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The Wrong Medicine for Asia By JEFFREY D SACHS CAMBRIDGE Mass -- In a matter of just a few months the Asian economies went from being the darlings of the investment community to being virtual pariahs There was a touch of the absurd in the unfolding drama as international money managers harshly castigated the very same Asian governments they were praising just months before The International Monetary Fund has just announced a second bailout package for the region about 20 billion for Indonesia That should in principal boost confidence But if it is tied to orthodox financial conditions including budget cuts and sharply higher interest rates the package could do more harm than good transforming a currency crisis into a rip-roaring economic downturn In the Great Depression panicked investors fled from weak banks in the United States and abroad Since banks borrow short term in order to lend long term they can be thrown into crisis when a large number of depositors suddenly line up to withdraw money In the days before deposit insurance individual depositors would all try to be first in line for withdrawals In 1933 the Federal Reserve played it disastrously wrong Rather than lending money to the banks to calm the panic and to show the depositors that they could indeed still get their money out the Fed tightened credit as financial orthodoxy prescribed Confidence sank and the banking system crumbled The Asian crisis is akin to a bank run Investors are lining up to be the first out of the region Much of the panic is a self-feeding frenzy even if the economies were fundamentally healthy at the start of the panic nobody wants to be the last one out when currencies are weakening and banks are tottering because of the rapid drain of foreign loans I t is somehow comforting as in a good morality tale to blame corruption and
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