Last week's Economist survey was on Taiwan. With economies all over
the Pacific Rim collapsing, Taiwan's has stood firm, growing at a steady
5% a year. How come? The Economist offers an interesting theory,
that since Taiwan is banned from most international organizations (thanks to
China, which considers it a rebel province), Taiwan knew it could not depend
on sugar daddies to put together loans to save its economy. Accordingly,
its banks kept higher reserves and made better loans. Foreign investors
were more diligent in what they purchased. Since folks in Taiwan knew that
they would not be rescued, they took better care of their finances.
It is not surprising. Lots of things, including medical
insurance , can be improved by letting people pay for their notions.
No mutual fund in American equities will be bailed out if it makes collossal
losses -- the investors would simply lose their shirts. This is a very good
incentive to ensure that mutual fund managers invest wisely.
When the IMF and merchant banks and the Federal Reserve go around providing
backup to investors taking market risks (such as loans going bad, a country
defaulting, a hedge fund making a bad bet), it simply encourages other
investors to take those same risks, in the knowledge that they won't be
allowed to fail.
Taiwan's example is instructive. When you know that no one will bail you out,
you will behave in a smart manner.
