CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press The Root of Many U.S. Economic Problems Lie In Stanley Fischer's East Asian Bailout

The Root of Many U.S. Economic Problems Lie In Stanley Fischer's East Asian Bailout

Thursday, 13 March 2014 05:43

Morning Edition engaged in ritualistic praise of Stanley Fischer, in discussing his prospects for approval as President Obama's pick to be vice-chair of the Federal Reserve Board. It accurately reported that economists on both the left and right of the political mainstream respect Fischer and see him as central to shaping the current state of macroeconomics.

The small point left out of this discussion is that this macroeconomics led us into the worst economic downturn since the Great Depression, giving the country and the world a slump from which we have not yet recovered. Tens of millions of people have seen their lives ruined as a result of failed economic management.

Fischer personally played a direct role in creating the imbalances that led to the crisis. As first managing director at the I.M.F., he played a central role in directing the bailout from the East Asian financial crisis. The harsh conditions imposed by the I.M.F. led the countries of the region, along with countries throughout the developing world, to begin to accumulate massive amounts of reserves (dollars) in order to avoid ever being in the same situation as the East Asian countries.

This led to a huge rise in the value of the dollar and an explosion in the size of the U.S. trade deficit. The trade deficit created a huge gap in demand. This gap in demand was filled in the late 1990s with the demand generated by the stock bubble. The demand gap was filled in the last decade by the housing bubble. This is not a stable mechanism for generating demand.

In standard textbook economics capital is supposed to flow from rich countries to poor countries where in principle it will derive a higher rate of return. Fischer's policies at the I.M.F. led to a reversal of this pattern in a very big way. The consequences for the world economy have been disastrous. This point could have been made to NPR's audience if it had spoken to anyone who was not complicit in this momentous mistake.


Comments (15)Add Comment
Water, Water Everywhere, But Not a Drop to Drink
written by Last Mover, March 13, 2014 7:28

Oh Captain of Industry, how did we get here? What brought us to this barren economic landscape with little hope of recovery for the 99%?

The consensus brought you here my little one, the grand bargains struck over the years between the left and right to arrive at decisions that kept the Good Ship Centrist America afloat and sailing strong. Look around you. Wealth is everywhere.

But Captain, wealth is everywhere but the middle class has none of it. It's like the waters we're sailing in right now, water is everywhere but there's not a drop to drink. What happened? Why didn't the compromises work?

Hush my dear for you have been mislead by extremists who want to lead you astray. Listen to the wisdom of reason that comes from the middle.

Listen to NPR.
written by DJB, March 13, 2014 7:37

imf institutes austerity measures

countries then try to print more money to pay off their debts and keep their countries running

their money becomes worth less on exchange compared to dollar and other currencies

making holding the dollar in those countries much more attractive, ie so your money keeps its value

other countries and rich people see this, and try get hold of dollars as a protection so their money holdings keep their value

all of which increases the value of dollar on the exchange, make us exports much more expensive

causing increased trade deficit for us

is that the correct interpretation??
Thank you for always speaking the truth......
written by indiana patriot, March 13, 2014 8:13
....I've come to really dislike NPR over the years but my "liberal" friends and relatives think this makes me an extremist.

I'm really not sure what the point of majoring in economics is. You devote time and energy to studying very useful concepts and tools, but no one in the mainstream policy world seems to have the slightest idea that their ideas have nothing to do with economics.

Got left and right covered
written by Dave, March 13, 2014 8:16
These days there is a neurotic belief at if a person has support from both left and right hat they are perfect. It doesn't matter if they are correct about important stuff.

Chances are good that if the right has respect for you, you have some trouble with reality.
Suffer the little children
written by ifthethunderdontgetya™³²®©, March 13, 2014 8:50
- The New Testament

"Make the little children suffer"

- our plutocratic overlords and their un-humble servants.
written by Bart, March 13, 2014 8:52

Also, didn't the IMF under Fischer encourage (force?) privatization and debt on countries like Yeltsin's Russia?
written by jeff S, March 13, 2014 8:57
i'm not familiar with Fisher and i don't want to defend the IMF or anyone who worked there but i think there is a whole in your logic. You imply that the trade deficit led to stock market and RE bubble. I don't think the two are related. I'm sure you are aware low interest rates and the problem of over production are the more likely culprits.
One other thing, i think it is right to critisize the stock and real estate bubble because of the waste associated with the financial speculation that drove those bubbles. Nevertheless, given the limits of capitalism we would not have had the boom of the 90s or the 00s without those bubbles. That is an issue i have never seen you address.

