P.O. Box 19312
Washington, D.C. 20036
December 31, 1997
Secretary Robert Rubin
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Dear Secretary Rubin:
One of the more disturbing traits of the architects of economic globalization is their penchant for secrecy and apparent disdain for democratic processes. This modus operandi is problematic on procedural grounds alone, but also because it tends to foster policies that serve narrow corporate interests over broader taxpayer, consumer, worker, environmental and other citizen interests.
Your involvement and leadership in the ongoing South Korean/Citicorp bailout illustrates the perils of top government officials crafting policy with very little democratic influence and virtually no public debate. One result is that the "national interest" is typically confused with corporate interests -- here the particular financial corporate interests of Wall Street. This is a natural outgrowth of Wall Street's intimate involvement in the process leading up to the announcement of the various South Korea bailout packages and the effective avoidance of any public disclosure and debate over the bailout.
To be clear, there is no doubt that the globalization-induced Asian financial crisis and the South Korean meltdown in particular were and are serious problems. And there is no doubt the problems are complicated by the fact that, in globalized financial markets, perception is reality, at least to some significant extent in the short term. However, as serious problems, they merit open debate and explanation of policy choices by government officials -- not stealth meetings, secret decisions, concealed information, intentionally obscure comments from you and other officials and sudden reversals of policy. The priorities of democracy must be elevated over those of "the market" -- and if that sounds like an impossibility to you, then you should say so, in order to dispel illusions about the legitimacy of the decisions being made.
As you may recall, in the first weeks of the South Korean crisis, you and members of the Clinton administration repeatedly asserted that U.S. funds would be involved in the South Korea/Citicorp bailout only as "a second line of defense." On December 3, South Korea and the International Monetary Fund (IMF) agreed to a $55 billion loan package in which South Korea agreed to substantial economic conditions. Of that $55 billion, $20 billion was committed by the United States, Japan and several other nations. The U.S. contribution was $5 billion, drawn from the Exchange Stabilization Fund, a pool of money on which the president can draw without approval by Congress. That $20 billion, including the U.S. share, was specifically characterized as a "second line of defense" to be used only after the multilateral development bank money was exhausted. You continued to assure the American people that U.S. taxpayer money would not be put at risk.
On December 24, in what may become known as the Great Christmas Eve Reversal, the Clinton administration agreed to lend South Korea $1.7 billion next month as part of a $10 billion emergency loan package. In exchange for the loan, you extracted a series of additional South Korean economic conditions which are of questionable benefit to the South Korean economy, though of certain advantage to big U.S. banks and other corporations which will now be able to acquire majority stakes in South Korean firms at firesale prices.
It is not surprising that to you globalization has certain imperatives, including taxpayer-guaranteed bailouts for overextended foreign conglomerates and financial institutions when they start collapsing, as well as their private U.S. corporate creditors.
But the manner in which the loan packages have been crafted do not build public confidence for the administration's efforts. The packages have been drafted in secret. There was no genuine possibility for critical discussion, since up to the Christmas Eve Reversal, you had expressly disavowed the very policies you proceeded to adopt in what the New York Times called an "about face." The U.S. monies put at risk were drawn from a fund over which Congress does not exercise appropriation powers, denying the legislative branch its power of the purse and effective oversight.
The loan packages impose an array of austerity measures on the South Korean economy which many economists have argued compellingly are exactly the opposite of what is justified by the underlying fundamentals of the South Korean economy. The financial markets, at least temporarily, did indeed respond positively to these measures -- but you could have shaped market perceptions significantly so that the herd mentality of financial traders did not lead to demands for counterproductive recessionary policies. The recessionary policies pushed by the IMF and the Treasury Department will throw tens of thousands of South Korean workers out of their jobs and depress the wages of those who hold on to their jobs, even though there appeared to be effective alternative policies (such as increased transparency and financial sector restructuring, with no macroeconomic dictates) available. Devaluation and other contractionary policies will also further the problem of cheap foreign labor undermining the jobs and negotiating leverage of U.S. workers.
Meanwhile, the international banks who made loans to South Korean enterprises and are complicit in whatever imprudent loans were made will apparently be bailed out by the IMF and Christmas Eve Reversal packages -- suffering no more than deferred payments. Knowing the financial industry from whence you came, how can you justify crafting bailout packages that inflict enormous pain on innocent South Korean workers, while letting reckless U.S. banks escape without a bruise?
Furthering the inequity, the IMF and Christmas Eve Reversal packages require South Korea to open its economy to foreign mergers and acquisitions -- meaning that Citicorp, J.P. Morgan, Bankers Trust, BankAmerica, the Bank of New York, Chase Manhattan and others are not only bailed out, but then given the opportunity to buy up lucrative sectors of the South Korean economy -- a double windfall.
How does the man who preached of the risk of "moral hazard" justify such a generous package
for lenders and such a harsh package for the borrower? Given the precedent of the Mexican
bailout, what limit is there on future bailouts? Why should investors not believe that bailouts will
inevitably follow large-scale financial collapses through an obligatory new form of profit-propping
foreign aid? Moreover, you should not underestimate the unintended consequences leading to
widespread Korean resentment against a surge of absentee corporate ownership moving in on
their local economy.
Given Mexico and South Korea, you have a clear obligation to the American people to establish explicit standards for boundaries that reveal how far you and the administration are prepared to apply taxpayer resources towards additional bailouts of the foreign loans and investments of U.S.multinationals and the respective economies which receive the loans and investments. This is the minimum that should be expected to prevent future seat-of-the-pants policy decisions and sudden reversals of assurances to the public. The future will assuredly bring more crises; now is the time to establish a policy framework to assure that the "emergency" rationale is not endlessly invoked to justify frantic and flailing closed-door decisionmaking and bailout after bailout.
Your handling of the South Korean/Citicorp bailout is a textbook study of the dark side of globalization. It is time for you to remember that you are employed by the people of the United States, not by the banks and financial houses on Wall Street.
The first step in demonstrating your respect for the American people is to disclose the list of the big banks that are the ultimate recipients of the bailout. A second step would be to cease to make large-scale use of the Exchange Stabilization Fund without prior congressional approval, as proposed in legislation introduced by Senator Lauch Faircloth. Third, there should no administration request this spring for more funding for the IMF, which has demonstrated that is too secretive and too enchanted with pull-down austerity measures (which hurt working people in Third World countries and ultimately boomerang to hurt working people in the United States) to merit support. The administration should use its considerable influence to reform the IMF before asking Congress and the taxpayers to support greater funding.
Finally, next time you dine in solitude at your hotel, you may wish to ponder the inadequacies of the administration's public indicators that prevented a higher quality of economic intelligence and advanced warning that might have alerted the administration much earlier to the turbulent undercurrents that erupted a few months ago into what is now called the Asian financial crisis. A broader array of empirical indicators, however unsettling they may be to narrow interests, are a reflection of a more anticipatory and therefore democratic process of decision making.
Co-director, Essential Action