New York Times February 18, 1999

The World's Ills May Be Obvious, but Their Cure Is Not

By NICHOLAS D. KRISTOF with SHERYL WuDUNN

Pigs to the left, pigs to the right, pigs all around him, Charles Burrus stood in the cacophonous center of his barn, gesturing at the indignant squealers. He felt like squealing, too.

"I don't know what we're going to do in the next three months," said Burrus, oblivious to the stench of the 7,000 animals around him. "We're losing $10,000 to $15,000 a semi load."

Burrus, a 65-year-old whose gray hair peeks through his farm cap, has seen some tough times in a life of hog farming, including a fire that ripped through his barns in 1978 and roasted 1,200 pigs alive. But nothing, he said, has ever been nearly so devastating as today's prices. These days he is bleeding money so badly that he worries about losing his 600-acre farm here among the cornfields near Cantrall, Ill., 130 miles southwest of Chicago.

"This is something we've never seen in the livestock business," Burrus said dolefully. "We've never seen this heavy a loss in the pork industry, not even in the Depression."

The problems on the Burrus farm, a sprawling collection of 14 hog buildings with temperature controls and automatic curtains on the windows, underscore how the economic crisis that began 19 months ago in Thailand is knocking on the gates of the American heartland. The only real chance of a rescue for Burrus would come through an economic revival on the other side of the globe, in Asia, where his hogs usually end up between chopsticks.

So far, the United States as a whole has been remarkably impervious to the crisis, and much of American industry has benefited from the cheaper oil and imports resulting from the downturn elsewhere. Still, it is not clear whether the United States can remain unaffected, and the crisis presents the country -- and the rest of the world -- with far-reaching political and economic challenges.

If the Cuban missile standoff was a quintessential Cold War crisis, then today's global economic upheaval may be a landmark crisis of the post-Cold War era.

The simplest challenge is for the United States to sustain its strong growth rates. But the broader task will be to prevent nationalistic cataclysms in the worst-off countries, like Russia and Indonesia, and to contain the political and security risks of explosive frustration if the crisis bites further into places like China and Latin America.

The American economy has demonstrated tremendous flexibility and resilience, but uncertainties arise because the American stock market is 64 percent higher than it was on Dec. 5, 1996, when Alan Greenspan, the Federal Reserve chairman, warned about "irrational exuberance."

Moreover, the Brazilian crisis -- marking the failure of the November bailout -- underscores that the storm has not necessarily passed.

"To some extent Brazil's problem is a reflection of slowing economic activity," said Henry Kaufman, a Wall Street economist who now runs his own consulting company. "We have to consider whether there is more to come. Developing countries are still coming to grips with a slowdown in the global economy. If the economic revival in Europe is subdued and the American economy slows down, that is bound to put some pressure on other parts of the world."

The message from Washington during these upheavals strikes some foreigners as hypocritical. When Thailand and Brazil were hit, the Clinton administration's message was firm: Raise interest rates, cut government spending, put up with a recession if necessary, allow banks to fail, be stoical.

Yet in September when the crisis seemed as if it might strike the United States, the administration had a change of heart. President Clinton went into overdrive in September, welcoming three interest rate cuts by the Federal Reserve, pressing Europe and others to cut rates as well, and finally getting money out of Congress for the International Monetary Fund. The Federal Reserve even coordinated the rescue of Long-Term Capital Management, a hedge fund backed by wealthy investors.

The rate cuts were precisely the opposite of the prescription that the United States had handed out to everyone else. And these days, there is a lurking fear in Washington that these countermeasures may have worked too well -- creating a false sense of security.

At Treasury and the Federal Reserve, officials were concerned to see that their actions seemed to have moved millions of investors from an excess of fear to a new spasm of exuberance, sending the market to a new high. Officials say they worry that the eventual fall, if there is one, may be that much farther.

For all the condemnation of cronyism and mismanagement abroad, there are signs in America and Europe of some of the vulnerabilities that brought down Asia.

