Lessons for the Next Financial Crisis

LEARNING FROM THE ASIAN DEBACLE

The turmoil in Brazil in January was grim evidence that the global financial crisis that began in Thailand in June 1997 is far from over. Brazil showed that the international community has a long way to go to make the world economy more resistant to the kinds of shocks that have been occurring with increasing regularity. In fact, a recent series of intensive off-the-record discussions with a number of top Washington officials and Wall Street executives who have played crucial roles in the various rescue efforts -- speaking not only in their constraining official capacities but also giving their private views -- show that while there is some consensus about what happened and why, the major players are badly split over what must now be done. It is as if the global economy has just had a prolonged heart attack. The systemic failure was a total surprise to the doctors, all of whom had previously pronounced the patient not only healthy but robust. But the injured party is still in intensive care, and the physicians are arguing among themselves about the diagnosis and prescription.

To be fair, no one ever really had a clear picture of the global financial system, even before today's crisis-ridden uncertainties. It is not just that over $1.5 trillion in currency changes hands every day, nor that understanding some of the newer financial instruments requires a background in quantum physics, nor that the range of market players -- from banks to hedge funds -- keeps expanding, nor that the variety of countries participating in the global economy keeps growing. Besides all this, there is also a broad range of regulatory, supervisory, and political systems, and there are disputes about what political, economic, and social mechanisms are required to underpin modern capitalism. Not only do these mind-boggling complexities make it difficult to examine what happened and why, but the sense that the worst aspects of the crisis are over could erode the determination of weary crisis managers to take the painful measures necessary to prevent another calamity.