Bailing Out the Rich
In These Times magazine, February 1998
For more than a decade, banks throughout the world bankrolled
rapidly growing Asian exporters to the tune of billions of dollars.
As these firms expanded, their capacity to produce began to far
outstrip the capacity of consumers to buy their products. The
result: These firms have seen their profit margins shrink, making
it increasingly hard for them to pay back their creditors.
The Asian crisis began nearly a decade ago in Japan, where
declining growth and a stagnant domestic economy resulted in steadily
mounting lending losses. Japanese banks are now stuck with nearly
$600 billion in bad or questionable loans. Similarly, in Indonesia,
where the currency crisis hit last January, at least $80 billion
in loans from foreign creditors are now in default. The same general
pattern holds true for Thailand and South Korea.
As economic slowdowns in the region have turned to crises,
hundreds of thousands of people have lost their jobs or seen their
incomes decline. Workers in Japan and Korea had been assured that
they had lifetime job security. Those guarantees, however, have
evaporated as firms scramble to stay afloat.
Banks, too, are in a precarious position. In Hong Kong, Peregrine
Investments Holdings, the region's largest home-grown investment
bank outside Japan, collapsed in early January. The bank, which
has been in trouble since the Hong Kong stock market crashed in
October, had been negotiating with a consortium of Western banks
for a partial buyout of $295 million.
Peregrine's largest creditor is the First National Bank of
Chicago, which is owed $100 million. First Chicago was prepared
to put up another $25 million-along with some $200 million from
the Zurich Group, a Swiss financial-services company-to stabilize
Peregrine, but the deal unraveled when a $260 million loan that
Peregrine had made to an Indonesian taxi company owned by President
Suharto's oldest daughter went bad after the Indonesian currency
took a nose dive in January. Unwilling to throw good money after
bad, the Western banks pulled out. Now First Chicago, along with
other members of the consortium, will probably lose much of its
initial investment in Peregrine, a prospect that led the Zurich
Group's chief economist to exclaim, "This is a tragedy that's
taking on a human dimension."
While Western bankers shed tears over the prospect of losing
money, their main instrument of rescue-the International Monetary
Fund (IMF) has never shown much concern about the human dimension
of its policies. Indeed, the IMF's stock-in-trade is the imposition
of harsh sacrifices on working people and the poor. The organization's
traditional prescription for economic woes is austerity, high
interest rates and the opening of domestic markets to foreign
companies. In exchange, the IMF agrees to rescue banks from losses
or failures. In other words, working people in these countries
are forced to pay for the irresponsibility of the economic elite.
IMF policies may help to bail out the debtors-or, more to
the point, the Western creditors-but they do little or nothing
to address the recession or the declining purchasing power of
working people that invariably follow. Bailout packages only widen
the gap between rich and poor. Moreover, they do little to address
the underlying problem of excess capacity, since their goal is
to stimulate more investment in the export sector.
Of course, as excess capacity grows, prices fall. That is
why-despite continuing high levels of growth-inflation has begun
to fade from the radar screens of economists. And that is why
Federal Reserve chairman Alan Greenspan and other guardians of
the status quo are now warning that deflation, rather than inflation,
poses the greatest danger to economic growth and the continued
rise of corporate profits.