In some ways, the United States probably contributed to undermining the discipline of international financial institutions. In 1996,Washington strongly backed South Korea's entry into the Organization of Economic Cooperation and Development. Membership in the OECD is largely symbolic, but it has certain perks. Members may assume that bank loans to members carry no risk of default. This assumption rests on rules developed by the Bank for International Settlements in Basel, Switzerland. This bank was founded in 1930 as an institution for cooperation among the central banks of the various member countries. Foreign banks around the world, mindful that South Korea's membership was a sure thing, more than doubled their lending to South Korea from $52 billion to $108 billion.

As it happened South Korean banks were the biggest victims of the 1997 Asian meltdown, closely followed by Japan and the so-called Asian Tigers like Thailand, Malaysia, Indonesia, and Singapore. This latter city-state was home to the world's third largest oil refinery, so it was never in any real danger of financial collapse. In fact, Japan was one of the guarantors of the subscription of capital in the Bank for International Settlements -- 1,500,000,000 gold francs -- only 25 percent of which has been paid in.However, the public's money was at risk in South Korea and Japan, and it had no input into regulations designed to protect public money. Thus, management of huge loans was never made subject to regulations designed to protect the public. In fact, the financial meltdown was something like the savings and loan debacle of the 1980s in the United States, The savings and loan industry was simply deregulated by President Reagan and not replaced by well-trained financial managers and auditors. Chaos was the inevitable result.

During October, 1997 the world's financial markets went into a tailspin. The Dow Jones Index lost some 552 points in a few days. More or less the same were other market indexes in London, Paris, Frankfurt, Tokyo, Hong Kong, and Seoul; the indices were all down. The other so-called Tiger states of Southeast Asia had already either devalued their currency against the dollar or speculators had simply sold Thai currency (the baht), Malaysia (the ringgit), Indonesia (the rupiah), Singapore (the dollar), Seoul (the won), and Manila (the peso). Investors in Australia, Brazil, and Russia all lost money when the local currency declined sharply against the dollar. Hong Kong was the big surprise. At the end of June, 1997 Hong Kong was handed over by Great Britain, and its dollar was considered sound. However, the Hong Kong Monetary Authority announced it would support the local dollar; it had a rate of 7.5 to the American dollar. The three Hong Kong banks that issued these dollars viewed the slight rise in interest rates as one of the weapons used to support the Hong Kong dollar. However, higher rates for Hong Kong are bad, because they deter borrowing, slow the sale of property -- value in Hong Kong rests principally on real property -- and drive money out of stocks and into bonds. Furthermore, the Monetary Authority has about $80 billion in U.S. dollars and said it would use its reserves to defend the local dollar. The People's Bank of China has about $134 billion in U.S. dollars. Using these reserves to defend the Hong Kong dollar would be an exercise in utter futility. In the financial centers of the world, wire transfers of between $1 and $2 trillion a day are routine. To really defend its dollar, Hong Kong will probably have support an interest rate increase. Higher rates pull capital into Hong Kong and spur buying its dollars. While the monetary crisis continues, confidence in the Hong Kong dollar can be expected to decline. If this happens, neither Hong Kong nor Beijing has the resources to buy big ticket imports such as nuclear power plants.

There is however, a problem. Asea Brown Boveri (ABB) Inc. just announced it would lay off some 10,000 jobs in Western Europe and the United States. Company executives said the planned to shift thousands of jobs from countries like Sweden and and Germany to fastergrowing markets in Southeast Asia and China. This project may be amongst the first to be cancelled as a result of the global financial crisis. Furhermore, Germany's unemployment figures, now at 11.2 percent, will look worse with the people laid off by Brown Boveri.

The Southeast Asia crisis is probably limited to that area and includes China, Taiwan and South Korea. Sharp declines in Asian countries against the dollar make Asian products cheaper, and imported products far more expensive than they were in July, 1997. It was on this date that the Thai crisis erupted. The Thai crisis occurred against an environment of ongoing political corruption. Banks in Bangkok made poor loans with next to no security, and cronyism existed on a wide scale. Furthermore, there was little or no demand for the officebuildings so lavishly built during the last five years. Malaysia is in essentially the same position as Thailand. Its Prime Minister Mohammed Mahathir has had an edifice complex and Kuala Lumpur built the highest office building in Asia. Like Thailand, competitive bidding has not been used to finance the construction of public buildings. Indonesia has beenanother example of cronyism in management and finance. Rich landowners were corruptly allowed to engage in There has been a long time ban on these plants, but China is considered a gold mine for this technology. American reactor manufacturers have jointly developed a cheaper and safer reactor, and they are now lobbying Washington to lift the ban on sales to China. They succeeded when an agreement was announced on the occasion of Presidenyt Jiangh's visit to the United States. The lobby is led by Westinghouse Electric Corporation and ABB Asea Brown Boveri Ltd. with an American subsidiary. They have been partners with Westinghouse, the Bechtel Corporation and Stone & Webster Engislash and burn agriculture. The fires set to burn off trees was illegal as of 1996. The fires lingering on may last for a long time, and the smog generated has polluted the air of Singapore, Malaysia, the Philippines, and Sumatra.

