Stanley Fischer

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

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.

DeLong on East Asian Crisis & European Feedback Cycle of Doom

DeLong seems to be partly reacting to Baker's criticism of Summers and the Clinton administration's handling of the East Asian Financial Crisis. At least it is the same subject.

The Long and Large Shadows Cast by Financial Crises: The Future of the European Periphery in the Mirror of the Asian Pacific Rim 1997-98 by DeLong

And yet that is not what happened. On the Asian Pacific Rim in 1997-8, the fact that so much of the region’s debt was denominated in dollars meant that bouncing the value of the currency and thus of domestic production down far enough raised universal and valid fears of bankruptcy, and sharply raised risk premia: the Asian Pacific Rim thus had to, to a certain extent at least, defend its currency. And in Europe’s periphery nations are tied by treaty, by the deep and close technical integration of the financial system, and by hopes for a united and peaceful European future into the euro zone. Thus when the crisis comes both regions must generate rapid adjustment of the current account: a sudden stop.

The problem is general. There are lots of reasons why the natural market’s bounce-the-value-of-the-currency-down adjustment mechanism will not work. Overwhelming reasons to maintain a fixed parity. High levels of harder-currency debt. A tight coupling of import prices to domestic inflation and a belief that the costs of accepting domestic inflation are unacceptable–cough cough, why we all today feel sorry for Raghu Rajan. In any of these cases, when the crisis comes you must generate a rapid adjustment in your current account, and the easiest and the most straightforward way to do this are via domestic investment collapse. This is the first failure of the veil of the financial system to be merely a veil–the first coupling of financial distress to destructive real economic consequences.