Another financial crisis on the offing?

SINGAPORE: Financial markets are in the danger zone. First, it was just technology stocks. Last week, the Dow Jones Industrial Average fell below the 10,000 level. There were sharp declines in Europe and Asia, where Japan remains infamously moribund. Let's face it, the global retreat has the unwelcome capacity to precipitate another Asian crisis. Falling stock prices can affect consumer and business confidence to the extent that the United States slips into recession.

The best academics agree that relationships among stock prices, consumer and business confidence, and spending are not well understood. And as U.S. Federal Reserve chairman Alan Greenspan told Congress recently, that confidence can break abruptly, triggering a sharp slowdown.

The Clinton administration used a booming U.S. market to soak up Asian exports, which helped contain the Asian crisis then. With the technology-laden Nasdaq at a two-year low, Asian firms that were pulled out of the 1997-1998 depths by the market for infocomm now find they are equally tied to the effects of its blowout.

Countries that were most successful in switching to an infocomm focus then -- South Korea, Taiwan and Malaysia -- are also the most vulnerable now. If the U.S. shakeout leads to deep spending cuts by American consumers and businesses, Asian exports are going to be crimped.

What makes Asia's outlook particularly bad this time is a double whammy, wherein both of the world's largest economies are in trouble simultaneously. True, the Japanese morass is quite different from the 1997 currency crisis in Southeast Asia that spread contagion around the globe.

But it has been a long time since the United States and Japan, which together account for 40 percent of world output, were both in or near the zero-growth zone simultaneously. Where is the world going to turn to for an engine of growth to pull everyone out of the quagmire?

What is unconscionable is that, if a new crisis does erupt, there is no restructured international financial architecture in place yet to manage it.

All the post-crisis talk in industrial capitals, multilateral organizations and think-tanks about new international financial institutions has remained just that -- talk.

There is a sense of deja vu in the unchanged degree of financial volatility, and the unaltered frequency of panic, crisis and contagion that make the current state of affairs as socially costly and politically explosive as before.

The roots of financial fragility and liquidity can be traced to the fact that the national currency cannot be used to borrow abroad. That creates a mismatch.

It also limits the ability of central banks to shore up the market -- unless they hold enormous amounts of international reserves. Four years after the last calamity, speculators still rule the roost. Asia still lacks the deep liquid markets in bonds and derivatives that, in 1999, finance ministers of the Asia Pacific Economic Cooperation forum declared as necessary to provide a financial buffer.

The International Monetary Fund still misses financial crises that are a-brewing, like the current one in Turkey. And any incipient move to expand Asian currency-swap arrangements into some regional monetary fund has stalled. To what degree the social suffering that another crisis would inflict can be attributed to an inadequate financial order, remains an open question.

But clearly, the costs will be borne by emerging economies, while decisions on how to change that architecture inevitably involve the industrialized nations. Of course, as Ortega y Gasset says, the pain of others is so much easier to bear than one's own.

-- The Straits Times/Asia News Network