So far as corporate profits are concerned, American companies that earn significent revenue from Southeast Asian may see their profits in the United States shrink. Southeast Asian products that are exported became less expensive, even competitive with American prices. This means that the trade deficit for the United States can be expected to increase, probably at the expense of American manufacturers of like products. An exception exists with respect to the Hong Kong dollar. Because of its link to the American dollar, the Hong Kong dollar now buys less in this fiancial capital of China. Its leaders have not been entirely successful in supporting the Hong Kong dollarr by buying Hong Kong dollars and dipping into its foreign currency reserves of U.S. dollars. On October 21, 1997 it held firm at 7.15 to the U.S. dollar. On October 28, 1997 it dropped precipately to 7.7325 to the U.S. dollar. On the same day, the Dow Jones Industrial Average fell by 552.26 points, the largest singleday dccline in its history. Since then, the Dow Jones has bounced up and down with no apparent trend in either direction.

The weakness in Asian countries really began in Thailand. Most countries in Southeast Asia had chosen to tie their currencies to the dollar, with an exchange rate that was fixed or was allowed to fluctuate within a narrow range. Over time, Thailand -- the first of the countries to suffer -- found itself with a currency that was overvalued. Imports flooded in as Thais bought foreign luxury goods, while exports stagnated. Some international investors began to bet that the administration in Bangkok would devalue the baht. It did on July 2, 1997. These speculators then borrowed baht to buy dollars or other solid currencies. The speculators could make a tidy profit if they could later repurchase the baht for less. than they had paid. Bangkok took action by raising interest rates -- making it more expensive to borrow baht -- and prohibited some foreigners from acquiring baht . In the meantime, however, Thais began to worry. They had borrowed dollars to finance their businesses, because interest rates in dollars were lower. If the baht were to decline in value , they would be in trouble, because the dollaars needed to repay these loans would cost a lot more baht. By buying dollars to protect themselves, the value of the baht declined precipitately. The value of real property also declined in value, and this caused anxiety amongst bankers. Their security was based on a fixed rate for the baht. In Thailand, less real property was secured than in Hong Kong. This is why the Hong Kong dollar went into free fall in Octiber, 1997. Value in Hong Kong depended far more on real property that it did in Thailand. Still, many Thais lost a great deal of money, and so did the very rich in Hong Kong. According to news reports, the Kwok Brothers and Li KaShing lost a combined total of HK$1.5 billion in one day. It was on October 23, 1997 that Hong Kong's Hang Seng Index declined by 10,426 points, or 10.4 percent. On the same date, the Hang Seng had fallen by 22.5 percent since the beginning of 1997.

On October 27, the Hong Kong market had spread its troubles to Europe and Latin America as its Hang Seng Index hit another low. On Tuesday, October 28, the communications media reported that the Dow Jones Industrial Averages had lost 554.26 points, and the turmoil was global. Despite statements from Hong Kong officials vowing to support the HK dollar, thre was some evidence that the flight of capital from Hong Kong had already begun, the result of a growing fear that the territory's currency might be delinked from the dollar peg. By October 28, all major countries reported a decline on its stock index; ciyies in each of these countries included Hong Kong, Kuala Lumpur Singapore, Manila, Bangkok, Jakarta, Sydnet, Seoul, and Tokyo. In Europe, exchanges in London, Paris, Frankfurt, Rome, Madrid, Vienna, to name a few showed declines with a few exceptions. On October 30, Moody's Investor Service of the United States downgraded its outlike for the entire banking industry in Hong Kong. In Indonesai, the International Monetary Fund (IMF) has negotiated a plan leading to austerity in spending. It was supported by Singapore and Japan but only if Jakarta agrees to accept austerity. Japan also offered $billion to Indonesia on the same basis of conditionality. The IMF was also negotiating with Thailand.

The role of the IMF in staving off economic chaos has all been well documented at: http://www.imf.org/external/pubs/ft/exrp/govern/govindex.htm

All contents © 1998 William M. Brinton