IMF crushes Indonesia, but not credit problem

Kemp Calls for Firing IMF Director

The economic prescriptions pressed by the International Monetary Fund (IMF) on Indonesia will compound the crisis there and lead to future bailouts, according to free-market economists. And while some U.S. politicians want the IMF to go ahead with the bailout but impose different policy conditions, these will not solve the problem, which the economists describe as reckless credit expansion fueled by monetary bureaucrats at the U.S. Federal Reserve Bank and at Asians central banks.

On January 6, Indonesian President Suharto gave a budget speech in which he indicated he would not adhere to IMF policies. This led observers to fear that the IMF might cancel its $43-billion bailout, leaving Indonesia without enough funds to pay off its estimated $130-billion foreign debt. Consequently, stock prices fell, and the Indonesian currency, the rupiah, plunged 26%-to 10,500 rupiah to one dollar.

Indonesian consumers hoarded food, political opponents demanded Suharto's ouster, and rumors spread of an impending military crackdown or coup d'etat.

Suharto finally conceded to the IMF's demands after a phone call from President Clinton and visits from U.S. Deputy Treasury Secretary Lawrence Summers and IMF Director Michel Camdessus last week.

But while some of the IMF's directives are positivemore private-sector and foreign competition, and more public-sector transparency-they are undermined by IMF demands that Indonesia simultaneously increase taxes and further devalue its currency.

Such devaluation could drive inflation to 200%, according to David Malpass, chief international economist at Bear Stems. Furthermore, imposition of the policies by an international bureaucracy contemptuous of national sovereignty could spark a political backlash across Asia, with possibly disastrous consequences.

Camdessus, a French socialist, nonetheless, defends these policies.

In a December memo to Republican congressional leaders, former GOP vice-presidential candidate Jack Kemp called for replacing Camdessus with someone who will "promote sound money, sharply lower tax rates, economic deregulation and freer trade." Kemp also stated that "American banks that stand to lose considerable amounts on bad loans in these countries should not get a free pass."

House Banking Committee Chairman Jim Leach (R.Iowa) supports the administration's plan to allocate another $19-$30 billion to the IMF, which will probably be voted on by Congress early next month.

House Minority Leader Dick Gephardt (D.-Mo.) also supports the IMF, saying that "there's no sense for us in having these countries go bankrupt," because "it will hurt our workers."

Socialist Rep. Bernard Sanders (Vt.) and a number of liberal Democrats have indicated they will also support the bailout provided the IMF imposes regulations to ostensibly protect the environment and "workers' rights."

Joint Economic Committee Chairman James Saxton (R.N.J.) wants the IMF to look into "alternative funding sources," such as having Indonesia and the Asian governments sell their own treasury bonds.

But none of these measures addresses the central problem, "unprecedented globalization of credit expansion," said House Banking Committee member Rep. Ron Paul (R.Tex.), who introduced legislation last week to remove the United States from the IMF.

"This whole situation was set up by the Mexican bailout," Jeffrey Herbener, economics professor at Grove City (Pa.) College told HUMAN EVENTS. "These countries that had pegged their economies to the dollar-to the Fed's policies-understood that they could be bailed out whenever credit bubbles burst. They lost all incentive to restrain their credit inflation.

"As Indonesia began to receive foreign investment and lending from the U.S. and Japan, they parlayed that with their own monetary-credit inflation based on their own currency-at a greater rate than dollar inflation-which made the devaluation inevitable. To argue that the problem is that Indonesia is not accepting the IMF's terms is a vacuous explanation."

Noted economist Dr. Hans Sennholz, former president of the Foundation for Economic Education, told HuMAN EvEN-rs: "The currency upheaval followed by a recession in Asia is the result of prior credit expansion-easy money from the central banks and 'hot' dollars loaned to institutions in Asia. Credit expansion is the typical cause of the business cycle-a bubble that will burst.

"It has burst all over Asia, it's bursting in Latin America, and it will burst here. The IMF money is protection of Wall Street and U.S. banks. When we give money to Korea or Indonesia, it comes back to the creditors here. By bailing out bad creditors, it only makes matters worse.

Kemp, Sennholz, Herbener and Paul all argue that the credit-expansion problem will continue until America returns to a gold standard.

Copyright Human Events Publishing, Inc. Jan 23, 1998
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