Stanley Fischer on access to foreign borrowing

Stanley Fischer, 1991, Issues in International Economic Integration, Bangkok, p. 20; quoted in Gruen 1991, p. 13, via Dieter (1998):

… domestic firms should not be given unrestricted access to foreign borrowing, particularly non-equity financing. In both Chile and Argentina, the lenders in essence forced the government to take over the debt of failing private borrowers. The argument was that the credit of the country would be impaired unless the government stood behind its domestic firms. It might have been expected that the lenders’ interest in being repaid would be sufficient for them to exercise due caution in lending. But there is much evidence of unwise lending that imposes externalities on other firms and the government of a country. For this reason, governments should monitor even private sector borrowing, and may sometimes have to limit such borrowing.

This is very interesting advice from Stanley Fischer. It connects right to the question of whether the central bank should monitor the private debt market or not. Greenspan and company took the hands off approach. After the notorious “irrational exuberance” speech Greenspan refrained from taking responsibility for the financial market. People in the Fed ignored warning signs, because they were intellectually ignorant. However, with hindsight it should be clear that the financial market did not channel capital to where it would be used most efficiently. If it had done so, why would we have a financial crisis today?

I think there is a lot to be gained by sifting through the old development economics literature about financial crises and the balance of payments. Like Daniel Heymann remarked: in good times a current account deficit is seen as the result of investors moving capital to Argentina in expectations of good things to happen, in bad times the same current account deficit is seen as the result of a decline in competitiveness and bad things are thought to follow.