Asia will always have complicated feelings about Alan Greenspan. In the mid-to-late 1990s, the then-Federal Reserve chairman was a bona fide celebrity.
His photo was showing up in People magazine, Entertainment Tonight and the style pages of national newspapers. Greenspan’s command of the globe’s biggest economy earned him a glowing Bob Woodward biography titled Maestro.
Yet Asia mostly remembers the Greenspan era for precipitating the 1997-1998 Asian financial crisis. It was the Fed’s 1994-1995 tightening cycle—doubling short-term interest rates in just 12 months—that set the stage for Asia’s reckoning.
As the dollar surged and capital raced toward the West, officials in Bangkok, Jakarta and Seoul could not maintain currency pegs to the greenback. The resulting waves of currency devaluations also pushed Malaysia toward the brink and nearly dragged Japan into the mix.
In late 1997, extreme market turmoil claimed a major prize: the then-100-year-old Yamaichi Securities, one of Japan’s fabled big-four brokerages. Its collapse panicked officials in Washington.
Both the U.S. Treasury Department and the International Monetary Fund worried not that Japan was too big to fail. They thought Japan’s economy might be too big to save.
All this explains why Jerome Powell’s comments on Aug. 26 spooked Asia so viscerally. Suddenly, the region is fearing what former Bank of Korea Governor Kim Choong Soo calls the “ghost of 1994.”
Over the last decade this fear sprung up from time to time. In 2013, when the Fed “taper tantrum” was stalking bond markets, Bank of America strategist Michael Hartnett warned of a "repeat of the 1994 moment." Lloyd Blankfein, then the CEO of Goldman Sachs, admitted that “I worry now as I look out of the corner of my eye to the 1994 period."
Hence the impact of Powell warning about the Fed’s hawkish turn persisting “for some time” and necessitating “some pain” for households and businesses. It comes against the backdrop of the most aggressive Fed tightening moves since the 1990s.
In fact, one even wonders if Powell is pulling his rhetorical punches as inflation increases the most in 40 years.
The yen is already on the verge of 140 to the dollar, a level that New York University economist Nouriel Roubini, “Dr. Doom” himself, warns could force the Bank of Japan to “change policy” in ways that intensify global turmoil.
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Over the weekend, Isabel Schnabel, a member of the European Central Bank executive board, spoke for many when she talked of the “great volatility" challenge to come. Already, she said, “the pandemic and the war in Ukraine have led to an unprecedented increase in macroeconomic volatility.” Source: Forbes