The crisis abroad was partly a consequence of success: Soaring growth rates led to excess confidence, excess borrowing, excess investment and excess capacity. Not everyone agrees, but some economists see similar patterns in corporate giants like U.S. Steel and even on farms like the one Burrus runs.

When pig prices were 80 cents a pound of live weight, Burrus borrowed from the banks to build new barns. In fact, he just completed his latest barn a few months ago. But the high prices were also driving every other hog farmer in the world to increase production as well, and in hindsight it was a pig bubble that popped.

So now Burrus is getting 17 cents a pound for his pigs, even though his costs are running 38 cents a pound. Bankers in Cantrall are nervously eyeing hog farms the way bankers in Rio de Janeiro are anxiously examining coffee plantations.

Just a couple of hours' drive from Burrus' farm is steel country, the huge chimneys and fiery vats of molten steel that represent the traditional sinews of American industry. These days steel companies are crying foul and laying off workers, saying they are facing a deluge of imports from Japan, Russia, Indonesia and other countries. These nations worry about a new round of protectionism, and on Friday the United States announced penalties against Japan and Brazil for selling goods in the United States below cost.

In a broader sense, however, the steel companies' problem reflects the pattern of excess capacity that one sees in hogs, cars or Indonesian rickshaws. During the boom years, steel companies all over the world invested huge sums in production, in anticipation of the Asian market -- which then shriveled.

So far U.S. Steel and Burrus are both exceptions, and the American economy is still growing strongly. Yet apprehensions arise because the global economy is a three-engine jet, with one engine dead (Japan's) and another losing speed (Europe's). It all comes down to how much fuel is left for the final, American engine. The gauges are broken, the pilots are arguing and the journey has already set a distance record -- the United States' longest peacetime expansion, now almost eight years.

Slender Gains for Salamet

In the remote Indonesian town of Mojokerto, Salamet is in mourning. Salamet, a rickshaw driver, was outside trying to get rides one afternoon recently when his mother finally died in her sleep on the floor of his little house.

It was a relief, for she had groaned piteously from the pain of breast cancer, and he had been unable to afford painkillers. Yet Salamet now found himself faced with another bill he could not pay: the $28 for the coffin and burial.

In the end neighbors stepped in to lend him the money. But custom dictates that a bereaved son not leave the neighborhood for 40 days. This made it more difficult than ever to find the rickshaw rides that would buy food for his three hungry children and pay the fees to keep his eldest son, Dwi, in the second grade.

Yet to keep it all in perspective, Salamet is in the worst-off group -- the urban poor -- in the worst-off country of all, Indonesia, and even he is managing to get by.

In Salamet's neighborhood, no one thinks that the quality of life has retreated even to the level of 1990.

Asked about how much the depression had pushed his life backward, Salamet (who like many Indonesians uses only one name) described the positive changes over the last decade, and emphasized that these have been enduring.

"The biggest change was electricity, which came about six years ago," he reflected. "It cheers us all up, and at night there's light. And then there's also television now as well.

"The second-biggest change is that the roads here got paved. It used to be that in the rainy season, everything got so muddy you couldn't go anywhere. But now we can get around in all seasons, and I can drive the rickshaw and earn a living even after it's rained."

"The third change is the toilets," he concluded. "They were built four years ago. Until then everybody just used the river, but that was a problem at night. It was far away, and there were snakes that used to bite people."

These kinds of gains are still fragile, particularly in places like Indonesia, China and Russia, where there are serious risks of political instability. But for now at least, they have not come close to being undone.

Could Asia's Worst Be Over?

More broadly, the striking thing about the economic news from Asia these days is that so much of it is good. A year and a half after the Asian crisis began, countries like Thailand and South Korea are showing signs of bottoming out. Asia's currencies have recovered sharply, with the Indonesian rupiah now standing at about 9,000 to the dollar, compared with 16,650 in June (or 2,500 before the crisis).

