in praise of doing nothing

["Ian Murray" <seamus2001@xxxxxxxxx>]

The International Herald Tribune | www.iht.com

Ignoring Financial Crises Could Become a Dangerous
Habit
David Ignatius International Herald Tribune
Monday, January 14, 2002



PARIS The Bush administration got mauled last week for
its ties to Enron Corp., the imploding death star of
corporate America. But while it makes for juicy
headlines, the Bush-Enron "scandal" strikes me, so far,
as a bum rap.

In fact, rather than intervene to help their pals at
Enron avoid bankruptcy, the Bushies seem to have
adopted the same tactic they have used in many other
matters affecting the financial markets, namely, do
nothing.

This reluctance to intervene in financial crises - even
ones involving their campaign contributors - is
becoming a hallmark of the Bush Treasury Department.
You can see the same studied indifference in the
administration's response to recent financial debacles
in Argentina and Japan.

And you can certainly argue that inaction has been the
best policy. Bailing out Argentina's bondholders would
have made no more sense than rescuing Enron's
management and stockholders.

The surprising fact is that the Bush Republicans have
been much less sympathetic to financial worries than
the Clinton administration, which in retrospect seems
one of the most ardently pro-Wall Street
administrations in America's history.

White House spokesman Ari Fleischer made the Clinton
comparison in discussing the Enron case on Thursday. He
noted that as Enron was beginning its final swan dive,
CEO Kenneth Lay called Treasury Secretary Paul O'Neill
and warned that his company might be heading the way of
Long-Term Capital Management, which averted a dangerous
bankruptcy in 1998 with assistance from the Clinton
Treasury and the Fed. Enron pleaded for similar help to
Mr. O'Neill and his aides at Treasury, to Commerce
Secretary Don Evans and to Fed Chairman Alan Greenspan.
So far as we know, they took no action to avert the
looming disaster. The Bush administration basically
stood on the sidelines and watched as the biggest
bankruptcy in American history ensued. During the past
year the company's stock fell from a high of $83 to 67
cents as of Friday.

Doing nothing was also the correct response in the case
of Argentina. The Bush administration did support an
extra $5 billion for Argentina last August. But after
that, as it became clear that Argentina would default
on its bonds, the administration ignored warnings about
financial "contagion" and let Argentina collapse.

It turned out to be right. Even though this was the
largest sovereign debt default in history, Argentina's
collapse has had little effect on the bond prices of
emerging-market countries.

"I'm glad to see there is less 'contagion' than many
people had thought," said John Taylor, the
undersecretary for international affairs at Treasury,
in a telephone interview on Friday. The reason, he
said, is that "the markets are paying greater attention
to the differences between countries." The markets have
indeed been taught a lesson - less by the Bush
administration's policies than by the brutal experience
of the past few years, which burned investors and made
them far more careful. A look at bond spreads shows
that during the run-up to the Argentine default this
"contagion factor" was about half what it had been
during the 1997 Asian crisis and the 1998 Russian
default.

The danger is that the Bush Treasury will conclude that
nonintervention is always the best policy. It isn't.
You can make a case, for example, that now that
Argentina has taken the hit, the United States should
help put the pieces of a sound market economy back
together. Otherwise there is a danger of what might be
called "political contagion," as the populist anger of
ordinary Argentinians spreads to other countries in
Latin America. Those countries may decide to default on
their debts, too.

The real black hole in global finance right now is
Japan. Despite hopes for reform and revival under Prime
Minister Junichiro Koizumi, things in Japan have gone
from bad to worse to disastrous. That is why the
Japanese Finance Ministry halted its yen devaluation
last week - things were beginning to spin out of
control.

In Japan as elsewhere, the Bush Treasury has tended to
show disdain for the sort of aggressive financial
intervention the Clinton team favored. But that is
beginning to look misguided. Japan needs help now,
badly. Most of all, it needs an orderly way for its
financial sector to, in effect, declare bankruptcy - a
process something like the savings-and-loan cleanup in
the United States a decade ago. The Japanese could use
U.S. help in restructuring, but the Bush administration
is mostly sitting on its hands.

The administration is wildly interventionist in its
foreign military policy but almost passive in
international economic policy. That imbalance is a
mistake. One lesson of the war against terrorism is
that the United States needs to be involved in the
welfare of ordinary people around the world, sharing
the fruits of the global economy so that more people
have a stake in its success.

Nonintervention was the right choice with Enron and
Argentina, but the administration shouldn't make a
fetish of it.