Commentary: Welcome To The New World Order Of Financeby
Global financial panics erupt every decade or so. But even by historical standards, Mexico's currency collapse ranks among the scariest. With the crisis stretching into its seventh week, investors were stampeding. Worse yet, the panic was spreading from Buenos Aires to Budapest. Even the dollar was taking an unexpected shellacking. Some were bracing for another 1987 crash--not just in Mexico City, but in New York, London, and Tokyo.
It took forceful action to stop the runaway markets before they dragged the world economy down with them: $49.8 billion in loans and guarantees for Mexico from the U.S. and its allies. Some bankers say the total could reach $53 billion or more. Certainly, this will go down as the largest socialization of market risk in international history.
AMBITIOUS LABOR. With the U.S. spreading the gospel of democracy and free-market economics throughout the developing world, Clinton and his cohorts had little choice but to assemble the megaplan. As the club of emerging-market nations expands, the rich nations' obligation to provide a safety net for poorer trading partners is growing exponentially. America and its allies must mount a collective drive to ensure global monetary and economic stability--much like their efforts to maintain geopolitical order in the post-cold-war era.
Such ambitious labor is needed because the nature of financial markets has changed since Latin America's last financial crisis in 1982. Back then, it was gunslinging bankers who lent to Latin America. Because banks could lend for the long haul and absorb losses, they were a valuable shock absorber for the financial system. When enough Latin loans eventually went bad, it still took years to craft and conclude their restructuring.
Since then, bankers have wised up. Now, others with a shorter time horizon make the emerging-market deals. This time, it was mutual-, hedge-, and pension-fund gunslingers who provided the capital. Mexico attracted $45 billion in mutual-fund cash in the past three years. And when the peso dived, fund managers bolted. In this global market, all it takes is a phone call to Fidelity to send money hurtling toward Monterrey--or zooming back. And world leaders should be able to act with similar speed.
Clinton's $40 billion in loan guarantees for Mexico got nowhere because Congress objected to bailing out Wall Street. Legislators also did not like the U.S. shouldering most of the cost. They were right. Emerging markets will stay volatile, and countries and investors shouldn't expect a handout every time an economy hits a rough patch. And when a rescue is necessary, it should be global.
BRIDGE THE GAP. Europe and Japan, after all, will benefit from a healthy Mexican economy and thus should bear the burden of supporting it in times of crisis. Likewise, Washington should be obliged to lend a hand to European or Asian allies if Poland or Indonesia comes unglued. One way to keep the next crisis at bay: bridge the gap between short-term money and long-term investment needs.
In addition, emerging economies need to take steps to immunize themselves from the vagaries of a fund-dominated world. It would help a lot if more of them developed mandatory pension schemes to build up domestic savings. Along with that should come privatization.With capital so flighty, it may take hard decisions to make money stay put. But if the first world wants to encourage capitalism, it will have to underwrite it--even if the cost is huge.