Interest rates have fallen as well, and this has bolstered the stock markets. They remain far, far below their pre-crisis levels, but Asian stock markets were some of the best performing in the world last year. South Korea's rose 121 percent in dollar terms in 1998, and Thailand's was up 34 percent -- both from abysmal lows.

If countries like South Korea and Thailand really restructure their economies in fundamental ways -- which so far has not happened, despite a lot of promising talk -- then it is possible that they will emerge that much stronger from the crisis, with better banking systems, more open economies, stronger legal systems and more democratic political structures. President Kim Dae-jung of South Korea argues that the crisis will be remembered as a blessing, because it is forcing essential economic changes.

"I believe that having to restructure our economy under the agreement of the IMF is ultimately a big help for our economy," Kim said.

Whether the recovery is slow or rapid, the emerging markets eventually are expected to regain their pulse. Although they make up just 7 percent of the global value of stocks around the world, emerging markets account for 70 percent of the world's land, 85 percent of the world's population, and 99 percent of the anticipated growth in the world's labor force.

The Sandwich Man

Sirivat Voravetvuthikun offers a hopeful image of Asia's future, one in which Asians manage to rebuild their lives in new ways and thus achieve greater prosperity.

Sirivat, 50, a Chinese Thai businessman who went to high school and college in Texas, was a successful investment manager and property developer in Bangkok. With his brother, he built 28 lavish homes in the middle of a vast golf resort, with no luxury spared, from the swimming pools to the landscaping beneath mango trees and coconut palms.

The development cost $12 million, $10 million of it borrowed from banks and much of the rest from Sirivat's savings. It is in a lovely spot, nestled among the hills 115 miles northeast of Bangkok, but just as it was being completed the property market collapsed. Now the homes are empty and the main pool is green with algae.

The homes did not sell, and interest costs soared. Banks pressed him for payment, and Sirivat could not meet the payroll for his staff. He and his brother began quarreling.

That was when Sirivat, like thousands of other businessmen around Asia, decided to start again. Drawing on his years in the United States, he decided to become a sandwich peddler. Sandwiches are not a customary food in Thailand, so Sirivat decided it would be a good market niche in a country whose young people are increasingly experimental about foreign foods.

"My wife started by making 20 sandwiches," Sirivat remembered. "I told my staff we had to sell them on the street. I remembered people in the states selling popcorn, carrying bags of it, and I thought, we'll try this. It's illegal to have pushcarts or to set up a table on the sidewalk, but I thought it would be OK if we just carried the sandwiches in a box."

Sirivat's business -- now known as Sirivat Sandwiches -- is thriving, and he is turning a nice profit on it. The first 20 sandwiches took six hours to sell, but now daily sales have reached 550 sandwiches. Sirivat has rented another building in Bangkok to make sandwiches and to experiment with new varieties. He aims to emerge as the sandwich king of Thailand.

"This is going to be big," he boasted, adding that he was trying to build a strong brand name and ultimately hoped to list Sirivat Sandwiches on the Thai stock exchange.

Rocky Roads, Resentments

In assaying what comes next, some of the most fundamental concerns are not economic but social and political.

A growing backlash is evident against Western capitalism, and especially against the Americans who exemplify it. This is most apparent in countries like Russia, which has already defaulted on its debts, but it is found even in Japan, where politicians heap abuse on what they call Anglo-Saxon capitalism, deriding its ferocity and lack of civility.

In a rebellion against the American-led drive for free markets, the finance ministers of the second- and third-largest industrial countries, Japan and Germany, have both spoken about the need for tighter controls on currency movements. And late last year, a three-year-old international effort to achieve a Multilateral Agreement on Investments -- which would have promoted globalization and cross-border investments -- collapsed after France, applauded by Australia and Canada, backed out of the talks. They all worried about surrendering power to foreign companies and open markets.

Malaysia, once a darling of international investors, went the furthest in thumbing its nose at the markets. Prime Minister Mahathir Mohamad has denounced Jews and the West for conspiring against him, and has warned that people in the developing world will stage "a kind of guerrilla war" against Western corporations that buy overseas companies at depressed prices.

