Interviews - Jeffrey D. Sachs | The Crash | FRONTLINE

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You have criticized what the United States has been up to, as wanting global leadership on the cheap ...

Basically, we have taken a view that's partly right, but quite superficial. We've taken the view that if the rest of the world would democratize and create market economies, that would spread the benefits of prosperity around the world, and that it would enhance our own prosperity, and our own stability and security, as well.

My sense is that the IMF does not have a proper modus operandi for the current conditions in the world. They misjudge rhetorically. They misjudge tactically. They misunderstand the dangers of financial panic, and the results are terrible.

I think that view is correct. But what we haven't noted is that for many parts of the world, the chasm that has to be crossed to get from where they were, whether it's a dictatorship, economic collapse, financial crisis or all of the above, to the other side, that is a working market economy and a functioning democracy, is extraordinarily difficult and requires help.

The help has to be well directed. It has to be well timed. It has to be appropriate for the particular circumstances. And unfortunately, the real focus in this country has not been on the rest of the world. It's been on our own issues and our own problems. Fair enough. But it means that our simple hopes that everything will just work out abroad aren't really coming to pass.

Is it beyond simple hopes, or haven't we been fairly rigid about our demands on countries that we deal with?

There is another question in addition to how much effort we're willing to put into it. The question of whether we're thinking hard enough about the realities abroad. My own view is that we operate on a real hit and miss basis. Sometimes we get it right. There have been times when U.S. leadership has just been wonderfully decisive in helping a country to turn a corner. There are other times, even in crucial cases, such as Russia ... where we're not thinking straight at all. Where we over-simplify so dramatically. Where we use a recipe off the shelf. We often do more damage than good.

What if a place like Russia is not ready to plunge into the global economy, into international competition?

In 1991, a miraculous thing happened, and that's the Soviet Union ended ... So there was an opportunity to build a very healthy and new world, on the basis of the change that the Russian people themselves wanted. But for Russia to make that change was going to be one of the most remarkably difficult and complex passages imaginable. After all, here was a new country, an empire had ended ... Here was a society which had been dictatorial or authoritarian, for a thousand years, trying to become a democracy. Here was a centrally planned economy, trying to become a market economy.

You had great social upheaval. At the same time, the government itself was, literally, financially bankrupt, as a result of what the waning days of the Soviet Union had brought about. They needed massive help. Clever thinking. Lots of ideas. Lots of involvement. What did they get, by and large? They got a seven or eight person mission from the International Monetary Fund, putting up its nose, saying, "Why are you complaining so much? Just pay your debts. Do the reforms. Life will come out fine."

For the first two or three years of this transformation, they heard a lot of lecturing from Washington, but they didn't get any real financial help. I was there as an economic advisor to President Yeltsin. But I could see and said, publicly and privately, that if this has a chance, Russia is going to need a considerable amount of financial assistance. The tragedy is, it never came. What did come, came too late, after the reformers were kicked out. The whole notion that Russia needed some help was more or less scorned in the early years.

Now, we give away tens of billions to Brazil, or to one place or another, without thinking. But in those days, to give even a tiny amount to Russia was viewed almost as anathema by many parts of our own society and our political leadership, whether it was the Bush administration or the Clinton administration. [They] really just didn't want to get deeply involved..

Part of the '90s ... was also the era of the Washington consensus. Explain that.

As of the late 1980s and early 1990s, a kind of professional consensus arose in Washington. It was called a consensus for the world, but how many people really believed all of it is an open question. A consensus came, at least within Washington, about how countries should change from non-market economies to market economies.

Now, the basic idea was that if a country would put its economy as an integrated piece of the world system, that it would benefit from that with economic growth. I concur with that basic view. The Washington consensus listed 10 or 12 steps--the recipe for economic development. When you look at those, they're all pretty reasonable. But it's a kind of bland list of commandments, rather than a real blueprint of how to get from A to B, much less from A to Z, when you're trying to make an extraordinarily difficult passage from one disaster to hopefully something better. There are so many land mines around that just having the list of the to-do's, the good things that one should do, is not really a strategy or a set of tactics.

So the Washington consensus had a lot of merit in one sense. It did provide some sensible, broad ideas, about how countries that were outside of the international system could become part of the international system. But it became a substitute for real thinking. It became a kind of mantra. It became a substitute for assistance, because the idea was, "You don't need us. You don't need any help. You don't even need a time-out on your debt payments. You just have to follow the magic rules, one through ten, and you'll be just fine."

