Gekko

National Review, August 11, 1997 by John Dizard

Fine. When trouble comes, don't worry, your bank is likely to be safe. But we are not paying much attention to our dependence on foreign capital flows. That's no secret; you can read all the relevant stats in the Federal Reserve's publications, and occasionally hear them deplored by talking heads on the most tedious cable networks. But we don't want to know, because it's not fun and we want to have fun. But we borrow nearly three dollars out of a hundred in our GDP, which is a lot, given that real interest rates here are already pretty high. While our budget deficit is coming down, we still need that foreign money to keep our private sector going. Ironically, it is probably the very good news in our stock market that is contributing to our requirement for foreign cash, since the illusory increased wealth from equities prices probably encourages Americans to believe they can be rich without saving. Which they can, if only for a while.

At the moment, central banks in Europe and Japan are pumping out a lot of liquidity into their domestic economies. This easy credit doesn't have enough takers at home, and so, like mercury, water, or bad jokes, it flows quickly to a lower level, i.e., us. But suppose that Europe and Japan finally recover from their doldrums of recent years. They'll use their liquidity at home, leaving American investors holding the bag as our interest rates go up and stock prices go down. It wouldn't be the end of the world for the United States, but it would be the end of the best-of-all-possible-worlds that we are beginning to think is our due.

In the emerging markets, or backward nations, as my grandmother used to call them, they are also preparing for their last war, which was the mirror image of what we went through. The high-growth emerging markets, old people will recall, went through what they called balance-of-payments crises in the late Seventies and Eighties, with a mild reprise after the Mexico crisis of 1994. So naturally the best and brightest in these countries have learned that they need to build up large foreign-exchange reserves and diversify their sources of foreign capital. No longer do they depend on Citibank in between IMF programs. Now they issue bonds, prepare public reports in the neat form that gweilos/gringos like, and are well prepared to lie about defending their currency right up to the moment they devalue.

So their problems are contained, right? Just as they say in those fund brochures, right? Sorry, but no. The countries -- they are countries, not just "markets" -- have spent much time and care on their official finances that might better have been used on their banking systems. For when these countries have their crash, it won't be because John Reed at Citibank has decided to call loans to their central banks, but because the local bankers have lent excessively and corruptly to the wrong customers. As always, it's the fast-developing dynamic markets that are most likely to experience credit problems. Houston and Calgary in the Seventies, Taipei and Shanghai in the Nineties; when people get the sense that there are no limits, they behave as if there aren't.