My view is nobody knows yet whether this is over or not. But I would remind people, we've had three or four false dawns in the last two years where the newspapers began reporting that recovery was in sight. Almost always those judgments were based, not on the real economies in the world, what people were doing and producing and buying, but on financial indicators.

This present moment is very much based on some currencies in Asia that got hammered a year ago, have recovered a bit and now seem stable. Stock markets are reviving in some countries. If you look at the real economies, what's really happening to industry and commerce in those countries, they're still very negative. So I will feel like we may be coming out of this when I stop seeing unemployment rising in those countries, stop seeing so many bankruptcies increasing--indicators like that, the real health of the economy.

We have, what, 40% of the world in recession or depression still?

We have something like half the world in recession or depression. The German economy, which is one of the big [ones], has been contracting for two quarters now. People in Europe are very nervous about a European-wide recession. The U.S., it's true, keeps chugging along. On the other hand, we have a negative personal savings rate. People are spending more than they're earning, despite the fact that wages have been increasing. We have falling profit rates ...

If you were a person who had his or her retirement savings in the stock market, would you be worried?

Yes ... I'm among those who felt it was an inflated price bubble for a long time, several years, and it keeps going up, defying all sorts of predictions. Nevertheless, one of two things has to happen. Either the stock market will go down considerably. We hope not all at once, but dramatically ... or those people who have invested their money in the stock market are going to be disappointed by the return. Just simply by the arithmetic--if you paid an over valued price for a stock, you're going to get a smaller return than you anticipated. I don't think we can escape from one or two of those consequences.

... ultimately, the problem in the stock markets--you can argue over whose numbers you're using--but basically those stock markets are predicting a continuation of extraordinary profit levels, double digit profits from companies at the very time those profit rates are coming down and have been for a year and a half now.

Somebody's got to be wrong. I don't think it's the companies. They can see what's happening ... The collapse in demand in overseas markets and the falling crisis for goods ... that put a squeeze on American companies even if they aren't big overseas exporters, because you've got all these foreign goods pouring in here. It makes it impossible for a company to raise its prices. Probably it has to cut prices. That squeezes profits. If you squeeze profits long enough, then the company's got to cut back on new investment. You see you're in a chain of bad events. That's where we are. Maybe we'll glide out of it and bottom out and things will turn around, but I wouldn't bet my mortgage on that at this point.

Looking at the global economy, you think we're at a critical moment and that we have been for the last year or half year. What is your sense? What is it based on?

The critical moment that faces the global system now is: Will governments be wise enough to learn from these catastrophic events and reform the system? That is, impose some rules on, particularly, global financial markets, but some other aspects as well. Not to shut it down, but to keep it alive and moderate its pace and help countries protect themselves against the ravages of fickle financiers running in and out of their economy.

I am gloomy at the moment because I don't see much prospect of those reforms being done seriously in a timely manner. If they're not, then it is very clear that we'll be back in crisis, whether that's six months or 18 months or two years from now, I don't know and nobody else could say. But the fundamentals are now clear and we're not acting on them.

What do you mean by the fundamentals?

The core problem is that the world system, led by the United States, has pursued what is really a utopian idea. The idea that self-regulating markets, cut free from any moderating controls and regulations, will always correct themselves. That's a very alluring idea put out by the classical, neoclassical economists.

History has demonstrated repeatedly over 300 or 400 years of capitalism that it's wrong. That that's not what happens. Unregulated markets--their idea of equilibrium may be to swing widely back and forth at extremes. Sooner or later, they'll get caught in a period of wishful thinking or over investment, use whatever term you like. That illusion, bubble collapses and you've got ruin. General ruin.Then governments have to step in after the fact and say, "Well, we'll pick up the pieces because somebody's got to put the system back together again." That's the fallacy of the sort of liberalized system we've been pursuing. It's centrally about the global financial system, but it also is trading rules or the absence of trading rules. It's about labor rights. It's about social conditions, safety nets in poorer countries, as well as wealthy countries.

There's a rather long list of things that governments ought to be addressing. There is an argument underway. I think it's fair to say that a debate among learned economists and government policy makers, especially outside the United States has started. But, at least in the United States, rhetoric aside, this government has said, "The thing works pretty well. We had some catastrophes in Asia, but those weren't our fault. They weren't the system's fault. As soon as we get them straightened out, we'll be back on the upward path again."

Could you go back and talk about the end of World War II, the position the United States was in, the theories behind Bretton Woods--we had just been through one of these moments of financial crash in a big way.

At the end of World War II, we had two rare conditions. One, most of the industrial world, excluding the United States, was in ruin, including our allies in Europe, and, of course, our enemies, Germany and Japan. Secondly, we were still recovering in a sense from the depression of the '30s when a similar catastrophe took down everything, literally shut down the global trading system. That was a great opportunity for the United States to lead and to sketch out the new principles that would, first of all, get international trade going in the Marshall Plan, help rebuild Europe, similar program in Japan, help their industries come back to life ...