So, in this sense, everything became over-simplified. The actions of the IMF and the World Bank became very stylized. The U.S. Treasury had its model, and unfortunately, at that level of simplicity, it just doesn't work.

Is the basic mantra, "Open your markets?"

Opening markets is a core part of the idea, because the essential truth for developing countries is, if you try to live by yourself, you will cut yourself off from the amazing progress of world technology. You won't be able to purchase the goods that you need from abroad, because you're not exporting to the rest of the world. You have to be part of the world system.

That's the essential element that's right about the Washington consensus. But how to do it, and what does it mean to open markets, it doesn't mean suddenly to let your banks and your enterprises borrow from New York banks, without any restraint, without any regulation, without any supervision. That's ironically what a lot of countries understood by this. They opened up their financial markets. They took on a huge amount of debt. Then they ended up in a massive amount of trouble down the road.

But that was essentially what we were also proposing, that they open their financial markets, and let capital flow freely.

We were proposing that these countries open their trading systems, which means that goods could flow freely. We were proposing that countries open their financial markets, so that we could lend to them or invest in their shares. We were proposing that these countries open up their economies to our long-term foreign direct investment, where American firms would build factories abroad. We were proposing, in a sense, that the rest of the world be made safe for American ideas, as they adopted intellectual property rights that gave patent protection to our very innovative economy.

Now, again, there's a lot of truth to a lot of this, but how you do it counts. Just like you don't give a medical diagnosis on one page without seeing the patient, and you don't think that there is one remedy that fits all, the truth of good economic doctoring is to know the general principles, and to really know the specifics. To understand the context, and also, to understand that an economy may need some tender loving care, not just the so-called hard truths, if it's going to get by.

And so-called hot money ...

To live on hot money, rather than some foreign assistance that may be needed, might work in the short term, and it might absolve the U.S. Congress or the administration, of having to do the hard work of asking the American people to lend a hand some place, because after all, the banks will do it. But two or three years down the road, we really regret it. The banks yank their money. The economy collapses. Our foreign policy and economic goals are not met. Of course, the worst losers are the poor people and the poor countries that end up holding the bill.

Who was pushing this?

Globalization was a deep trend pushed by technology and right ideas, as much as anything else. And the failure of dozens of attempts throughout the rest of the world to try to develop in a closed way. So the deep push came from deep forces, but the way that the deep forces were translated into the day-to-day practice came from the U.S. Treasury, the International Monetary Fund, the World Bank. Of course, investment bankers were part of that milieu, as well.

All of this made these emerging market countries quite vulnerable ...

When countries open up to trade, they generally benefit, because they can sell more, then they can buy more. And trade has two-way gain. When countries open up to financial flows, they can get themselves into a lot of hot water. If our banks are willing to lend to their banks a lot of money at short term, you get into a very vulnerable situation where, for whatever reason, our banks decide to yank their money, that can bring down the whole economy that's borrowed from the international banks.

So, in the early 1990s, when a lot of the developing world opened up to international capital flows, without the right kind of regulatory environment, and not understanding how vulnerable they would become to panics and euphoric waves of sentiment, coming from London, New York or other money centers, they ended up with a tremendous amount of short-term debt, often invested in very good long-term projects, but projects that weren't going to pay off for five or 10 or 20 years.

If they have short-term debt, that means ...

If you have a lot of short-term debt, it means that all of that money can be demanded in a very short period of time. Technically, short-term debt means money that's coming due within a year. Typically, it means money that's coming due within 30 to 90 days.

Now, if you have billions and billions of dollars coming due in a country in a short period of time, and if a sense of panic develops among your creditors, so that everybody demands the money out all at once, it's almost inevitable that the debtor economy will collapse, because it won't be able to come up with that amount of money in a short period.

That's what happened in Asia, to start this ... most recent rolling crisis, in 1997.

In Asia, a lot of successful economies, that had been living on their own saving, decided to open up their financial markets to international capital in the early 1990s. So here were countries doing quite well, but they decided they'd borrow a bit more and do even better. They started borrowing several percentage points of their national income, every year. It added up to about $175 billion of short-term debt, owed by five developing countries in Asia: Indonesia, Korea, Malaysia, the Philippines, and Thailand. That $175 billion could all be yanked quite quickly.

