The Chastening: Inside the Crisis That Rocked the Global Financial System and Humbled the IMFby Paul Blustein
The breathtaking behind-the-scenes story of the nearly disastrous global financial crisis of the late 1990s and how the International Monetary Fund tried-and failed-to stop it. At a time when the IMF has become the object of intense political controversy, The Chastening is the first book to provide a behind-the-scenes look at the Fund during an extraordinarily turbulent period in modern economic history. Based on interviews with more than 200 officials at the IMF, the World Bank, the U.S. Treasury, the Federal Reserve, the White House and many foreign governments, The Chastening recounts the struggle to stem the financial crisis that flared in Thailand in mid-1997 and spread to three continents. Its disquieting conclusion: at a time when massive flows of money traverse borders and oceans, the IMF is often woefully ill-equipped to safeguard the global economy or to combat virulent new strains of investor panics. The IMF and its overseers have cultivated the image of masterminds coolly dispensing effective economic remedies. But the reality, as Washington Post economics correspondent Paul Blustein shows, is that as markets were sinking and defaults looming, the guardians of global financial stability were often scrambling, floundering, improvising, feuding among themselves and striking messy compromises. The Chastening—important and fascinating reading for anyone interested in business, finance, and economics-will chasten readers out of any sense of complacency.
New York Times Sunday Business Section
Read an Excerpt
The ChasteningHubert Neiss spent most of his career as an economic disciplinarian for troubled countries, and with his flattop haircut and sober demeanor, he looked every bit the part. A native of Austria, Neiss was a veteran of more than three decades at the International Monetary Fund, which he joined in 1967 after finishing his Ph.D. in economics at the Hochschule fur Welthandel in Vienna. He was short but remarkably barrel-chested, the result of an enthusiasm for fitness that evoked both admiration and amusement among colleagues and friends. He often limited himself to eating, say, a banana at midday so he could spend lunchtime at a gym lifting weights. Among Neiss's strengths was an ability to remain serene and businesslike amid turbulent circumstances. His steeliness helped him rise through the IMF's ranks, culminating in his appointment in early 1997 to one of the institution's highest staff positions, director of the department overseeing the Asia Pacific Region.
But nothing in Neiss's career prepared him for the series of events that began the morning of November 26, 1997, when he landed in Seoul, the capital of South Korea, following a 16-hour plane trip from Washington.
After a brief stop at his hotel, Neiss and a couple of other IMF staffers were driven through the iron gate of the Renaissance-style headquarters of the Bank of Korea, the nation's central bank, and Neiss was ushered into the bank's international department for a briefing on Korea's latest financial data. He expected the news to be grim; what he didn't know was that the meeting would thrust him into a frenzy of activity, the likes of which no IMF official had ever experienced, aimed at staving off global economic disaster.
Korea's financial markets were undergoing a bout of turmoil similar to the crisis that had devastated another of Asia's dynamos, Thailand, about five months earlier. In late October, the Hong Kong stock market had crashed, followed by a 554-point single-day drop in the Dow Jones Industrial Average, and once-thriving Indonesia had turned to the IMF for help in shoring up the value of its currency. Now many big international investors and lenders were betting that Korea would be the next domino to fall; the Korean currency, the won, had fallen 17 percent against the dollar in four weeks...
Korean government officials had taken the humiliating step of seeking IMF assistance only after considerable anguish and debate. They were enormously proud of having guided their nation from the ruins of war in the 1950s to the status of an export powerhouse that boasted the eleventh largest gross domestic product in the world. But the country's financial position was becoming increasingly precarious. Foreign banks were calling in short-term loans to Korean banks, and foreign investors were dumping the Korean won for dollars as they unloaded their holdings of Korean stocks and bonds. If this kept up, the central bank's reserves of hard currency would run so low that it would no longer be able to provide dollars to people who needed them. The ultimate nightmare was default, meaning that the government, the nation's banks and virtually all the biggest corporate names in Korea Inc.--such as Hyundai, Daewoo and Samsung--wouldn't be able to obtain enough dollars to make payments that were due to foreign creditors and suppliers.
Neiss's mission was to negotiate a plan that would calm the markets and banish the nightmare. To the IMF, and to the top officials of the U.S. government who exercise major influence over the Fund, the specter of default by such an important economy raised the prospect of unfathomable, dreadful consequences. A failure by Korea to honor its debts, they feared, could cause the country to suffer a prolonged, crippling cutoff of loans and investments from abroad, and as neighboring countries' creditworthiness came into question they might follow Korea into default, sending the entire Asian region into a decade of stagnation and depression like the one that afflicted Latin America during most of the 1980's. Conceivably, the nerves of investors and lenders the world over would be so shattered that the financial conflagration would leap across the Pacific, lay waste to the U.S. economy, and engender a worldwide recession....
Meet the Author
Paul Blustein, a staff writer at The Washington Post, has covered business and economic issues for more than twenty years. He reported on the global financial crisis ofthe late 1990s for the Post and served as a correspondent in Asia for the newspaper from 1990 to 1995. A graduate of the University of Wisconsin and Oxford University, he has also worked at Forbes Magazine and The Wall Street Journal, and his work has won several prizes, including business journalism's most prestigious, the Gerald Loeb Award.
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