Despite warnings from the West, Malaysia adopted capital controls on Sept. 1. The controls, which are now being relaxed to lure foreign investors back, seemed to help: The currency was stable, the stock market more than doubled and foreign exchange reserves rose sharply. Moreover, with interest rates of just 7 percent (compared with 38 percent in Indonesia), Malaysia is expected to eke out a bit of economic growth this year -- even as a continued dip is anticipated in Indonesia. Western officials worry that other countries may adopt Malaysia's methods.

Less dramatic capital controls, like Chile's system to encourage long-term inflows rather than short-term ones, now are also widely praised. Chile dismantled them late last year -- because at the moment there is no problem with excess capital inflows -- but those controls may become a model for other developing countries.

One of the greatest worries in the West is about the future of Russia. The stock market there plunged 84 percent last year in dollar terms. President Boris Yeltsin, once seen as Clinton's ally and the man who would tug Russia toward the West, has now faded into the backdrop along with reforms.

Oleg Sysuyev, a top aide to Yeltsin, sat in his immense office in the old Central Committee Headquarters one day recently and said that reforms very likely were dead for the next five years in Russia. He added that unless the monetary fund gave in and offered Russia major support, there were only two scenarios for the country.

The first, Sysuyev said as he chain-smoked Marlboro Lights, is ruthless budget-cutting, which might lead voters to choose old-style, totalitarian candidates in the parliamentary elections in 1999 and the presidential elections in 2000. The second, he went on, is hyperinflation. "This scenario -- not as fast -- may lead to the same consequences," he said.

China Avoids the Crunch

As for China, it has evaded the crisis, and what saved it from catastrophe may in part have been its unwillingness to listen to Western economists. Urged to make its currency freely tradable with the dollar, it resisted. If the Chinese yuan had been convertible, then Chinese would have sent their money fleeing as Thais and Indonesians did, and China might also be mired in a major financial crisis.

China claims economic growth last year of almost 8 percent -- a tribute to the government's $1.2 trillion stimulus plan and probably to the audacity of the statisticians.

Yet one troublesome parallel with the hardest-hit countries of Asia is found in a vast hole in the ground in the Pudong district of Shanghai. The hole, swarming with construction workers, is scheduled to become the Shanghai World Financial Center, the tallest building in the world. At 1,509 feet tall, it will be 27 feet taller than the Petronas Towers of Malaysia, which in 1997 surpassed the Sears Tower to become the tallest.

Someday it may pay off. But for now it is scheduled to cost $625 million and provide 3.6 million square feet of floor space (twice as much as the Empire State Building) just as the Pudong business district finds itself with dozens of new buildings and an overall occupancy rate of only 30 percent.

This real estate bubble is linked to Japan, for the World Financial Center is backed in part by Japanese banks and is the brainchild of Minoru Mori, chief executive of Mori Building Co. Mori is a visionary in Japanese business circles, a man who reveres the French architect and planner Le Corbusier and who also aspires not just to put up roofs but to shape society.

Mori is unabashed. He argues that while Shanghai property may look like it is heading for a bust, in the long run there will be another boom as well.

"I think the abacus will show a profit for us," he said, but he acknowledged that completion of the World Financial Center might now be delayed a couple of years after the original target date of 2001.

On the wall of his boardroom, on the 37th floor of his Ark-Mori building in Tokyo, is a painting from Mori's outstanding collection of Le Corbusiers, bearing a large inscription by the artist: "Je revais," or "I was dreaming."

The real estate glut in China is at the heart of a banking mess perhaps more serious than anywhere else in the world.

Chinese banks have lent heavily to construct buildings that are now largely vacant and worth little. Three of the four major banks are effectively insolvent by a huge margin, even though these are boom times.

So long as depositors keep their money in the accounts, the banks can keep functioning indefinitely. But the moment depositors start asking for their money back, the banking system in China will face the possibility of collapse.

