Created 1/11/1998
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The Economist's East Asian Schizophrenia

The Economist published a very... odd--schizophrenic--lead editorial on the East Asian financial crisis, both approving and condemning IMF rescue attempts.

J. Bradford DeLong
Professor of Economics
Evans Hall 601, #3880
University of California
Berkeley, CA 94720-3880
(510) 643-4027; 283-2709 voice
(510) 642-6615; 283-9933 fax

January 11, 1998

Dear Mesdames and Sirs:

Have you had your leader-writers examined recently for signs of schizophrenia?

Your January 10 contents page heralds your leader on East Asia by suggesting that the IMF is doing more harm than good. The introductory paragraphs pose the question "should these bail-outs be happening at all?" Two paragraphs then minimize systemic risks from letting the crisis burn itself out . Two more paragraphs set up the argument for lenders-of-last-resort so that the three key paragraphs of the article can knock it down: one explaining how bail-outs can create "moral hazard", one arguing that this series of bail-outs amplifies mistakes made by Asia's banking regulators, and one casting doubt on IMF competence and power.

It is no wonder, then, that your article is summarized by readers like Slate's Seth Stevenson as "...disapprov[ing] of the International Monetary Fund's bailout. The recession it is supposed to prevent might never have happened, and rescuing financiers who make mistakes encourages them to make the same errors again."

But those of us who read through the ultimate paragraph found in it the declaration that "...it was right to intervene," which--given the tone and the balance of argument--came as a shock. And it made me wonder whether you should be offering your writers better mental health benefits, so that they could afford modern psychiatric drugs to control their condition.

You should decide which side you are on. If you are against lender-of-last- resort activities, study the prose of Andrew Mellon, Treasury Secretary for Herbert Hoover, who thought that the solution to a financial crisis was to:

[l]iquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... [E]ven a panic is not altogether a bad thing.... It will purge the rottenness out of the system.... People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

If institutional continuity leads you to favor lenders-of-last-resort, study the prose of your former editor Walter Bagehot:

...in time of panic [the lender-of-last-resort] must advance freely and vigorously to the public out of the reserve.... The end is to stay the panic; and the advances should, if possible, stay the panic. And for this purpose there are two rules: First, that these loans should only be made at a very high rate of interest... [to] operate as a heavy fine.... Secondly, that at this rate these advances should be made... as largely as the public ask for them... [and] on what in ordinary times is reckoned good security.

And if so, you should loudly applaud the efforts of Messrs. Camdessus and Fischer; Rubin, Summers, and Lipton; Greenspan and Truman; and many others to apply what are in a sense your principles to this financial crisis.


Sincerely yours,

J. Bradford DeLong
Professor of Economics

Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax

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