When the creditors, which were mainly international banks, started to have anxieties about Asia in the middle of 1997, and then they started to have anxieties about what the other banks were going to do, because each one thought that the other one was going to get his money out first. Then they realized that the amount of short-term debt that was due was probably about 75% more than the short-term dollar assets that those countries held, a panic developed, in which every bank said, "We don't know and we don't care about the long term of this country. We just want our money out right now."

So, all of a sudden, there was a massive run on Asia, meaning that all the creditors wanted to yank their money out as fast as possible. And Asia didn't have the dollars to pay, so the dollars went into default. The currencies plummeted. Interest rates soared. Working capital disappeared. Production seized up. The whole region went into economic collapse.

Tragically, some of that process was actually aided and abetted in an odd kind of way by the IMF, itself. When the IMF intervened in the Asia crisis, it did it through such provocative steps, like insisting on large scale closures of dozens and dozens of banks, and financial institutions in the region, that the IMF's own actions triggered a large part of the panic, and made everything much worse than it would have been, had the IMF not been there.

In a lot of your writings, you essentially accuse the IMF and ... the U.S. Treasury, of a kind of economic malpractice in how they dealt with the Asian crisis ...

As of mid-1997, east Asia was vulnerable to panic. But it didn't mean that a panic, financially, was actually going to come. Vulnerability meant there was a lot of short-term debt, much lower level of assets. So that, if the creditors decided to panic, these countries would be in a lot of trouble.

What was the name of the game for good doctoring at that point? It was to calm the nerves and prevent panic. But the IMF came in, as is their wont. I think the U.S. rhetorically added to this. The IMF took one look around Thailand and said, "This place is much worse than anybody thinks. We're going to clean it up. Fifty-eight finance companies, we want you to close right now. We want you to put up interest rates. We want you to cut fiscal policy."

All of a sudden, people who thought that there were troubles, but not catastrophe, started to look around, said, "Gee, I'm getting the heck out of this place. I don't know what's going to happen in Thailand in 1998. But I know in the second half of 1997, there's not enough to pay us all off. And I want to be the first one out."

So the runs started in Thailand after the IMF intervened in such a dramatic way. Then the IMF came to Indonesia. On November 1st, 1997, the IMF demanded that 16 commercial banks suddenly close their doors to operations. [They] announced that depositors would lose money, and didn't say anything about protecting deposits in other banks, as well.

Well, what happened was quite obvious. The Indonesians started to take their money out of all the rest of the banks, as well. Then, when the foreign creditors saw that the Indonesian banking system was imploding, they started to yank the money out of Indonesia.

So, I think the IMF helped to detonate the Indonesian crisis, which turned out to be the worst of all of them, because when your banking system completely implodes, that drives down all the rest of the economy. Even good firms can't get the working capital they need, to buy the inputs that they need, to produce the goods that they need, to sell on world markets.

Then the crisis went to Korea, and the same kinds of provocative steps were taken. Sudden bank closures. Dramatic heights of interest rates. A lot of heated rhetoric. That, in my view, all added to the sense of outright panic, in a region that just three or four months ago, had been viewed very positively, with a lot of equanimity, if not more. So how did we get this dramatic change of mood in such a short time? Unfortunately, the international community contributed to that dramatic turn-around, and the damage that resulted from that has been profound.

And continues to be profound.

These countries experienced a remarkable fall of output, jobs, employment, income, security of the people, in 1998. Indonesia had major cities burned in the midst of social upheaval that came from this economic collapse. So the costs of all of this have been huge. Countries are starting gradually to claw their way back out of this hole. Korea and Thailand are probably ahead in making a recovery. Some of the other countries are still in a lot of trouble. However fast these countries get out of this crisis, at this point, a tremendous amount of damage has been done, and will continue to be felt in the coming couple of years, at least.

But the IMF would say in its defense that the steps they took were to reassure the markets. How could they misread the situation?

The IMF simply didn't figure on how its own inputs and its own style of operation, its own recommendations, could shift the mood so dramatically. I think they made a bad mistake. They have a way of doing things, which fits, perhaps, when the IMF is negotiating with a government that's pretty profligate, has really messed up. When there's not so much private money around, but just a government that may have borrowed too much from the World Bank, for example. But they're not used to having the same discussion when there's $175 billion of private money, listening in, saying, "What's really going on in this discussion?"

