American-Style Crony Capitalism

Beware of lecturing others; you may have to learn that same lesson. And sooner than you may think!

In 1983 when the Soviets shot down a Korean Airline 747 jet, there was outrage especially in America, and rightly so. How could those Russians be so barbaric? How could they not recognize a jumbo jet on a clear moonlit night? Barely five years later, an American missile cruiser shot down Iran Air Flight 655 on a clear morning, also killing hundreds of innocent passengers.

As an aside, the Soviet general who ordered the shooting was disgraced while the American commander was honored upon his retirement.

In 1997 with an economic contagion destroying much of Asia’s recently-gained prosperity, the ‘Washington consensus’ demanded, as the price for its much-needed assistance, greater transparency, end of crony capitalism, and “shock therapy” to wean citizens off subsidies.

A decade later, with America reeling from its humongous sub-prime mortgage mess that threatens its (and the global) financial edifice, there is little indication that America is willing to learn the very lessons it dogmatically preached earlier to Asia and the world.

Asian leaders, especially former Malaysian Prime Minister Mahathir, may be excused in being gleeful at America’s present economic plight. Alone among them, Mahathir bravely defied the then prevailing wisdom and stood up against the Washington consensus. The result of this unique economic ‘experiment of nature’ is now readily apparent: Malaysia emerged earlier and stronger than the other Asian countries that followed Washington’s prescription.

Mahathir could also be excused for being smugly satisfied, for many of the measures Washington is now taking in managing its economic mess are straight out of his 1997 playbook. There is the massive bailout of huge government-linked companies (Freddie Mac and Fannie Mae), the earlier ‘rescue’ of Bear Stearns, a major investment bank, and FDIC’s (a regulatory agency) nationalizing a major bank, Indymack.

Of course this is the 21^st Century, and with it some new vocabulary for a new-fangled financial age. Granting massive and generous credit lines to the two financially-troubled giant mortgage companies is not a “bail out” but merely providing the necessary “liquidity backstop,” in the language of Treasury Secretary Paulson. Taking over Indy Bank is not nationalization, rather “regulatory supervision.”

Then, suffering Asian countries were forced to end subsidies for food and other essential goods as per the wisdom of Washington. Meanwhile in America, the tax-deductibility of mortgage interests (otherwise known as subsidy for homeowners) remains sacrosanct. No politician would even dare touch that, even in light of the current mortgage mess. At least with the Indonesians, the subsidies were for basic staples and benefited the poor.

Like Malaysia earlier, America is purposefully keeping its interest rates low and unhesitatingly going into massive deficits to keep its economic pump primed, even at the risk of igniting inflation and devaluing its currency.

Malaysia also anticipated the same potential negative effects then and wisely devalued its currency formally; America leaves it to the marketplace to determine the value of its dollar. There is orderliness and predictability to the former; the latter would be at the mercy of and subject to the herd mentality inherent in the marketplace. Yes, it is this same herd mentality that created the housing bubble in the first place.

Of course when Mahathir devalued the currency, kept interest rates low, and injected much-needed capital into government-liked enterprises (otherwise known as bailouts), he was accused of being reckless, anti-capitalistic, and ignorant of marketplace realities. When Paulson does essentially the same thing however, he is being prudent and responsible, to calm a jittery market and maintain its stability.

Cynicism aside, I hope (and the world too) Secretary Paulson would be successful.

The Relevant Lessons

Before Malayisans savor their sense of schadenfreud (glee in the misfortune of others), remember that America is, among other things, our biggest trading partner and source of foreign investments. Whatever that would cause America to sniffle could wreck a suffocating pneumonia upon Malaysia.

Besides, there is much that Malaysia could learn from the current American financial mess, and for America to tweak the lessons Malaysia so painfully learned during its tribulations of a decade earlier.

The Malaysian situation in 1997 was eased considerably in that the economic crisis was her only albeit heavy burden. America today faces the far more serious challenge of simultaneously fighting not one but two very expensive and bloody wars abroad.

Treasury Secretary Paulson’s remarks that the bailouts would cost “at most two month’s war in Iraq” betrayed his callousness on the plight of hundreds of thousands of Americans evicted from their homes through foreclosures, and the consequent devastations on their loved ones. He also dishonored the sacrifices of hundreds of thousands of civilians and soldiers, Americans as well as Iraqis.

Quite apart from the huge expense, the wars divert attention and resources of American leaders and institutions. The economic crisis is challenging enough even without the two ongoing wars. Ending the war would simultaneously ease the global oil market and remove a huge financial burden, two steps that could only help the financial strain, quite apart from the humanitarian considerations of ending the killings and sufferings.

Had Malaysia still been fighting its communist insurgency in 1997, or had to contend with ethnic unrest as with 1969, that would have definitely slowed if not aborted the recovery. Economists in their analyses of the slower recovery in the other Asian countries ignore this important element. Indonesia was bogged down fighting a bloody secessionist movement in Aceh; the Philippines its Moro Independence movement; and Thailand its rebellion in the south.

Malaysia also had a strong leader then; Mahathir could and did push whatever stern measures he needed and the populace would comply, if not grudgingly. Had Abdullah been in charge, he would be flip-flopping from one policy to the next, and Malaysia would still be mired in the mess. To say that President Bush is weak is a gross understatement; besides, the Democrats control Congress. Thus any initiative would have to satisfy both parties and their respective lobbyists, meaning it would more likely be diluted and ineffective, with the taxpayers carrying the final tab.

Malaysia could take comfort in that the blights of crony capitalism and political corruption, in their infinite variations, are universal. In America, the transfer of money from interested parties to politicians is ‘political contributions;’ in Malaysia, outright corruption. The intent is the same in both. Presumably when the transfer of money is receipted and duly claimed as ‘business expense,’ it all miraculously becomes legitimate.

America may swallow its capitalistic pride and adopt barely-concealed socialistic remedies in managing its current crisis, nonetheless it does not lack for strong dissenting views. These are expressed vigorously in open congressional hearings, the editorial pages, and in academic symposia.

There will also be lawsuits, civil and criminal. Rest assured that accounting and other shenanigans will be uncovered, and appropriate punishments meted out. The Enron scandal of a few years ago took the venerable accounting firm of Arthur Andersen with it, together with some hitherto powerful corporate figures. More than a few are now behind bars.

More importantly, new legislations were adopted that would hopefully prevent future recurrences. The consequence of the Savings and Loans scandal of the late 1980s saw the demise of that entire financial sector.

Contrast that to the many financial debacles in Malaysia, from the London Tin fiasco to the collapse of Bank Bumiputra. No one was held accountable. There were no parliamentary hearings or royal commissions, and our academics have showed minimal inclination in studying them.

If in our haste in gleefully criticizing the American style of crony capitalism we overlook these other important lessons, then we would have missed a splendid learning opportunity. It is always dyspeptic to acknowledge our mistakes and to learn from them, but ultimately that is the best safeguard against repeating them. That is the crucial lesson Malaysia could take from America, regardless of whether America is preaching it or not.