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The Chastening

Paul Blustein

Inside the Crisis That Rocked the Global Financial System and Humbled the Imf

(Public Affairs Books)

Economic Armageddon, Anyone?

I remember glancing at the headlines a few years back when the situations outlined effectively in Paul Blustein’s, The Chastening first came to light. Glanced at them and then turned the pages to the comics section. But after reading a few chapters in Blustein’s 400-plus-page tome I realized I should have been paying more attention to what was going on in the world. The American economy was perilously close to collapse, an event which, according to economists, would have been a disaster far worse than the stock market crash of 1929. Only quick thinking by the world’s top financial advisors, notably members of the IMF, the International Monetary Fund, kept economic Armageddon from occurring in the waning years of the 20th century.


As a concern of the Allied Powers during World War II, the International Monetary Fund was formed to provide a fixed income system based on the value of gold in which to manage international monetary agreements. It was hoped that such a system would help the world not to make the same mistakes it had tears earlier; mistakes which had led to worldwide depression and war.


The IMF was a virtual government in and of itself, run with military precision, answering to no one. At the end of the ‘90s, the IMF had a staff of over two thousand employees (a thousand of which were economic ambassadors to countries in turmoil), and a slush fund of hundreds of billions of dollars in which to apply leverage.


When you hear folks talk about the invisible “Them” who control the world, they just might mean the IMF. For nearly fifty years the IMF gave advice to countries in economic turmoil, countries whose economies were in serious danger of collapse.


Blustein details the events which led to the current IMF situation. For decades their word was law and their advice rarely, if at all, questioned. That was until the late 1990s when the currencies of several Asian countries drastically dropped in value, threatening to bring financial devastation to Asia’s economies. The IMF sent a team of advisors to straighten out the problem using the methods which had worked fine for them for years, crisis after crisis: devalue the country’s currency, restrict imports, and enforce strict budget cuts. Only something new had burst onto the scene by the end of the Twentieth Century, something the IMF hadn’t counted on: The Electronic Herd (the nickname for the unorganized conglomerate of money managers, mutual funds, pension funds, and business planners who trade and do business electronically in today’s markets) had risen in strength and power unheard of in the world financial markets. With the advent of electronic commerce it had become easier for individuals and corporations to trade with one another, taking fast advantage of situations such as an unfortunate country’s devaluation of their currency or a dip in prices, therefore making themselves a quick fortune. This threatened to overturn everything the IMF had worked so hard to control. South Korea ended up losing control of the entire $9 billion loan they had received from the IMF in a matter of days, therefore requiring the IMF to bail them out yet once again.


With this and other blunders and problems occurring, the IMF became embroiled with internal discord over how to handle these situations. People and governments began to lose faith in the IMF. Thailand actually forbid members of the IMF from entering the country and dispensing advice; at least until the problem became so large and monstrous the entire country was in imminent danger of collapse. It wasn’t long before several South American countries and then even Russia fell prey to the Electronic Herd, which threatened to collapse the entire global economy.


Paul Blustein, a staff business and finance writer at the Washington Post, has managed to craft a readable and often gripping book about—of all things—world finance. He interviewed nearly two hundred people connected with finance, many of them current or former employees of the IMF, and also top officials in the United States Treasury Department. He traveled for sixteen months to nearly every major player in the world’s economy to get first hand answers to tough questions and what really happened behind those closed-doors while the world’s economy was shrinking away.


Although Blustein’s accounts of the various wheeling and dealings and behind closed-door strategies can get dizzying as foreign names and eleven-digit figures are tossed around, he manages to juggle them efficiently enough to keep you jaunting merrily along. When you read about how close the United States itself came to falling victim to the Electronic Herd, to tail spinning into financial oblivion, at how perilous the collapse really was, it can send chills along your spine.  

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