So my sense is that the IMF does not have a proper modus operandi for the current conditions in the world. They misjudge rhetorically. They misjudge tactically. They misunderstand the dangers of financial panic, and the results are terrible. Now, they say in their own defense that the economic contraction was worse than they anticipated. They say that their programs did not restore market confidence as much as they hoped. But then, they say in their reports, but nobody else did much better in their estimates.

With all due respect, I seriously beg to differ. There were some of us, I don't know if it's many or few ... who were absolutely pointing out, "If you do this, you will make panic. You will make a loss of market confidence. And the outcome will be tremendously worse than you think."

The other thing the IMF says, is, "Well, it's all coming out all right in the end. You see, the Korean won is stable. The Thai baht is stable. Our policies worked." What they do is, they shift the attention away from the real facts and from the real world that people live in. Sure, the currency is stable. But at what cost? An economic collapse? A massive social crisis? Isn't that what they're trying to prevent? Isn't the reason that they're concerned about the exchange rate, because they think that will be a good thing for the rest of the economy? I believe that they have lost sight of their major goals. They think in financial terms, but they're not understanding that the effects of their actions are having such a disastrous effect on the real economy, on the jobs, the production, the exports, and the living standards of the people.

Let's skip to Russia. The U.S. Treasury and the IMF were in Russia, standing by, watching a corrupt privatization. Can you talk about that?

The Russian drama began at the end of 1991, when the Soviet Union mercifully ended. Russia and 14 other new countries emerged from the ruins of the Soviet Union. Every one of those 15 new states faced a profound historical, economic, financial, social and political challenge. And for the first year or so, there was almost no-one around.

I had a rare privilege to be watching this from the vantage point of being an advisor to President Yeltsin of Russia. I could see that the IMF was only tangentially involved. Most of the other governments were watching and waiting, but no one was really getting involved in the serious and historic way that the circumstances demanded. By the end of 1992, so many technical mistakes had been made by the IMF, and so little help had come, that most of the reformers had already been pushed aside. Russia was in high inflation, and it was just going off the rails.

In 1993 and '94 most of the rest of the reformers were pushed aside. We ended up, by 1994, ironically with the Clinton administration a little bit more engaged than it had been in 1993. But now engaging with the likes of Viktor Chernomyrdin, an old "apparatchik" who ... presided over one of the most corrupt privatization practices that one could imagine. Mr. Chernomyrdin emerged from Gasprom. Gasprom was the Russian state monopoly of natural gas. It had almost half of the world's natural gas deposits. Well, under Mr. Chernomyrdin, a lot of that was "privatized," meaning, given away to cronies and friends of the Yeltsin government ...

Watching this disastrous spectacle was quite horrifying. I approached the IMF, the U.S. government, the Organization for Economic Cooperation and Development in Paris, and I said, "Look, we're watching one of the most corrupt privatizations imaginable. Let's do something. At least blow the whistle. We don't have to stand, and watch, and give aid, and give help at this point. We have to say that this is going to undermine the most fundamental legitimacy of this new society that the Russians are trying to build."

Ah, but we didn't want to have a word. Because, well, the reformers were mostly out. We thought that this government was better than any alternative. So we winked and smiled, turned our head, and ignored what was really a disastrous outcome.

One of the implications of that disaster is that the Russian government not only acted corruptly, not only built up a new oligarchy of billionaires out of nothing, basically, but also gave away its most valuable financial assets--its ownership of the huge natural resource sector in Russia.

Those resources could have been turned into real money, to be used to pay pensions, to close the budget deficit, to keep inflation low, to get the reforms under way. But they gave away those natural resources, and ended up instead relying on borrowing from international speculators and investors, at very high interest rates, on very short-term debts ...

Talk about the establishment of the GKOs, the short term government bills. Why were those instruments being set up?

One of the ideas was that the government should be able to borrow cash, both domestically and abroad. In principle and in moderation, there's nothing wrong with that. Every well functioning market economy has a treasury bill market. For the Russian government, if the choice was to always have to go from hand to mouth of what you took in revenue and spending it, versus having some means to borrow domestically and abroad on a market basis, the idea of having a market for treasury bills, which in Russian became called the GKOs. That was all right.

