Central Bankers, Economists
Ponder Lessons of Thai Crisis

By DAVID WESSEL
Staff Reporter of THE WALL STREET JOURNAL

JACKSON HOLE, Wyo. -- The pattern following a national financial crisis anywhere around the world is predictable: First comes panic, then an official bailout and, finally, conferences are convened to glean the lessons learned.

In the case of the latest crisis, that of Thailand, the lesson learners are off to an early start. A Federal Reserve Bank of Kansas City weekend conference on "financial stability in a global economy," conceived long before Thailand devalued the baht in July, gave central bankers, finance ministry experts and academic and Wall Street economists a chance to ponder the significance of it all.

Of course, the big threat to financial stability world-wide is the prospect of a plunge in the U.S. stock market. Although much discussed during the coffee breaks -- one money manager confessed he has moved 85% of his own savings into bonds and the mention of the market brought furrows to brows of Fed officials -- the topic was barely discussed in public.

When it was discussed, the consensus was that central bankers can't tell when stock prices are truly out of line. And even when prices seem to be, the wisdom of a central bank doing anything in response, as former Federal Reserve vice chairman Alan Blinder put it, is "somewhere between impossible ... and inadvisable."

Officials and experts agreed that Thailand is suffering because its poorly supervised banks and finance companies borrowed so heavily in U.S. dollars, foolishly lent the money (in Thai baht) for real estate and were devastated by a devaluation which was, in retrospect, inevitable.

Here are some early lessons:

Because financial crises are unavoidable so are big-ticket bailouts, unfortunately.

Preventing crises caused by messy devaluations, misguided macroeconomic policies and fear of bank failures or government default would be nice, officials agreed, but impossible. "Some instability must be there. There is no way to avoid it," counseled Vaclav Klaus, the Czech Republic prime minister whose free-market views make him a hero to the world's central bankers.

So the International Monetary Fund and rich governments will make emergency loans again, as they did to Thailand and Mexico. But Fed Chairman Alan Greenspan said such "catastrophic financial insurance ... should be reserved for only the rarest of disasters." If investors and financial institutions count on government bailouts, they will take "reckless and irresponsible risks."

Harvard University economist Jeffrey Sachs challenged the nearly universal conviction here that Thailand was a "crisis" that demanded such quick response. "What's the crisis?" he asked. "That some people are going to lose money?"

"Who exactly do you punish when you don't help a country?" replied the IMF's No. 2, Stanley Fischer. "You punish three policymakers ... and 60 million people."

The "real crisis," countered Mr. Sachs, is in desperately poor countries like Malawi and Burkina Faso that wait years to get the aid they need.

Giving markets more data may prevent some crises, but isn't enough.

After Mexico's near-default in 1995, the IMF and its allies pressed countries to open their books, hoping to alert investors early and thereby make it harder for governments to maintain policies that can't be sustained. It hasn't worked. "The market kept financing Thailand longer than one might have expected," Mr. Fischer said.

So even more information, particularly about the health of banks, should be available. "I don't know what the appropriate amount of disclosure is," Mr. Greenspan said at one point, "but it's pretty clear, in both the Mexican and Thai experiences' that it wasn't sufficient. In a reminder of how jittery world stock markets are, Mr. Greenspan's comments triggered a drop in the Mexican stock market Friday, forcing Fed staff members to reassure the world that their boss was referring to 1994, not to today.

Mr. Klaus, however, suggested the problem isn't "a lack of information," but rather "a lack of analysis."

Fixing an exchange rate, as Thailand did, can be hazardous.

Just a few years back, fixing the value of one's currency to that of a low-inflation country was seen by some experts as an appealing strategy for inflation-prone, developing countries. The experts are less enamored now. Countries tend to hold the exchange-rate fixed too long, gradually undermining the competitiveness of their exports. Governments have a tendency "to regard devaluation as an admission of failure," said Barry Eichengreen, an economist at the University of California at Berkeley. When the exchange rate cracks, the event triggers a crisis of confidence.

The "most significant source of weakness" in southeast Asia's policies, argued Yoshio Suzuki, a former Bank of Japan economist who is now a member of parliament, is that they didn't allow their currencies to float freely. And Harvard's Mr. Sachs noted that European currencies have fallen further against the U.S. dollar than southeast Asian currencies have lately, but the change was far less disruptive because it came gradually through market forces.

Weak banks pose a huge problem.

Not all devaluations prompt global financial crises. One reason Thailand's did lies in its banks and finance companies -- many of which are now closed because they are broke. The cost to the government of protecting bank depositors and creditors is enormous, forcing tax increases and spending cuts elsewhere. Moreover, the fragility of banks makes it tough for governments to raise interest rates, devalue a currency or alter other policies that, though desirable in the long run, would devastate banks.

The terms of emergency loans to Thailand may not convey the right message, warned Morris Goldstein of the Institute for International Economics, a Washington think thank. Although shareholders in Thai banks will lose big, bank creditors won't lose much. If big investors who put money in weak banks or buy bank bonds never lose any money, he said, they won't have any reason to be cautious in the future; that will drive up the cost of future bailouts.

Speculators aren't the problem.

Despite loud complaints from Malaysian Prime Minister Mahathir Mohamad, mega-speculators such as George Soros came under little fire here.

"Maybe, it was positive," Mr. Klaus said of speculative selling of the Czech koruna which forced a devaluation earlier this year. "It's not possible to have drastic changes without a crisis."

Separately, the head of the Bank of England, Eddie George, said the value of the British pound is "clearly stronger than we think that can be sustained in the longer-term." He attributed its rising value to "forces outside our control," namely market worries about monetary union in continental Europe.