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Strategies & Market Trends : Asia Forum
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To: Frodo Baxter who wrote (5851)8/25/1998 3:35:00 AM
From: tom   of 9980
 
Not that you need any more reasons for disagreeing with Krugman but here's Goldman's contribution to the argument (I can't think why they'd disagree with capital controls!!)

Goldmans believe that ad hoc capital controls are a bad idea because....

1. In many Asian countries, real interest rates are already coming down
2. Even if interest rates came down, banks would not start lending until they are recapitalised. Interest rate reduction would also throw away any opportunity to source bank capital from overseas.
3. Capital flight
4. Asian currencies are undervalued in real terms so whether inflation rises or currencies appreciate. Expected real appreciation and international arbitrage means that countries can show negative real interest rates (eg Indonesia) but still attract capital inflows. If you cut off short term capital inflows then this stabilization is gone.

I agree with the bulk of these points but I have sympathy for Krugman's argument which is that Asia is imploding and there is no point in trying to maintain a strong currency if you are running your economy into the ground. The reason you are trying to maintain a strong currency is so that companies with foreign debt can pay some of this debt back. If they are go bankrupt they will not be able to do this.
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