Commentary by William Pesek
Oct. 15 (Bloomberg) -- A year ago, ``The Age of Turbulence'' was just a book by Alan Greenspan. Now, the words are being employed to explain Asia's plight in a world the former Federal Reserve chairman helped create.
References to Greenspan's book came up in recent meetings in Hong Kong, Manila, Singapore and Tokyo. Yet Asia's situation is more amply summed up in Naomi Klein's ``The Shock Doctrine,'' a study of capitalism's disasters. It highlights what may be Greenspan's most important Asia-related observation, one made in December 1997.
``The current crisis is likely to accelerate the dismantling in many Asian countries of the remnants of a system with large elements of government-directed investment, in which finance played a key role in carrying out the state's objectives,'' Greenspan told the Economic Club of New York.
Greenspan added that Asia's crisis was a ``very dramatic event towards a consensus of the type of market system which we have in this country.'' In other words, the destruction of Asia's managed economy was actually a process of creating a new American-style one -- birth pangs of a new region.
Some television commentators dismiss Klein as Michael Moore without the humor. Her latest work won't get kudos from the pro- market crowd in which Greenspan is a central figure.
Asia's rebirth owes more to privatization, labor policies, independent central banks and trade liberalization than Klein claims. As Asian Development Bank President Haruhiko Kuroda often says, the region's experience with crisis helped it avoid the worst of the U.S. meltdown.
Unfettered Markets
Klein's concerns about unfettered markets have more sympathy in Asia than Greenspan might like to admit as officials struggle to avoid their own crisis.
Economists and journalists tend to focus on what the U.S. can learn from Asia's crisis or Japan's ``lost decade.'' Less time is spent on the lessons Asia can learn from what may be the worst financial crisis since the Great Depression. Here are five.
1. Regulation. As the crisis that began in subprime loans deepens, the U.S. is becoming an example of what not to do. For that, Greenspan deserves considerable blame. He spent 18 years at the Fed fighting against checks and balances on risky investments in the name of market efficiencies.
`Financial Weapons'
Speculators such as George Soros say they don't really understand derivatives. Business leaders, including Warren Buffett, call them ``financial weapons of mass destruction.'' Greenspan championed their use and argued that they had all but eradicated risk from markets. Hardly.
Asia shouldn't turn inward or return to pre-1997 policies, yet neither should it allow the kind of practices that destroyed Wall Street. Yes, markets should be free. They also require enough oversight to keep investors from imperiling entire economies with highly leveraged bets.
2. Transparency. The trouble with financial innovation is that few could understand it. The finest minds at the U.S. Securities and Exchange Commission, Standard & Poor's and Moody's Investors Service are hard-pressed to keep up with financial alchemists. So are Wall Street chief executives.
One problem is the Enronization of banks, whereby they move risky investments off balance sheets. Another is an executive- compensation system that encourages excessive risk-taking and creative accounting. In the future, markets will demand complete openness, an area in which Asia has never been strong. Credible institutions such as judiciaries, central banks and watchdog groups are also vital.
Too Much Ideology
3. Ideology. When the administration of George W. Bush announced a $700 billion rescue package last month, it vehemently opposed buying stakes in banks. The reason: It ran counter to free-market principles. Plunging markets since then forced the White House to reverse course.
A less ideological response by President Bush's team could have avoided two weeks of headline-grabbing market drops. Those declines damaged consumer confidence and retirement accounts and might help precipitate a recession. Bold, creative and flexible actions are needed to stabilize Asia's economies -- not doctrinaire policy-making.
Age of Turbulence
4. Diversify. Just as the U.S. economy has become too much about housing, Asia's economies are too much about America. China's 10 percent growth is helping, yet the $14 trillion U.S. economy still dominates.
While there's not a lot you can do when ``black swan'' events such as the U.S. market crisis occur, Asia would benefit by strengthening ties with the Middle East, Latin America and other rapidly emerging regions.
5. Coordination. The slow pace with which the Group of Seven nations got together on this crisis is a cautionary tale. Efforts over the weekend by the world's richest nations to endorse spending taxpayer cash in order to save banks from collapse may be cooling markets.
Such actions 10 days earlier would have helped more, and U.S. officials should have worked harder for a global response. Bold cooperation 10 weeks ago would have been even better.
Asian leaders should consider their own joint interest-rate cuts and bank guarantees. The trillions of dollars of currency reserves amassed since the 1990s could be pooled into an Asian bailout fund. Asia should boost regional cooperation -- not just talk about it.
That, and wise policy-making, will help Asia cope in the age of turbulence.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
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