It was a rather broad program, but with a very conscious understanding that you do have to have some operating rules over this global financial system and over trade. Ideally, they should be liberal in the sense that they're open to all and fair, etc. But you can't just simply let the markets do it. It won't happen. So the centerpiece of Bretton Woods was a system of stable currencies. The stability was built around the guarantee from the United States that everybody's currency would be in relation to the dollar. If they liked, they could bring the currency in debt paper or whatever, and exchange it for dollars or exchange it for gold.

That system broke down in the U.S. inflation in the early 1970s. Since then, there hasn't been any operating regime. Currencies are on their own. They're subject to market prices every day. We know over the last 25 years we have had this extraordinarily destructive instability at the center of the global system. That is, in currencies themselves. You buy a product in yen one year and six months later it's worth 30% more compared to the dollar or 30% less. The same with the Deutsche mark. Then all of those smaller, lighter currencies, the gyrations are even more extreme.

So if you were going to reform a system now, you would begin probably not with the details of how to do it, but with some broad principles. How do we want the system? We would have to begin with some way of whether it's an institution or simply new operating rules that guarantees people and countries and companies that they're not going to be hostage to these wild gyrations in finance. Not just currency values, but the sort of free flow, the sloshing back and forth of speculative capital, of short-term lending, and all those other things. This is hard to do. That's why nobody wants to get their head into it. But I think present events demonstrate that if you don't tackle those problems, the instabilities will keep swaying back and forth. One year it may be Southeast Asia that's victimized by it and another year it's Latin America or Eastern Europe or maybe us. It's almost not meaningful as to who the target is this season. The question is the system itself.

Is it over-simplifying it to say that in the spirit of Bretton Woods, there was a recognition that if we wanted capitalism to thrive, we had to build in protections?

Yes, if you think back to the ruin following World War II, real existing capitalism had shrunk basically almost to the United States, with a few other outposts still alive and functioning. So part of the process of Bretton Woods was rebuilding a capitalist system that was convincing to people that they would actually participate in. That required some rules on the flows of capital that each nation had at that time and also some other guarantees about fair treatment for rich and poor. It was far from perfect, but over a period of years it functioned brilliantly.

You can't recreate Bretton Woods in the present circumstances, because the world is so different. But I think the idea ought to be the centerpiece now of what people want to do. Do you want to keep a basically free flowing, free running capitalist system?

Or do you want to see countries just pull out and retreat to either regional or localized trading situations and build walls and put on their own peculiar protectionist limitations? Or do you want to keep the system whole? ...

So is the core part of this debate whether or not some rules are going to be reestablished?

The debate is first whether there should be new rules, I mean, fundamental rules like controls on capital as well as some prohibitions, some rights for people and society, not just for businesses and financiers. But beyond that, there's an even richer debate underway over exactly what are those new rules that you would do. Some of them are fairly limited--like a poor country ought to be able to put on emergency capital controls. If foreign investors are playing this sloshing in and out game with them and they're about to collapse the economy, a country ... ought to have the ability to say fair warning.

These rules would exist and investors would know about them in advance. Say we're in a crisis situation. We're going to slow down, if not stop, capital outflows for the next 18 months until we get our books straight, until we get balance. That's a perfectly simple device. A few countries have such devices and they work fine.

A more ambitious scheme would say that we need some international institutions that can handle the exchange of finance and begin to build stable currency relations again. That's a much more difficult and long-term task. But I'm among those who think we ought to start now talking about it, at least, and arguing over its terms. It will take, in the best set of circumstances, years to actually create it. If you don't begin the discussion, however, you invite the regular protectionists, even reactionary responses. Believe me, these countries that have been hammered, those forces are unleashed at least in public opinion, if not in the government's. You can't do this to people and not expect them to react and to ask, "Wait a minute" ...

... So that's why I think the responsible task is to begin that difficult debate and begin it very publicly. Because one of my recurring themes is that you can't solve this problem with economists and bankers. It's got to be a much broader social, political debate, not just among the developed industrialized countries, but among the rich and poor ...

So the economic grievances become political grievances.

Yes, the economic grievances are already political grievances. That's not something people decide. It just happens in the natural course of events. That's why it seems to me it is so crucial for governments, especially ours, to focus on the fallout from these crises in different countries. That is not just the simple ones like: Are people getting enough to eat? But much more aggressive economic measures to start-up the real economy. That is get people back to work, get factories producing again, create markets that demand their goods. That's the real economy where people live.

If you simply concentrate, as governments are doing now, on straightening out the financial system and making financial investors feel secure and safe again, and let the real economy deteriorate like that, you're even widening the contrast in people's minds. I keep reading in the paper that Malaysia and Indonesia and Korea have recovered. I didn't recover. None of my friends recovered. Our country didn't recover. What are they talking about?

Mexico's a vivid example of this. Mexico got smashed ahead of the crowd in 1994 and '95. We have been reading the celebration for the last couple of years about Mexico's great recovery. The reality is, of course, that Mexico is about where they were two, three, four years ago, in terms of wages, in terms of employment, etc. The financial indicators look good again, but the people are themselves still bleeding. That is predictable, setting off really turbulent politics in Mexico. The ruling party, which has ruled for seven or eight years, may actually lose the presidency. That's if there's not a more violent reaction.

