The Wall Street Meltdown: the View from Asia

Sep 30

Many Asians absorb what is happening in Wall Street with a combination of déjà vu, skepticism and "I-told-you-so." For many, the Wall Street crisis is a replay, though on a much larger scale, of the 1997 Asian financial crisis, which brought down the red-hot "tiger economies" of the East. The shocking absence of Wall Street regulation brings back awful memories of the elimination of capital controls by East Asian governments, which were under pressure from the International Monetary Fund and the US Treasury Department. That move triggered a tsunami of speculative capital onto Asian markets that sharply receded after sky-high land and stock prices came tumbling down. Treasury Secretary Paulson's proposed massive bailout of Wall Street's tarnished titans reminds people here of the billions the IMF hustled up after '97 in the name of assisting them–money that was used instead to rescue foreign investors.   So Asian governments and financial players are skeptical about Washington's talk of re-regulating the financial sector, and, although their central banks and sovereign wealth funds are flush with cash, they're wary about being drawn into the Wall Street maelstrom. Among East Asian official funds, only Singapore's Temasek and the China Investment Corporation have stepped up to the plate. Temasek pumped over $4 billion into Merrill Lynch a few months ago, but only after driving a hard bargain. CIC invested $5 billion in Morgan Stanley last December but refused the troubled investment bank's recent desperate plea to increase its share of the firm. Initially seen as a potential savior, the Korean Development Bank turned down the overtures of Lehman Brothers a week before the latter's historic collapse into bankruptcy.   Trillions of dollars of Asian public and private money are invested in US firms and property, with the five biggest Asian holders accounting for over half of all foreign investment in US government debt instruments. Funds from Asia have become a key prop of US government spending and the middle-class consumption that have become the driver of the American economy. With so much of Asia's wealth relying on the stability of the US economy, there is not likely to be any precipitate move to abandon Wall Street securities and US Treasury bills.   At home, however,...

Read More

A Primer on the Wall Street Meltdown

Sep 25

Many on Wall Street are still digesting the momentous events of the last ten days: 1-3 trillion dollars worth of financial assets wiped out. Wall Street effectively nationalized, with the Federal Reserve and the Treasury Department making all the major strategic decisions in the financial sector and, with the rescue of the American International Group (AIG), the US government now runs the world’s biggest insurance company. The biggest bailout since the Great Depression, with $700 billion, being desperately put together to save the global financial system. The usual explanations no longer suffice.  Extraordinary events demand extraordinary explanations.  But first… Is the worst over? No, if anything is clear from the contradictory moves of the last week—allowing Lehman Brothers to collapse while taking over AIG, and engineering Bank of America’s takeover of Merrill Lynch–there is no strategy to deal with the crisis, just tactical responses, like the fire department’s response to a conflagration. The $700 billion buyout of banks’ bad mortgaged-backed securities is not a strategy but mainly a desperate effort to shore up confidence in the system, to prevent the erosion of trust in the banks and other financial institutions and preventing a massive bank run such as the one that triggered the Great Depression of 1929. What caused the collapse of global capitalism’s nerve center?  Was it greed?      Good old fashioned greed played a part.  This is what Klaus Schwab, the organizer of the World Economic Forum, the yearly global elite jamboree in the Swiss Alps, meant when he told his clientele in Davos earlier this year: “We have to pay for the sins of the past.” Was this a case of Wall Street outsmarting itself? Definitely. Financial speculators outsmarted themselves by creating more and more complex financial contracts like derivatives that would securitize and make money from all forms of risk—including exotic futures instruments as “credit default swaps” that enable investors to bet on the odds that the banks’ own corporate borrowers would not be able to pay their debts!  This is the unregulated multitrillion dollar trade that brought down AIG. On December 17, 2005, when International Financing Review (IFR) announced its 2005 Annual Awards — one of the securities industry's most prestigious awards programs—it...

Read More

Towards a New American Isolationism

Sep 06

Despite the glitter that surrounded both the Olympics in Beijing and the Democratic National Convention in Denver, the messages coming to Asia from the two events were very different. From Beijing, the message was, to put it in the words of one pundit, China has had a few bad centuries but is back on its feet.  From Denver, the word was that the world’s most powerful country has been on a desperate decade-long downspin that can only get worse if the Republicans keep the White House. For people in this part of the world, the weakening of US power is most evident elsewhere:  in the Middle East and Southwest Asia, where Washington is bogged down in unending wars in Iraq and Afghanistan; in Latin America, where the rebellion against neoliberalism and US meddling is in full swing; and, most recently, in Central Asia, where Washington and the North Atlantic Treaty Organization (NATO) have been taught a painful lesson in overextension in Georgia. The erosion of Washington’s position is less obvious in East Asia.  After all, the US continues to maintain over 300 military bases and facilities in the Western Pacific.  Over the last decade, it has established what amounts to a permanent troop presence in the Southern Philippines to make up for its giving up its two big military bases on Luzon Island in 1992.   And in Indonesia, the Pentagon has reestablished its close ties with the Indonesian military after several years of uncertainty, using the opportunity provided by relief operations during the tsunami of 2004. Erosion of US Power in East Asia     Nevertheless, the region—and Southeast Asia in particular—is probably more independent of the US today than at any other time in the last 60 years.  Economics is the reason.  Over the last two decades, several developments have eroded the US’s position.     First of all, its drive to create the trans-Pacific free trade area known as the Asia Pacific Cooperation (APEC) failed.  APEC was meant to be a westward extension of the North American Free Trade Area (NAFTA), and both were intended to serve as a geoeconomic counterweight to the European Union.  Japan, China, and the Association of Southeast Asian (ASEAN) countries, fearing US economic domination...

Read More