Monday, March 9, 2009

Give a dog a bad name

Neoneocon has up a post which links to an interesting if depressing article of the “now they tell us” variety. Apparently former Australian Prime Minister Paul Keating blames Timothy Geithner for Indonesia’s dismal economic results following the IMF’s involvement in the mid-90’s Asian financial crisis and claims that “Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences...”

Just how badly did the IMF hurt Indonesia? Here what Keating says:

Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century...

As for the “serious geoeconomic consequences”, Keating claims that the mishandling of Asian financial crisis is:

one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive [$US2 trillion] reserves.

Keating’s account certainly contradicts other sources quoted in the article which credit Geithner with scoring successes in the crisis and I don’t know enough about the subject to evaluate how accurate Keating’s analysis is*. What made me sit up and take notice, however, was Keating’s explanation of why Geithner did so badly. According to Keating (emphasis mine):

"Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

That sort of confusion might help explain a pattern Paul Krugman finds frustrating:

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away. [snip]

The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions...

Henry Blodget, springboarding off Krugman’s article, puts it more bluntly (bolding mine):

... so far, with respect to the banks, Obama, Bernanke, and Geithner haven't done squat.

What they have proposed doing, meanwhile, is based on an incorrect assessment of the problem.

We are not having a "liquidity" crisis in which assets are temporarily worth less than they will be soon. We are having a solvency crisis: Our mountain of debt is finally collapsing on top of us, and most financial assets are getting crushed. [snip]

We suspect the problem is Geithner ...

Great. Now I can stop worrying that Obama’s team doesn’t know what to do to fix the crisis and start worrying that they haven’t even figured out what the crisis is.


* I did check Wikipedia to see if it was any help in figuring out whether Keating’s claims are accurate. There seem to be enough theories about what went wrong to make that difficult to sort out. As Wikipedia puts it: “The causes of the debacle are many and disputed.” Boy, does that sound familiar.

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