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Book
Description
Hardcover - 288 pages (January 2001)
Because of the remarkable number of currency and emerging
market meltdowns during the 1990s--from the Mexican peso
crisis to the collapse of the Asian markets to the Russian
devaluation of the ruble--the free market system faces the
prospect of tighter global regulation. DeRosa makes a
compelling case that less, not more regulation is vitally
needed; that public policies often have been dead wrong in
concept and application; that so-called controls generate
indirect and unintended harmful consequences; and that
aggressive intervention is no panacea.
cause
Derosa to examine demands for a redesign of the
international monetary system:
-
Japan: Beginning in 1990, this economic
powerhouse took a fatal nosedive due in part to Japan's
centrally planned economy, which according to DeRosa is
a "hit-or-miss proposition, with the odds favoring a
miss." The decline has been exacerbated by the Bank of
Japan's monetary policy "that seems almost designed to
prevent an economic recovery." Japanese bureaucrats
have consistently used attacks on the foreign exchange
and equity derivatives markets as a smokescreen for
their continued domestic failure.
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- Mexico: Mexico's
overheated economy required massive amounts of foreign capital to
fuel its growth, which created a huge current account deficit by
1994. A tightening of U.S. Federal Reserve monetary policy, combined
with the disastrous issuance of government bonds indexed to the U.S.
dollar, wreaked havoc on Mexico's fixed exchange rate regime,
forcing devaluation and eventual abandonment of the fixed rate
altogether. The peso's value plunged, requiring the inaugural
supranational bailout that came to characterize the decade
- Southeast Asia: The
Southeast Asian "tiger" nations of Thailand, the Philippines,
Indonesia, and Malaysia managed to prosper, at least superficially,
for most of the decade.
- However, in 1997, Thailand
experienced a currency crisis, which spread to the other "tiger"
belt nations. Though officials blamed currency and stock market
speculators for the crises, DeRosa cites scholarly research and
finds "scant evidence for any of these claims." The U.S.
"strong-dollar" policy, coupled with serious intervention blunders
by the Bank of Thailand, led to the abandonment of a fixed exchange
rate.
Economic disaster then struck the Philippines and Indonesia, where
it was exacerbated by the crony capitalism and graft of the Sukarno
regime. Similar events occurred in Malaysia, where Prime Minister
Matathir enacted strict capital controls, all the while attacking
currency traders and eventually using the IMF to cover for his
regime's shortcomings.
A solution? Among the crises DeRosa
studied, he found that, "once broken fixed-exchange rate systems were
replaced with floating [exchange rate] regimes, no further disruptions
occurred." In the end, the best intervention appears to be no
intervention at all!
"The challenge will be whether the Bush Treasury has the fortitude to
stick by its conservative principles. Will it neuter the IMF, or will it
stumble down the same road as the Clinton-Rubin team when the next
financial uproar takes place?"
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"In Defense of Free Capital Markets
is an impressive survey and analysis
of the crises of the 1990s. Mr. DeRosa makes a strong
case that official intervention has made matters worse,
not better, and that in such instances it is far better
to leave it to the invisible hand of the market than to
the clumsy, visible hand of regulators."
--Milton
Friedman
Senior Research Fellow,
Hoover Institution
Nobel
Economics Prize, 1976
Barron's, July 1, 2001
"This book is the proverbial tall drink of water after a
long trek through an intellectual desert."
more
The Phi Beta Kappa Key Reporter, Spring
2001
"A particularly valuable contribution...is DeRosa's
explanation of the flaws in statistical computer models of
risk."
Nassim N. Taleb, President, Empirica
Capital, LLC
"David DeRosa wrote a modern day version
of von Hayek's Road to Serfdom
. He eloquently shows how governments
can use pseudoscience to disrupt markets and create
additional financial risk and volatility."
Thomas S. Coleman, Ph.D., Director,
Aequilibrium Investments Ltd
Important reading for all those interested in world economic
issues and the future path of economic growth.
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