Hd — Too Big
To Fail?
Hurricane Bonnie attracted significantly more attention last week than the financial storms battering Russia and understandably so. Bonnie was a real and immediate threat to U.S. shores easy to grasp and pretty much over in a matter of days. By contrast, what’s happening in Russia is much harder to grasp, and it won’t be resolved for months, if not years.
But make no mistake, Russia’s hurricane is very real, very immediate and its threat to the United States economically as well as politically cannot be understated.
What’s happened, according to no less an authority than financier George Soros, is “a meltdown in Russian financial markets.” After steadily racking up debts from overseas investors at extraordinarily high interest rates, the government finally gave up the charade last week by saying, in essence, that it was facing default.
That acknowledgement, along with the free fall of the ruble in recent weeks, has set off a financial crisis that looks eerily reminiscent of the U.S. bank runs in 1929. Last week, Russians were lining up at their local banks to withdraw cash, only to be told there was no cash available. Come back tomorrow, they were advised, or better yet, next week.
Of course, there’s no guarantee that money will suddenly appear next week or even next month. The International Monetary Fund assembled a financial package earlier this summer, but it’s proven to be inadequate for the crisis at hand. And judging by the lukewarm response last week from the Western powers, no one seems especially anxious to bail out the Russians one more time.
It’s easy to see why. The country is in political and economic shambles, with the ineptitude of Boris Yeltsin and the plotting by his various enemies making Monica-gate seem almost virtuous by comparison. If ever there were a case of good money going after bad, this is it. Consider that foreign lenders who were foolish enough to plunk down $1.25 billion in June already stand to lose nearly two-thirds of their investment.
There is, to be sure, a temptation to do something, if for no other reason than that Russia, unlike, say, Thailand, is simply too big and too nuclear-equipped to fail. The problem is how to help a nation of 148 million people that’s too battered and bruised to help itself. Even Japan, which is more than a few paces ahead of the Russians, remains incapable of overhauling its financial system. Western policymakers might rightly ask: If Japan can’t manage to shake its troubled ways, how will Russia?
Confounding the discussion is the cynical, bottom-line question: What does all this mean for us? Aside from the likely political fallout, will Russia’s financial woes affect the world at large, and the United States in particular? No one seems quite sure (although judging from the plunge in world markets last week, there are lots of jittery investors). Such uncertainty could help explain why the Federal Reserve appears so reluctant to lower interest rates as a way of propping up the world economy. Simply put, it’s hard to know whether intervention will do much good. When the net effects appear ambiguous, the Fed tends to do nothing.
Still, a lot can happen in the coming weeks and months which makes this hurricane very unpredictable and dangerous.