China's bad bank debts are staggeringly large, totaling about 40 percent of gross national product, compared with 3 percent in the United States during the savings and loan crisis. Nonperforming loans (those that are not being paid back) are about 25 percent of the total at the big banks, significantly higher than in other countries when they were hit by the crisis.

Paradoxically, there seems little prospect that China will face an international currency crisis of the kind that hit Thailand and Indonesia. Beijing has $145 billion in foreign exchange reserves, exceeding the country's entire $131 billion foreign debt.

That leaves the risks of political upheaval in China coming from two directions, both economic.

One danger for the government is a banking crisis, driving furious depositors to the streets to demand their money back.

The second risk comes from workers who lose their jobs at state-owned companies. The Communist Party has reiterated its plans to close down money-losing companies, but those workers may represent the sternest challenge to the Communist Party since the democracy movement in 1989.

Officially, 11.5 million people are unemployed in China, but that figure is not very meaningful because it excludes people who have been laid off as well as rural workers and peasant migrants to the cities. Estimates of total unemployment range up to 260 million, which is also not very meaningful, because many of these people manage to get odd jobs or make money on their land.

Still, no one doubts that there are tens of millions of Chinese workers and peasants who are unemployed or underemployed and who are a potentially dangerous element in the social mix. Outside the southern city of Changsha, near where Mao grew up, thousands of people clashed with police early in January, and one man was killed when he was hit with an exploding tear-gas canister and bled to death.

Earlier, some 500 laid-off workers from a defunct wire-cable factory marched through Changsha and were joined by several thousand sympathetic onlookers who brought traffic in the downtown area to a standstill for most of the day.

Wang Weilin, 45, one of the onlookers, acknowledged that these protests might not lead anywhere, for workers are very careful not to push too far or to come across as protest leaders, for that might mean arrest.

Still, the frustrations were evident in the placards that workers carried, declaring, "We have no food," and "We don't want fish or meat, just a bowl of rice."

"These people," Wang said, "have nothing to eat."

The World's Ills May Be Obvious, but Their Cure Is Not

(Part II)

Panic Spawns the Ninja

Indonesia offers frightening images of how economic distress can tear a society apart. Optimists sometimes used to say there was a possibility that China could turn out as well as Indonesia, but now Indonesia seems less a model than a nightmare.

Indonesian Muslims have been burning down churches, and Christians have been attacking mosques. In the capital, Muslim mobs have chased down and hacked Christian men to death as police officers and soldiers stood by. And when there is no other target around, rioters attack ethnic Chinese.

In the East Java region of Indonesia's main island, mysterious groups of men dressed in black have been killing Muslim religious leaders, chopping up the bodies and throwing the pieces into mosques. This has created a panic, leading to a witch hunt -- literally -- for the killers.

Called ninja by local people, these killers are believed to be sorcerers, and panicked mobs sometimes beat to death those whom they think might be ninja. More than 200 people have been killed so far, either by real ninja or by mobs looking for ninja, and crowds have sometimes paraded the heads of their victims on pikes.

Such brutality seems particularly incongruous because Java was civilized before England and has an ancient culture emphasizing harmony and restraint. The killings and mutilations have been a gruesome reminder of how rapidly economic crises can cause societies to mutate in horrific ways.

In Mojokerto, even Salamet, the rickshaw driver, has joined a posse to guard against ninja. He goes out each evening with a group of men, armed with clubs and sickles. Salamet is the most reasonable of the group, but some of the men spend their days sharpening their sickles and talking proudly of hacking to death any intruders they find.

Down the street from Salamet, a Muslim activist named Ahmed Banu claims to have beaten two ninja to death, and he shows off a pair of boots that he says belonged to one of the dead men. In fact, the entire episode seems to have been fictional, but Banu is a charismatic man with a growing following.

After prayers on a recent evening, he held an open meeting of local Muslims to deal with the supposed ninja menace. Salamet stayed away, but 24 men attended, listening intently as Banu warned passionately that the ninja were ready to destroy the neighborhood and vanquish all Muslims.

