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.

New Global Economy