Bahtulism
I often run
into people who assert confidently that massive speculative attacks on
currencies like the ones on the British pound in 1992, the Mexican peso in
1994-1995, and the Thai baht in 1997, prove that we are in a new world in which
computerized trading, satellite hookups, and all that mean that old economic
rules, and conventional economic theory, no longer apply. (One physicist
insisted that the economy has "gone nonlinear," and is now governed by chaos
theory.) But the truth is that currency crises are old hat. The travails of the
French franc in the '20s were thoroughly modern, and the speculative attacks
that brought down the Bretton Woods system of exchange rates in the early '70s
were almost as big, compared with the size of the economies involved, as the
biggest recent blowouts. Currency crises have been a favorite topic of
international financial economists ever since the 1970s. In fact, they are
among my favorite topics--after all, I helped found the field.
The
standard economic model of currency crises had its genesis in a brilliant
mid-'70s analysis of the gold market by Dale Henderson and Steve Salant, two
economists at the Federal Reserve. They showed that abrupt speculative attacks,
which would almost instantly wipe out the government's stockpile, were a
natural consequence of typical price-stabilization schemes. In 1977 I was an
intern at the Fed, and realized that Henderson and Salant's story could, with
some reinterpretation, be applied to currency crises that suddenly wipe out the
government's foreign exchange reserves. A bit later Robert Flood, now at the
International Monetary Fund, and Peter Garber, of Brown, produced the canonical
version of that conventional story.
The key
lesson from that conventional model is that abrupt runs on a currency, which
move billions of dollars in a very short time, are not necessarily the result
of either irrational investor stampedes or evil financial manipulation. On the
contrary, they are the normal result when rational investors contemplate the
implications of unsustainable policies.
Some
economists, however--notably Berkeley's Maurice Obstfeld and Barry
Eichengreen--argue that the standard model is too mechanical in its
representation of government policy, and that the more complex motives of
actual governments make speculation a more uncertain and perhaps more
pernicious affair. Self-fulfilling crises, in which a currency that could have
survived is nonetheless brought down, are a hot topic these days. But everyone
agrees that a sufficiently credible currency will never be attacked, and a
sufficiently incredible one will always come under fire.
