Commentary: Welcome To The New World Order Of Finance

Global financial panics seem to 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 as a $40 billion U.S. bailout proposal threatened to founder in a hostile Congress, 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 on Wall Street, London, Frankfurt, Tokyo, and Hong Kong as well.

It would take forceful action to stop the runaway markets before they dragged the world economy down with them. The plan that President Clinton ordered into effect on Jan. 31 will see the U.S. and its allies ante up $49.8 billion in loans and guarantees for Mexico. Some bankers say the total could reach $53 billion or more. Certainly this will go down in the record books as the largest socialization of international market risk in monetary history.

GUNSLINGING. With the U.S. spreading the gospel of democracy and free-market economics throughout the developing world, Clinton and his allies 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 their poorer trading partners is growing exponentially. That means America and its allies must mount a collective drive to ensure global monetary and economic stability akin to their efforts to maintain geopolitical order in the post-cold-war era.

Such an ambitious effort 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. But because banks could lend for the long haul and absorb losses when credits soured, they were a valuable shock absorber for the world 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 around, it was mutual, hedge, and pension fund gunslingers who flocked to Mexico and other countries. Mexico attracted $45 billion in mutual-fund cash in the past three years alone. But when the peso dived, fund managers, fearing waves of redemptions, pulled out much of their money as quickly as it went in. In this new global market, where all it takes is a phone call to Fidelity to send money hurtling toward Monterrey--or zooming back--world leaders are going to have to make quick responses that will inevitably involve many nations.

Clinton's $40 billion in loan guarantees for Mexico got nowhere because Congress objected to bailing out investors who should have been prepared to take their lumps in risky emerging markets. Legislators also did not like the U.S. shouldering most of the cost of saving Mexico. They were right. Emerging markets will continue to be volatile, and countries shouldn't expect a handout every time an economy hits a rough patch. But when a rescue is necessary, it should be global in scope.

UNGLUED. 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, the U.S. should be obliged to lend a hand to European or Asian allies if Poland or Indonesia comes unglued. It would be a tragedy if the flow of investment to the developing world were interrupted by a panic that could be averted. One way to keep the next crisis from occurring would be to bridge the current gap between short-term money and long-term investment needs. Despite all the computer power on Wall Street, no one has figured a way out of this conundrum.

In addition, emerging economies will 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 of state industries across the board, as Argentina and Chile have done, to encourage long-term capital to flow in.

With capital so flighty nowadays, it may take hard decisions to encourage it to stay put for the long haul. But if the industrial world wants to encourage capitalism, it will have to underwrite it, even if the cost is huge.

By William Glasgall