Danby seminar -- Mahathir vs. currency traders

[Colin Danby <danbyc@xxxxxxx>]

I just received an interesting off-list query about my
notes on SE Asian currency and financial crises (in the
Thirlwall post).  The query noted the obloquy that
Malaysian PM Mohamad Mahathir has recently heaped upon
currency traders, blaming them for Malaysia's if not the
whole region's recent troubles.  The query also suggested
that the main alternative explanation for those troubles,
that these economies' "funadamentals" were weak, did not
seem compelling.

In response:

I'm not sympathetic with Mahathir's comments.  I don't find
currency traders terribly attractive people, but they're
opportunists and the opportunity has to be made first.  The
opportunity I think has a lot to do with financial structure,
and in particular overborrowing in dollars.  Once a lot of
firms have accumulated dollar debt to finance local-currency-
earning assets, there is a terrible instability built into the
system because the moment the currency starts to slide those
firms will try to buy dollars to cover their positions,
worsening the slide.  You have in essence a run on the central
bank.

If it's a choice between blaming macro fundamentals then and
blaming traders I'd blame "fundamentals," but we'd have to
have a discussion about what "fundamentals" means.  For a lot
of conventional economists it's exclusively a real-sector
term: output, employment, and whatnot.  If that's what the term
means then you're right that these fundamentals are not too
bad.  Indonesian exports for example are very strong so that
the ruppiah's slide is puzzling from that point of view.

But if we can, in PK-ish terms, open out "fundamentals" to
include financial structure and monetary issues, then I think
we can make an argument about inherent fragility.

Thanks, Colin