Why Panic Isn’t Helpful--and What Would Be Better

In the 1830s, many American states borrowed heavily from foreign investors to build canals for the growing transport of grain and goods in the young republic. There were glowing expectations of great revenues flowing from the traffic on the new canals.

But the traffic never equaled the expectations, and most of the canals went bust in the Panic of 1837. Many of the states defaulted on the bonds that investors, mostly British and European, had bought. The U.S. was frozen out of global investment markets for a decade.

Yet the country continued to develop. It reformed its banking system, by law requiring reserves against loan losses. And the sounder banking system financed farming and industry. Smart investors, foreign and domestic, stayed with the young republic and reaped opportunity with the new railroads in the 1840s.

The parallel with the world today is obvious. Developing countries in Asia are starved for capital after their ambitious development projects came to grief and global investors got burned.

The prescription is obvious too. The developing countries, even Japan, with the second-largest economy in the world, need to reform their economies. They need to end distorted lending and investment policies, open markets to competition and to the flow of goods and investment.

The U.S. in the 1830s didn’t have help from other governments. But it must help other countries now, not by funneling money but by showing support for reform and instilling confidence.

The U.S. government will soon demonstrate just such backing for Japan, and that will help other countries in Asia, perhaps even still the current panic and bring a sense of perspective back to international markets.

Right now, a crisis of confidence has hit the world. Investment is flowing, but mostly to the U.S. as a safe haven. That’s why U.S. interest rates are falling and there is plenty of money around for Americans to buy houses and take vacations.

But the U.S. never wanted to stand alone in the world. The aim of economic policy since World War II, and even going back to the 1930s, has been to spread rising living standards to every country by opening their economies. A prospering world where goods and investment moved freely and opportunity extended broadly to more people was the dream of postwar statesmen and planners.

You’d never know it from the panicky stock markets, but that dream of a changed economy is alive in virtually every country. China is changing its economy to encourage people to own their own homes. Mexico and Brazil are changing to more open markets. Even Russia is trying, if fitfully.

“And Japan has already changed its economic policy,” notes Kenneth Courtis, the Tokyo-based economist of Deutsche Bank Securities. “The problem is in implementing the changes.”

In a key event for economic policy, U.S. Treasury Secretary Robert Rubin will meet Japanese Finance Minister Kiichi Miyazawa in San Francisco on Sept. 4 and 5.

The meeting, say experts, will signal that U.S. policy will back intervention in currency markets to support a higher value for the yen, perhaps to get it to 125 yen to the dollar. The U.S. may also help set up mechanisms through which bad loans on the books of Japan’s banks can be refinanced.

Both of those steps are designed to help Japan’s banks to resume lending to Japanese companies and to borrowers in Hong Kong and China, where Japan is the chief source of loans and investment.

But the main effect of U.S. government action will be to restore confidence. No new government program will ensue from the meeting because none is needed. The U.S. private sector--scores of lawyers, accountants and bankers--is already busy in Japan refinancing loans and real estate. Burton Fohrman, an attorney in the Los Angeles office of White & Case, is typical. He has just moved to Tokyo to “assist our clients with work on defaulted loan portfolios and the disposition of real properties.”

Private action also is running ahead of Japanese government officials in reforming personal finance and retirement savings in Japan. Japanese household savers are rushing to invest their money with U.S. financial companies, trusting them to provide a higher return than Japanese investment funds have produced.

It is the attraction of that huge market that prompted last week’s acquisition deal for Los Angeles-based SunAmerica, a retirement annuity firm, by New York-based American International Group, the fastest-growing insurance company in Japan. AIG’s shrewd chairman, Maurice Greenberg, sees the eagerness of people in Japan to invest and protect a retirement nest egg as having the potential to be one of the largest businesses in the world.

The point is that beneath the surface, reforms are occurring in Japan and that international investment markets are overstating the gloom.

One of the factors behind the world markets’ tremors is currencies. Russia devalued the ruble last week, Hong Kong is under pressure to devalue its dollar, and there is constant speculation that China will devalue the yuan. In each case, the losses to foreign investors and the local economies are seen as reasons for investors to abandon ship.

Perhaps in the case of Russia, the impulse is justified. But the U.S. must work to keep the trade routes open. In the case of China and Hong Kong, helping Japan will help both of them. And their economies are in better shape than world markets now indicate.

Similarly, the economies of Latin America are actually reforming their banking systems and industrial economies more than they have ever done. At this point, the economies of Latin America deserve the confidence of global investors.

The point is not to be a Pollyanna about the economic trials the world is going through. It is to remind ordinary Americans who have their savings invested in stocks, bonds and money funds--not to mention homes and jobs--to look at the underlying strengths in national and regional economies.

It can be a reassuring journey, especially if we understand that the powerful United States was once where many broke and bewildered developing nations are now.

James Flanigan can be reached by e-mail at [email protected].