"If we Muslims are being treated like animals," he said, his voice rising, "will we stand for it?"

"No!" his followers yelled back.

"If we catch the ninja, what should we do? Give them to the police or kill them?"

White House Brainstorms

On Labor Day last year, as financial markets worldwide were tumbling in the aftermath of Russia's financial turmoil, an impatient and annoyed Bill Clinton summoned his top advisers to the Yellow Oval Room on the third floor of the White House. Clinton, in cowboy boots, settled in his favorite chair by the fireplace, and Treasury Secretary Robert Rubin sat directly opposite, as he likes to do, so that he could look the president in the eye.

Clinton said he wanted to attack the crisis more directly and more openly. He also wanted his administration to lead the way in remaking the global financial system, so as to reduce the risk of another crisis down the road. He had been speaking on the telephone with Prime Minister Tony Blair of Britain, and they had agreed that world leaders should step out and convey a sense of urgency about altering the international economic order -- and so he was frustrated with Rubin's caution.

"Clinton was leaning on Treasury for some action," recalled one participant. "He was leaning hard. And of course the Treasury wanted to be cautious. It was telling the political types in the White House that this is sensitive stuff -- you say one wrong thing and you can mess things up."

The underlying problem is that today's Bretton Woods economic structure -- based on fixed exchange rates and the World Bank and International Monetary Fund -- is widely regarded as outdated and insufficient to steady today's markets.

"We need to establish a new system for the 21st century," said Eisuke Sakakibara, Japan's vice minister of finance. "You could call it a new Bretton Woods. It's difficult, but it's got to be done."

But what precisely is to be done?

While almost everyone agrees that the present system is inadequate, there is no consensus on what would be better. Ideas range from radical proposals for a global central bank and semifixed exchange rates among major currencies to more modest suggestions for tougher bank standards and curbs on hedge funds.

At the annual World Economic Conference in Davos, Switzerland, recently, some European officials urged the creation of an "early warning system," roughly equivalent to a weather satellite alerting the world to approaching economic tornadoes. But the technology simply does not exist.

Others argue for an "exit tax," which would require investors to pay a fee for removing their money from a country quickly -- an experiment that Malaysia is now trying. But Rubin fears the tax could scare off investors.

Just as Clinton's enthusiasm for doing something seems to have ebbed as the sense of crisis faded, there seems little chance that the present debate will lead to any major changes soon in the international economic system.

One reason is that for all the tragedies now unfolding in places like Indonesia, supporters of the current economic system say that overall, it has done an excellent job of promoting economic growth. By some economic measures, Indonesians are better off materially today, in the bust stage of their boom-bust cycle, than if they had bought stability at the price of sacrificing growth in the boom years.

"All countries have benefited from the free market system," said Jurgen Stark, vice president of the Bundesbank, Germany's central bank. "I am a little worried about all the talk about a 'new financial architecture.' What's new? What would it accomplish?"

The upshot is that although the metaphor is always "new financial architecture," the proposals for the financial system are usually fairly small-bore.

"I think architecture is a bad word," said John Heimann, who recently stepped down as chairman of Merrill Lynch Global Capital Markets to head a new bank-supervisor training institute. "What you need is more attention to the plumbing and electricity. That's not as dramatic, but it's the plumbing and electricity that make the house work."

A number of these kinds of changes are under discussion. At the global level, the 22 leading industrialized countries proposed 44 initiatives, ranging from an international accounting code to better supervision of banks, insurance firms and brokerages.

Some countries are trying to take dull but important steps to reduce the risks of crises: improving their legal systems; creating a modern bankruptcy structure; fighting corruption, and hiring bank supervisors. But these steps often run into entrenched local interests, and the progress is slow.

"Have the lessons been tough enough so that people in individual countries are moving to actually fix their financial market infrastructure?" asked William McDonough, president of the New York Federal Reserve Bank and chairman of the Basel Committee on Banking Supervision. "Probably not. Should the effort be made? Yes. Definitely.