A smaller trade deficit or surplus would have given us a boom
written by Dean, March 13, 2014 9:40
Jeff S,

the whole point of my comment is that the trade deficit created the hole in demand that was filled by these bubbles. If we had a smaller trade deficit or a surplus that would have been driving growth, not the bubbles.
written by kharris, March 13, 2014 2:10

Slight modification to your reading, as mentioned in Dean's post.

The IMF, designed to lend to countries that need short-term payment assistance, refused to lend during the Asian crisis unless countries undertook damaging economic policies. Policies aimed at correcting a payments imbalance were imposed to correct what was largely a giant mismatch between assets and liabilities. The policy didn't match the source of the problem.

Asian economic managers took a particular lesson from this episode - the IMF will try to slow our growth whenever it can, so we can never be at the IMF's mercy again. We must hoard foreign currency. That requires running a current account surplus, so we must have export led growth.

When I told that story in the US as an explanation for the trade imbalance and the mortgage bubble, lots of people's eyes would glaze over. The story didn't rely on what we now call "austerity" so it didn't compute. When I told the same story in China, the response was along the lines of "well yeah, that makes sense" because the only new element to that audience was adding foreign inflows as a source of funding for the mortgage bubble.
written by urban legend, March 13, 2014 2:54
The stock bubble broke in March 2000, yet 18 months later the unemployment rate was still below 5%. It's not easy to see a cause-and-effect relationship between the stock bubble and the 2001 recession. (Of course, 18 months after the stock market collapse, 9-11 happened. The unemployment rate jumped to 5.7% by the end of the year, but then stayed about there for the next nine months.)

With the stock market bubble, (1) its effects did not reach nearly as deeply into affecting the apparent wealth of the population, I would guess at most no more than a quarter of the population; and (2) everyone knew it was the product in part of irrational exuberance, so it's value was already deeply discounted by its beneficiaries. Everyone knew the stock market goes up and it goes down, and if it goes up it will go down -- and when it went down it could, as it did for over a decade into the late 70s, stay down. On the other hand, everyone knew, or thought they knew, that real estate only goes up.

They seem like different animals by a significant order of magnitude.
stock bubble collapsed over the period from march 2000 to july 2002
written by Dean, March 13, 2014 4:06
Urban Legend,

the economy stopped creating jobs in Feb of 2001, more than half a year before Sept 11th. Investment slowed sharply and consumption began to weaken. It's pretty clear the stock crash caused the recession. Of course effects were not as bad as the housing crash for the reasons you mention.
allow me to quibble.
written by Squeezed Turnip, March 13, 2014 11:11
It's not really that the stock crash caused the recession, as much as it was reflecting a recession already underway. If the valuation were already correctly discounted (which urban legend claims), then the large correction wouldn't have occurred. The market makes mistakes, but the point is not to repeat them (until the next generation, I suppose). And most traders are uninformed traders, which is how the dealers can make a profit. But that didn't really spread into the economy as much as from the economy. Demand for crap dot com products didn't appear, to the chagrin of ignorant investors.

The reasons that the housing bubble created greater damage than the stock bubble is manifold, but is really not related to the particular mistake of believing that real estate values always go up. The real mistake was the undervaluation of risk. The valuations actually reflected risk (hence the bubble prices), but the big boys totally missed that fact and, thus, totally misplaced their credit instruments, which were being used as money. And, also, the market-based credit system was greatly expanded in 2007 compared to 2001.
The mistake that house prices would go up Was the problem
written by Dean, March 14, 2014 4:47
Squeezed Turnup,

I'm afraid the mistaken view of housing was central. This is what drove construction to ridiculous levels leading to enormous overbuilding. It's also what led to a huge consumption boom. When house prices reverted to trend, this spending disappeared. The fact that the Wall Street guys missed this and ended up bankrupting their banks created the fun of the financial crisis, but the severe recession was caused by the plunge in house prices.
i read somewhere 50% of SP 500 earnings are from overseas operations..
written by pete, March 14, 2014 10:44
Indeed, there is a higher rate of return. And phenomenal growth overseas. Huge increases in real wages in south Asia (they have so far to go), and Africa is next. Am I missing something somewhere? Also it is now 2014, so by the "past decade" regarding the housing bubble I guess you mean from 2002 to 2007. Or 1996 to 2002. In 2002 you and Shiller said we were in a bubble. Thats only 2 years after the dotcom burst in March 2000. Kind of hard to separate these two.
written by ibilln, March 14, 2014 9:13
For what was there a demand? My understanding is that, yes, there were (are) large amounts of capital (US dollars) seeking somewhere to go. US Dot-coms! US housing! Is this the "demand" Dean speaks of?

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.