The problem became that the Russian government, without other sources of revenue, without any real "aid" from abroad, facing tremendous political pressures, and I have to add, huge corruption inside, so this is a very mixed picture, went on a borrowing spree, with a lot of it money borrowed from abroad on a very short term, highly speculative basis.

This, in the end, as in so many other countries, is the immediate factor that did Russia in. But how did Russia get to that point of such dependence on short term borrowing? First, we being the Western world, wouldn't let Russia off the hook on debt. So there were demands on debt servicing in the early days until they ran out of reserves. Then there was no real aid program, just a fictional aid program. Then, in my way of understanding this, the early reformers were basically pushed away. A lot of the old apparatchiks came back in, and corruption really dramatically increased in '94/'95, particularly around Yeltsin's re-election in 1996, when the government used corrupt practices to give money to business, part of which was returned to the campaign coffers, and helped pay for Yeltsin's reelection.

So by 1996, you had a situation that had a patina of order, a huge amount of corruption. As in so many other foreign policy debacles, the U.S. was saying, "He's our man." We were so happy to be dealing with him, no matter what was really going on. They just don't want to see the reports of the corruption. Rather than using its own natural resources, for example, or the income from them, and rather than getting real assistance with real reform from the outside world, Russia increasingly lived on short term borrowing.Now, this was an extraordinary merry-go-round. It's what economists call, in essence, a Ponzi scheme. That means, "I'll put money into your scheme, and expect to get a great return, because some greater fool is going to come put in money, the next one." Now, he believes that he'll get out, because there'll be even more money coming in afterwards. The Russian treasury bills were paying 50% returns in dollars. For many months, actually more than a year, in effect, because of this Ponzi game, where each investor believed that there would be a greater fool, or they thought, even more cleverly, in the end, the IMF will come in and give Russia just the money they need, so the last amount can be pulled out.That's how the game was played until August 1998, when Russia ran out of foreign exchange reserves, because it was defending its pegged exchange rate. When the investors stopped lending to Russia, because it looked like the game was up, when they all suddenly said in the press, "If the IMF doesn't lend quickly Russia the money, it's the end of the world." The IMF actually threw in the last $20 billion program, but there was so much desire to get out that the flow that the IMF gave was totally eaten up and Russia simply went into default.

While this Ponzi scheme was building, a lot of investors and then speculators ... were making a whole lot of money.

Anybody that got the money in and then was smart enough to take it out and go on vacation, make, say, a 50% return in dollars. This was the greatest game in town. What happens with a lot of these guys (mostly it's guys, that's just the truth), is that they get addicted to the easy money. They think they're all super geniuses, masters of the universe. They're going to lend. When they get the money out, they put it back in one more time. That greater fool is going to come, or the IMF is going to come, and get us out.

So a lot of people made money. A lot of ... clever people that had made a lot of money up to that point, lost a huge amount of money on August 17th when, low and behold, the IMF couldn't muster another one of these packages. Although even the IMF said, "If only we could do another one of these," because they're addicted to pumping in the money the same way. They like that game. That puts them in the center of attention and center of responsibility. Well, these people lost a lot of money in the end. So some made a lot of money. Everybody made large paper profits for a while. This was a great game.

I was horrified by it and was saying repeatedly in the press, in speeches, in articles, in books, "What's going on? The underlying policies aren't working. The corruption is rampant. The exchange rate is overvalued. The possibility of panic is huge." Yet, the money kept going in, until finally this massive withdrawal. The IMF made one last attempt. It was not enough and the system was finally overwhelmed by its own internal illogic.

Is it fair to say that the IMF and the U.S. Treasury had to have known at least the broad outlines of what was going on?

Yes, the IMF and the U.S. Treasury should have known everything, could have known everything, and presumably did know everything.

Through 1997, this Ponzi scheme and the addiction to debt is building. Then the Asian crisis starts in the middle of '97. How does that affect Russia?

Around October 1997, with the Asia crisis getting worse, a lot of currencies in other parts of the world came under speculative attack. This means that international investors began to believe that those currencies would lose value, so they started withdrawing money. Therefore, the currencies would have lost value, unless the central banks put in the dollars to keep the currencies stable. Two cases were particularly hard hit. Russia being one; Brazil being the other. Eventually, both of them collapsed.

