Bob Davis

This selection was originally published in the Wall Street Journal on 30 June 1998. Bob Davis is a staff reporter for the Journal.

Treasury secretary Robert Rubin is spreading the gospel of high interest rates to troubled Asian nations that don't want to hear it.

After a one-hour meeting with Malaysia's feisty prime minister, Mahathir Mohamad, an apostle of lower rates, Mr. Rubin defended the International Monetary Fund's tight monetary policy.

"If you had looser monetary policy, you'd run the risk of substantial depreciation of the currency," Mr. Rubin said at a news conference [in Kuala Lumpur, Malaysia]. That "generates additional inflation, discourages capital investment, encourages capital flight, and greatly increases the problem of repaying debt" denominated in dollars.

Great Debate

Monetary policy has become the great debate topic of the Asian crisis. IMF critics such as Harvard economist Jeffrey Sachs and World Bank chief economist Joseph Stiglitz argue that boosting interest rates to defend weak currencies worsens Asia's problems. High rates haven't stemmed Asian currency crashes, they argue, but have stifled economic activity.

When countries run high interest rates for months, companies and banks get buried under bad debt, Mr. Sachs said.

In recent months, that view has gained adherents as Asian economies deteriorated despite IMF programs. "These countries didn't get into trouble because of profligate monetary policy," said Alan Blinder, former vice chairman of the Federal Reserve and once a Clinton administration economist. "The IMF probably made the problems worse."

At a symposium [in Kuala Lumpur] yesterday attended by Mr. Rubin, Malaysian finance minister Anwar Ibrahim, who earlier resisted calls to loosen monetary policy, now complains that "interest rates are already prohibitively high." Mr. Rubin expects to hear the complaint again today in Bangkok and tomorrow in Seoul.

Bank lending rates are about 13 percent in Malaysia, 25 percent in Thailand, 18 percent in South Korea, and 50 percent in Indonesia. "There's considerable discussion about the proper stance of monetary policy," says David Lipton, U.S. Treasury's undersecretary for international affairs.

Treasury officials haven't been sure how to handle the criticism. At times, they have blamed the IMF for the tight monetary policy--and the Germans for insisting that it apply such conditions. Sometimes they've ducked the question in public. And at other times, they support the tough IMF stance and help guide it.

Mr. Rubin made a spirited defense of IMF policy yesterday. Speaking after Mr. Anwar at the symposium, he said, "The cause (of the Asian crisis) isn't the reform programs; reform is the answer."

The Treasury secretary says the Asian crisis is essentially one of confidence. The best way to restore investor confidence, he argues, is to reform financial institutions, restructure corporations overburdened by debt, and prohibit governments' telling banks to lend to favored companies. Healthier banks could begin lending again to power an economic revival.

The Trouble With Easy Money

Easy money would hinder such changes, Mr. Rubin argues, leading to further declines in local currency values and making repayment of dollar-denominated debt even harder. That would worsen banking problems and cause investors to shun economies that try such a strategy, he says.

Mr. Rubin tested his theories yesterday on U.S. business officials who gathered at the residence of the U.S. ambassador to Malaysia. Peter Woicke, managing director of J. P. Morgan & Company's Asia-Pacific subsidiary, said he advises the Malaysian government to boost rates even higher to defend the currency and push companies to reform. "With artificially low rates, you postpone problems," Mr. Woicke said.

The argument intrigued Mr. Rubin, a former cochairman of Goldman, Sachs & Company. "In a way," he responded, lower rates "are a device for delaying and not facing what needs to be done."

But then he asked the group, What about the potential for high rates to "strangle business"? Mr. Woicke cited Japan, where interest rates are below 1 percent and banks still aren't lending. That clinched it for Mr. Rubin, who criticizes Japan at every Asian stop for failing to solve its economic problems.

Pressed at the news conference later, Mr. Rubin said, "What the IMF has done is about right." Raising rates further "could strangle the economy," but lowering them would wreck things too. "It's a question of reaching the right balance," he explained before heading off in an air force jet to spread the word in Thailand.