Friday, August 30, 2013

Should We Worry About The Fall Of The Rupiha In Indonesia?

The currencies in Indonesia and India have fallen dramatically against the dollar.  Paul Krugman explains why we should not be worried about another collapse in Asia.  His real purpose, however, is to expose the underlying problem of unregulated capital markets.  He also took this opportunity to contrast the rapid recovery in Indonesia from the last crisis with the of slow recovery in the eurozone.

The first crisis in Indonesia, and the current crisis in the eurozone, were both fueled by unregulated financial markets.  The crisis in Indonesia was fueled by a rapid flow of capital which created a temporary boom.  The debt was denominated in dollars.  Consequently, the fall in the value of the rupiah increased the burden of their dollar denominated debt. The economy crashed but the decline in the value of the rupiah led to an export based recovery.  Moreover, the IMF relented on its initial imposition of austerity which had been harming the recovery.

The problems in the eurozone were also caused by a flow of capital to private investors which triggered a boom primarily in real estate markets.  The bubble eventually burst but the recovery has been more difficult than the recovery from the crisis in Asia.  The affected countries do not have their own currency to devalue;  they have weakened domestic banks, and they have been required to accept contractionary fiscal policies.  There is no end in sight for the economic problems in Greece and Spain.

Krugman also takes a poke at the legacies of Alan Greenspan, Robert Rubin and Larry Summers who were given credit for engineering the original recovery in Asia.  He thinks that the Asia crisis should have taught them something about the problems of unregulated financial markets.  Instead they led the effort in the US to accelerate the deregulation of the financial markets in the US.  Larry Summers is currently one of the leading contenders for the Chairmanship of the US Federal Reserve.  My guess is that Krugman is not one his supporters.

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