But in the short term, the U.S. told both of them, "Don't give up. Use your reserves. Defend the currency. Raise interest rates even higher," which I think is the kiss of death for employment, for growth and so on, and which Washington is very happy to give, because Wall Street is getting the high interest rates, among other people. "So don't change your currency. By the way, we'll give you some money, in case you need it, to keep that currency stable." So already, in October 1997, both Russia and Brazil were on a collision course with history ... It was absolutely clear. I was amazed at just how bad the advice was. I was amazed with the advice in Asia. I was amazed at the advice given to Russia and to Brazil, because it was basically the same everywhere. "Just raise those interest rates and keep paying the foreign investors, because that's what establishes confidence, after all. If need be, we'll give you the money to do it."

So this went on in Russia. But then another thing happened, oil prices collapsed. So here you had a country where the budget hadn't been observed or honored, for seven years of IMF programs. It was all phony. You had a huge deficit. Who was going to pay for that? You had oil prices collapsing. You had an overvalued currency, in the sense that exporters weren't profitable, so that was another factor. You had Washington saying, "Everything's fine. Just raise those interest rates." This was a textbook case where something should have been done. Of course, nothing was done until the race car hit the brick wall at full speed in a direct collision.

If Russia had devalued its ruble earlier, would the landing have been quite as catastrophic as it ended up in August?

Devaluations are never easy. If you're a Russian, and the ruble devalues, that means you need more rubles to buy a dollar. If you are living in part on imported goods, like every country does, the price of those imports rises. Often, the standard of living falls in the short term. So devaluations are not easy, but they're sometimes necessary, as we've seen. Sometimes they simply can't be avoided.The problem with devaluations, though, is that if you wait too long, the damage is greatly compounded. If you wait till the bitter end to devalue, not only is there the pain that can come with any devaluation, but there's also the panic that can come with the country that has used up its foreign exchange reserves, trying to keep the exchange rate stable, and then failing in the end.

My own understanding of these crises, since the Mexican crisis in December of 1994, is that the pain we've seen is not really from the devaluations, but from their aftermath, when the foreign investors panic because they see that the country has squandered its foreign exchange reserves in the preceding defense of the currency exchange rate ... So the basic rule is, devaluations are not fun. The longer you wait, the less fun. If you wait until the bitter end, the whole economy can be destroyed.

Is there any evidence that people in the Russian government were thinking about advocating an earlier devaluation? That the IMF was saying, "No, hold firm."

Yes, there is. I have spoken to some senior government officials who felt already back in 1997, "Maybe we shouldn't be doing this. Something doesn't feel right." Then they were given great encouragement.

I think in all of these cases, it is fair to say that both the governments in question and Washington play a mutual role, "All right, just one more drink. Okay. Great. Let's go to the bar. One more. Great. One more. Just one more." They encourage each other. So it's not simply Washington forcing anyone to do it. The governments have a lot of responsibility on their own end.

In Russia, by the way, though, they haven't had a clue. They've never gone through this kind of process. They've relied so heavily on the IMF, that I'd put the responsibility so much more heavily on the side of Washington, in that case ...

Were you surprised on the 17th of August ... to find out that Russia was not only devaluing its ruble, but was defaulting on its debts?

... I was shocked. I'll tell you why. You sometimes default in dollars when you're, say, Russia or Brazil or others, and you've run out of dollars. Then you can't pay. But what Russia did was really amazing. They defaulted in rubles ... there's no shortage of rubles. They can print them as much as they want, so it's extremely unusual for a country to default on its own currency, on obligations in its own currency.

It's not so unusual to run out of someone else's currency. By force majeure, as it's called, absolutely have to declare a default, because you just don't have the dollars. But to do it in your own currency is quite extraordinary. There's more to this story than we really understand, because in some peculiar ways, even Washington may have been a little bit behind that, or not against it. It led to a huge international panic afterwards. But I have a feeling the Russians heard that maybe that wouldn't be so bad. If they did, it was extraordinarily wrong headed advice. I think we have more to learn about that episode.

What's the situation in Russia today?