"Is there a simple or common solution to these types of problems? I don't think so."

The Danger of Hubris

So what are the lessons of Asia and Russia as they apply to the American economy?

There is not much agreement on that. The lessons on which a consensus has emerged seem surprisingly obvious and modest for an economic catastrophe that has destroyed so much wealth and transformed the prospects of nations from Indonesia to Russia to Brazil. Historians may eventually elicit more subtle conclusions, but for now the lessons are almost embarrassingly straightforward.

One is the danger of hubris. The crisis arose in part because emerging-market countries built up too confidently, because Western investors and bankers were too optimistic in their assessments of risk and because Western governments were too convinced that they had the right solutions. Throughout the crisis, expert predictions have invariably been wrong and even miracle economies have crashed.

A second lesson is the importance of prudence in the banking system, the pillar of any modern economy. Financial institutions have generally been better supervised in America than in many other countries, but the near-failure of Long-Term Capital Management underscored the risks even in the most sophisticated and best-supervised market in the West.

And a third lesson is the danger of stock and property manias. Many Asians say glumly that they have learned the hard way the importance of scrutinizing the foundations of any economy, however dazzling it seems. And as they say that, they look -- jealously, resentfully and nervously -- at the American economy and especially at the U.S. stock market.

Still, there is a dispute about whether that lesson applies to the United States. America has far less corruption and cronyism than Russia or Indonesia, and no one thinks that America has built a bubble on the scale of Japan's in 1990, so some analysts argue that any parallel with Asia is ridiculous.

"I do not accept the comparison between Asia and the United States," said Abby Joseph Cohen, co-chairwoman of the investment policy committee at Goldman Sachs & Co. and so far one of the most bullish and accurate of Wall Street strategists. Ms. Cohen emphasized that while Asia's boom was fueled by cheap credit -- artificially low interest rates -- this has not been true of the United States. In addition, she noted that American accounting and banking standards are more rigorous than those abroad.

"The Asian economy has been having difficulty recovering because banks have large portfolios of underperforming loans," she said. "But here the level of bank regulation has been much higher. Regulators are really paying attention, and shareholders are paying attention."

Economists and policy-makers in Asia, with a biting skepticism that comes from seeing their own economies swell and pop, are often contemptuous of the American explanations. They point to the banking crisis in Texas in the late 1980s as an example of the foolishness that even highly regulated banks can engage in.

"If you look at it objectively," said Sakakibara, "the United States now has a bubble."

Skeptics like him say that the United States has followed the Asian pattern of an upward spiral whereby higher stock prices lead to rising investment and consumer spending, which leads to higher stock prices and pushes the spiral even higher. Moreover, the United States is financing its growth the Thai and Indonesian way -- by borrowing from abroad, although it has the advantage of being able to borrow in its own currency.

The American stock market has also soared to its highest ratio of market capitalization to gross national product (140 percent) ever recorded in history, a ratio that compares with a previous peak of 81 percent in 1929. The American ratio is more than twice as high as Indonesia's or Brazil's at the time their crises hit.

In the broadest sense, one of the central problems in Asia and Russia was that investors were so used to success that they did not contemplate catastrophe. In the same way, the long bull market in the West since 1982 means that most stock market investors cannot conceive of how devastating a bear market can be, even if the market turbulence in the fall did shake them up.

Charles Kindleberger, an economic historian and author of the book "Manias, Panics and Crashes," said he was "troubled by the volatility" of the American stock market today. "I've been thinking for two or three years that the market was too high," he added. "When it collapsed in August, I thought it might be becoming sensible again. But it turned out that the Fed reduced interest rates three times, and the market returned to its previous level."

Kindleberger also expressed concern over the parallel with Japan in the late 1980s. In the face of a global slowdown, Japan cut interest rates to stimulate its economy, and the result was even more frenzied speculation, which eventually collapsed and proved catastrophic to Japan and the world economy.

