Sunday, October 28, 2007

Revealing admissions

From a May 01 interview with Eisuke Sakakibara:

INTERVIEWER: It began in Thailand. Do you remember what your sense was at the time? Did you think it was likely to be contained there? Did you think that the baht crisis had serious implications for the whole region? Did your thinking about the crisis change as you watched it move from country to country?

EISUKE SAKAKIBARA: Thailand's prices erupted in May of '97. Of course, there was a sense of a bubble bursting in Thailand in late '96 and early '97, but at the time the Thai crisis erupted, nobody, including ourselves, thought that it would proceed to a crisis in Korea, for example. It was unbelievable that the crisis spread as quickly as it did to Indonesia and Korea within a matter of six months or seven months. We realized that the world was much more globalized than we had thought at that time.

INTERVIEWER: What was your own personal worst moment at that time?

EISUKE SAKAKIBARA: Well, I have lots of recollections during that time, but one meeting I remember very clearly was in September 1997. It was the annual meeting of International Monetary Fund, which was held in Hong Kong. That was at the time of the return of Hong Kong to China. I remember meeting with George Soros [the hedge-fund specialist and philanthropist] in Hong Kong. During our meeting Soros said Korean banks owed very heavily to Indonesia, and Indonesia was now entering the crisis, so that the problem will eventually proceed to Korea. So as early as September George Soros was predicting that the crisis would spread to Korea. After that meeting I checked the numbers and realized it was true. The American and European banks had been withdrawing their money from Korea beginning in the middle of 1997, and in September the Japanese bank, they were the last ones to get out of there. It was a very rapid withdrawal of money by European, American, and Japanese banks which resulted in the Korean crisis in December of 1997.

When the Thai Baht began its steep decline in July 97 I was a conference with Joseph Yam, of the HKMA and Dr. Zeti Akhtar Aziz of Bank Negara and they too, like Mr. Sakakibara who, at that time was Vice Minister of Finance for International Affairs for Japan's Ministry of Finance, had no sense that the crisis would spread.

These are not unintelligent, uninformed people and yet, perhaps as a function of a desire to be a part of the machine, they cannot see its flaws until they become too imposing to ignore.

In my next post, I'll explore the issue of lags in thought, perhaps "sticky assumptions" would be more apt, and their effect on policy.