Russia has gone through eight years of continuing economic pain. It has achieved almost nothing for its efforts. Living standards have declined sharply. Even life expectancy has declined sharply. Health conditions are deteriorating. IMF program after IMF program has done absolutely nothing. The Russian people are dispirited. The reformers are in disarray. The Communists are in a majority in the Parliament--not that they have any solutions, obviously.Russia is just struggling to maintain what is its greatest historical attempt to have some democracy. We'll see whether it sticks. I think it is the most important question right now, because only with democratic renewal will there be a chance, even, to pick up from this dreadful situation. Russia will go into parliamentary elections at the end of 1999 and presidential elections in the year 2000. If they can get through that process peacefully, if somehow, some reform minded, legitimate, non-corrupt people can be elected ... maybe there's a chance from this disastrous decade to do something better in the next decade. First thing I would do, send the IMF home. Keep them home. Keep them in Washington. Let's start fresh with Russia on some real help and some real reform.

Forgive the Soviet debt?

We're going to have to forgive a great deal of the Soviet era debt. There's no question about that. Let's face up to that. We're going to have to put in money if Russia is really going to consolidate a democracy, something that would make the world so much safer and make Russia so much safer for the Russians. We have a huge stake in this. We have all along. We have played recklessly with that stake. Who knows what's going to happen? But if we have a chance for a real government that we can work with, I hope that in the next decade we do it differently.

A growing number of observers have pointed out similarities in certain trends in the 1990s that were also trends in the 1930s. You've written some about that yourself ...

There's a question whether 1999 is 1929. We had a booming stock market in 1929 and then went into the world's greatest depression. We have a booming stock market in 1999. Will the bubble somehow burst, and then we enter depression? Well, some things are not different. The volatility of international capital played a big role in the onset of the Great Depression. The volatility of international capital is obviously destabilizing markets today.

There is, in my view, one fundamental difference, though. I think it really is so fundamental that the analogy doesn't hold in the end. In 1929, the world was on a gold standard. That meant that every major currency in the world was linking the value of its currency to gold ... with the price of the currency set to gold, you couldn't really do very much in terms of expanding the money supply in a depression, and so on. We only got out of the Great Depression as countries got off the gold standard, which was a long, arduous, tumultuous and, eventually, tragic process.

The good news for 1999 is, we are not on a gold standard. We have independent national currencies, or regional currencies, in the case of the euro. If we did go into a recession, something that's always possible for the U.S. or Europe, we could lower interest rates and expand the money supply without worrying about the price of gold.

If the whole world went into recession, all the major central banks could cut interest rates and expand the money supply. Indeed, last summer in 1998, when there was an intense moment of fear after the Russian default of a worldwide credit crunch, the Federal Reserve Board cut interest rates several times and successfully overcame that fear. I think that was important to a good monetary policy. So this is the big difference in my view. Could it happen again? It would take absolutely horrendous policy mistakes. The system itself is a lot safer right now, because we are not bound by the straight jacket of the gold standard.

Do you think that the stock market bubble, but more, the sense of American prosperity, is ever going to be affected by what is happening in the rest of the world?

The U.S. is in a bit of a euphoric mood. Euphorias come to an end. We hope they don't come to an end with a recession, much less a crash. There's a lot of strength in the U.S., but there's a lot of froth also. The froth will blow off. We're going to have to face up to some realities that we're not fully facing up to right now.

Ten years ago, there was a lot of euphoria about Japan ... [and] fear in the U.S., that we're about to be taken over or fully owned by Japan. Well, this was a lot of hysterical market misunderstanding. Opinions in markets just bounce off of each other. We see it happening again.

The U.S. has a sound economy. It also has a cyclical economy. It also has stock market values right now that are hard to explain on historical norms. While it's always possible that everything can be based on the new economy, it's also quite possible that we're doing a little bit of exaggeration in just how wonderful things are.

Do you have any sense that Washington policy makers are reconsidering some of the policies? ...

I think within a limited range of issues, they're thinking, "What about exchange rate recommendations? What about short term capital flows?" There is some discussion of some real issues. The broader issue of the real role of the U.S., the foreign assistance aspect of that, who's going to pay for the security of a global economy--no, we are not doing any broad rethinking right now. This is the end of an administration. That's usually a pretty terrible time for any real ambitious thinking.

Does that worry you?

I've been worried all through this decade. I'm more worried at the end of the decade than I am at the beginning of the decade, because you have so many of the poor countries of the world in utter crisis right now. I don't see that crisis getting better. I don't see much real and serious attention. By serious, I mean something that might cost us something.