenders from the consequences of their own foolish international lending," Mr. Todd wrote in a paper.
He said he would vote down the IMF's $18 billion request because "to use public funds for these purposes is the same as building a golf course with public funds and closing it off for private use."
Hitting back, Karin Lissakers, the U.S. executive director of the IMF, quoted chapter and verse from the IMF's Articles of Agreement, detailed the timing and sequences of events in the latest interventions, and confronted what she called "two schools of critics"-the "IMF too soft" and "IMF too harsh" camps.
"One can disagree with the policy, but at least there is a coherent policy," Ms. Lissakers said. "It is working as it should. The policy prescriptions do work.
"There is a moral hazard issue for the fund, everybody recognizes it," she added. "But I am convinced that when crises occur, the cost to global growth will be lower with the IMF than without it."
Rebutting Mr. Glassman, Ms. Lissakers said she has "36 directives from Congress" to push such causes as trade liberalization, education and health spending, and reduced military spending within the IMF. "I suspect there will be dozens more mandates for the U.S. executive director. If there is mission creep, let's look where it is coming from."
She also said that the IMF has $230 billion at its disposal, which pales next to the daily foreign exchange trading volume of up to $2 trillion. Mr. Glassman could not let that go, saying, "That really argues for a lesser IMF role."
Alice M. Rivlin, vice chairman of the Federal Reserve Board, spent just a few minutes of her talk last Thursday on how much blame there was to go around in the Asian countries' banking and industrial sectors, governments, and capital accounts. She then went into considerable detail about market and regulatory solutions.
She called for more accurate and timely information flows, or "transparency;" "serious prudential supervision" of financial institutions; independent and well-managed central banks; "clear and enforceable bankruptcy laws," which were totally lacking in Indonesia; and "appropriate burden-sharing" by the private sector when crises occur.
The last "runs into fundamental and sticky dilemmas," Ms. Rivlin said. "Without an orderly process"-she pointed to lessons learned in the 1980s in Mexico and Latin America-"there is inequitable burden-sharing and future moral hazard."
She seemed supportive of the IMF role and the need to isolate and attack the Asian problems, but said "cookie-cutter solutions could do more harm than good."
"Factories, banks, shining buildings, and eager investors do not by themselves create underpinnings of stability," she said. "There need to be laws, traditions, and expectations that cannot be built overnight or imposed from outside."
Martin Mayer, guest scholar at the Brookings Institution in Washington, author of two books called "The Bankers," and husband of Karin Lissakers, said central banks are inherently sources of moral hazard because their job is "to ride to the rescue."
He said the demise of Drexel Burnham Lambert in 1990 was a seminal event. Suffering the consequences of imprudence, it was allowed to fail "without systemic consequences."
The "too big to fail" doctrine still holds sway in commercial banking because the banking system remains the conduit for monetary policy. But Mr. Mayer contends that technology will separate banks from their monetary role.
As he wrote in a recent paper, "The credit card companies, data processors, and ATM networks have sabotaged the demand-for-money function that informs the theory of central banking. To the extent that banks wish to be brokers rather than holders of assets, the danger of a 'run' is greatly diminished."
"With a move to better technology," he said in a luncheon speech, "we can reorganize the banking and payment system so that moral hazard is greatly reduced and even eliminated."