So, looking at the financial crisis, John Kenneth Galbraith, the nonagenarian Harvard economist, concludes that "the overwhelming lesson is to be aware of the history" of speculative mania, and to be "further aware that the United States is also part of the history."

"The speculative mood," he added, "can pervade Wall Street as much as Tokyo or Malaysia."

Explaining a Crisis

Economists and government officials have offered an abundance of neat explanations for the crisis. Some attribute it to crony capitalism and fundamental weaknesses in overseas countries. Others point to the fickleness of international capital flows and the entire global economic system. Still others say that the culprit was the United States and the monetary fund, or alternatively the venality and incompetence of governments in Russia, or Indonesia, or other countries.

Economists will dispute for years which factors leading to the crisis were necessary, and which sufficient, and which tangential. But the causes seem so many and so intertwined that it is difficult to fit them together in any neat equation.

Moreover, for all the talk in recent months about grand solutions to crises, there is a growing sense that no good answer may be out there, and that one price of economic development has perhaps been a loss of control over the markets that nurtured the development.

Rising prosperity in general has led to what seems an unstoppable trend toward steadily greater oceans of capital sloshing around the globe, and all that cash in turn creates new instability. For all the post-Cold War sense of triumphalism, for all of the high-speed computer networks that in an instant can graph the trend in the yen-dollar rate, fundamentally the world's economies come across as corks bobbing in the sea. And, unless the U.S. economy was badly hit, it would be difficult to imagine world leaders galvanized to devise a new approach to international finance.

Some of the key causes of this crisis may lie not in economic ratios but human nature. In explaining the way that international economic crises have rippled around the globe, historians have often concluded that the most important factor was psychology. The same may be true today.

Computers and "rocket scientists" and first-rate research have yet to overcome the instinctive tendency of markets to overshoot up and down. The herds went from mania to panic in an instant, and this process trampled Asia and Russia. It is also what some economists worry about when they look at the United States.

"The old human emotions of fear and euphoria still prevail," said Laura D'Andrea Tyson, the former head of Clinton's Council of Economic Advisers. Ms. Tyson said that Alan Greenspan, the Federal Reserve chairman, had once made the same point to her, noting that if one looked at a graph of jumps and dips in stock prices, it would be impossible to tell whether one was looking at the 1890s or the 1990s.

The crisis suggests that the old high-tech tools are still in frail human hands.

Galbraith, musing on the crisis, said: "I wouldn't be as severe on the regulators as on those being regulated. When you are dealing with insanity, one looks first at the insane and then at those supervising them."

Back on the Home Front

In Cantrall, not far from Burrus' hog farm, Mary Jo Paoni is planning to retire in April from her job as a secretary. Whatever the uncertainties, and despite her pension fund's loss of $2.7 million on Indonesian stocks, it has still ridden the boom in American stocks and is in strong shape. Mrs. Paoni and her generation of Americans will be able to retire without difficulty.

Yet she is also embedded in her community, and these days it is showing signs of vulnerability. The corn that surrounds her home sold for $5 a bushel two years ago; now the global economic difficulties have sent corn plunging to $2.12.

"We're worried," she said, exclaiming: "Good God, look what's on TV now! How about the layoffs!"

The restructuring and downsizing strike a particular nerve in the Paoni household because the supermarket chain where Mrs. Paoni's husband, George, worked for 32 years was bought out by a distant company just nine months before his retirement. He did not lose his job as a meat cutter, but he lost his holiday pay and five weeks' vacation.

Mrs. Paoni is apprehensive about stock market levels and also about local signs of disquiet: With farmers in trouble, tractor sales have slumped, and the nearby John Deere plant has announced layoffs. Banks are nervously checking their exposure to the agricultural sector. And Mrs. Paoni, after some reflection and several hours of interviews, has decided that she is linked to the global crisis.

"I sit here in this kitchen and say I don't have anything to do with Asia, but I do," she said. "There's always some tentacles out there. Asia will definitely have an effect on Iowa and Illinois."

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Reformatted for mugajava website.
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