Rough Trade - currency traders and the economic crisis in Asia

Washington Monthly, June, 1999 by Nick Thompson

In this sense, Southeast Asia was currency traders' Tower of Babel. Ask a trader what happened there and you will be told that the governments of Southeast Asia brought the crisis on themselves through hubris. They let billions of dollars flow unregulated into their country. They didn't scrutinize loans (their friends were the ones getting rich) and they ran huge budget deficits. Malaysia spent billions on glamour projects like trying to build the world's tallest buildings. With this folly, the traders argue, the region's economic boom deserved to be crushed.

However, even if traders are a bit imperious, they have a case to make that they do benefit the world economy. Bill Jacobson, a trader at a major American bank, said, "even if currency traders had 100 percent control over the economies, which they don't, why would having millions of different people influencing markets through the way they choose to invest their own money be any worse than having a bunch of corrupt bureaucrats in control?"

It wouldn't--if you assume that politicians are corrupt or incompetent, that traders are just benevolent judges of economic guilt and innocence, and that the system works. Of course, not everyone accepts these assumptions. To some of their critics, traders aren't benevolent judges; they're monsters. In the worst case, traders deliberately manipulate currencies for personal gain. According to Prime Minister Mahathir of Malaysia, the most infamous critic of the profession, "Currency traders have become rich--very, very rich--through making other people poor ... Currency trading is unnecessary, unproductive, and totally immoral. It should be stopped."

Mahathir is both a hypocrite--his country's central bank reportedly lost $6 billion in currency speculation over the last few years--and wrong about the impacts of trading and the motivations of traders (Jacobsen, for one, just wants to earn some money so he can pay for his children's education and move back to a quiet life in western Massachusetts). A more effective argument acknowledges that blaming traders is akin to shooting the messengers. Traders themselves are not the problem; fundamental flaws in 1990s-style capitalism are. Specifically, without regulation or controls, the market is able to run wild, overshoot, and wreak havoc. Even worse, the market can be driven by impulses that evade objective measures of economics and politics.

When currency traders make decisions on whether to buy or to sell, they generally look at three factors: politics, economics, and perceptions. If traders think that economic policy is sound, they are likely to buy that currency. If they think that the political system is going to collapse, they'll sell. These political and economic evaluations are objective, but the third factor, perception, is subjective. If a currency trader thinks that other traders are going to start selling the currency in the near future, he would do well to sell now, regardless of other considerations.

Currencies collapse when a country tries to maintain a fixed currency. In Thailand, up until July of 1997, the government stabilized the currency near 26 baht to the dollar. If there were more sellers than buyers at that price, the government would either raise interest rates (slowing economic growth but making the baht more attractive), or use some of its dollars to buy baht in the open market until the price returned to 26. If there were more buyers than sellers, the policy would be just the reverse.