I mean, these are not complicated connections I'm making. History makes them again and again. If you ignore the reality of economic pain and aspirations and people come to realize the truth, you shouldn't be surprised if a few years down the road you get an ugly political reaction. That's what's happening around the world.

Yet, we, the United States, are claiming that Mexico is a great success story.

Well, it is if you're a banker or an investor or if you're an American multinational or a Japanese multinational who has built a factory in the maquiliadora zone that runs along the southern boundary of the United States. That zone is prospering and its exports are rising. In fact, contributing to our trade deficit here in the U.S. The banking system is still steeped in problems. But the stock market has started rising again and the currency looks stable. All of the little indicators of finance which reassure investors look healthy.

Then you walk the streets of Mexico City, for instance, and its crime rate is just out of control. Or you go out in the countryside and the peasant class that does small-grade agriculture has been devastated. You can go through the whole country. Small business, middle size manufacturing--they're still on their knees. We ignore that because that doesn't show up in the macroeconomic finance numbers. I think we ignore that at our peril ...

Let's go back to what you call ... "a poker game in the sky." Explain that to me--who's playing, who's winning or losing?

What I call the instability of currencies fluctuating dramatically, whether it's yen/dollar or dollar/Deutsche mark or the baht or the ruble is--makes what I call the poker game in the sky.

Almost nobody sees it clearly. Very few people even know that it's going on. It's played among governments, whether it's our Treasury Department and the Federal Reserve and the Bank of Japan and the Japanese Finance Ministry or somebody in Southeast Asia who's pegged their currency to the dollar and is hoping that will give them stability or, in Latin America ...

Almost all of it is done in private. Partly in fairness to the players so as not to alert the speculators that the game is even underway. The speculators usually find out anyway. What they're trying to do is make political understandings of "Okay, the yen is rising rapidly in value against the dollar. If we let that continue, the Japanese economy is going to be in the tank. So let's work out an understanding of what kind of range of relationships we'll try to maintain."

Then both governments, or maybe there are three or four governments involved, will do things like buy up one currency and sell another. They'll manipulate the market, which they're perfectly entitled to do, to try to hold that relationship. Something like stake--the stakes feed out to everybody else because in the present situation the dollar is very strong compared to all of those other currencies ...

That makes us more vulnerable to flows of imports, which in a sense is healthy, because that's the way these countries are trying to get out of their recessions. On the other hand, it wipes out a lot of American jobs in the process, and our trade deficit and debt accumulated get bigger and bigger. Sooner or later that becomes a crisis for us.

In another situation, we may have an oblivious attitude toward those countries in Asia, for instance, or some in Latin America, that decided, "Well, we can't play in that big poker game in the sky. So we'll just attach our currency to the dollar. Whether it goes up or down in relative value to others, we will promise investors that we're going to stick with the dollar. That's basically a guarantee to U.S. investors if you send our capital to our country, you won't be burned by a sudden change in currencies."

The problem with that common agreement, of course, is that as the dollar appreciates, those countries' currencies have to ride with that, too, whether it's the Thai baht or a peso in Mexico or whatever. That's when they break up. I mean, that's typical when they turn into a crisis situation because they can't sustain the reserves. Their economic strength doesn't justify the overvalued currency.

It makes their exports more? ...

It makes their exports more expensive and they get priced out of other markets, competing maybe not with the U.S., but with China or Vietnam or a dozen other producers of a similar status. When you talk about the poker game and its sort of smoky secretive qualities.

I see that as part of the fundamental problem in the global system. I'm not criticizing the Fed chairman or the Treasury secretary for doing their part in the game. They have to. They have no choice. But it leaves everybody else kind of guessing and wondering what's going to happen to the currency six months or a year or two years from now. It invites this constant attack from speculators.

The George Soros's and the hedge funds and big banks make a regular profitable practice of looking at that poker game and saying, "I think they got it wrong. They can't keep that relationship that's developed between the baht and the dollar or between the yen and the Deutsche mark or whatever. So I'm going to play off that imbalance that they're stuck with and wait for them to collapse or wait for them to quit the game and let the currency fall, whichever."

In this great global crisis that we're in now, that was the linchpin that set off everything else. But it goes on all the time. Soros doesn't just challenge poor countries. He challenges the Bank of England. He challenges the Deutsche mark and the French franc and others. I'm not suggesting that's an illegitimate practice. Given the currency system we have, in which nobody guarantees anything and there is no long term stability, of course, there will be speculators playing on the margins. That's the nature of the instability. Why not make a profit?

What is the "Washington consensus?"

The Washington consensus is a phrase that either the World Bank or the IMF concocted not that long ago, a decade ago, to describe the world finally coming to agreement that the Washington idea--that is the American idea of how the world ought to change as one of--if not unanimity, at least an overwhelming endorsement.

The Washington idea is trade liberalization. That is, doing away with barriers and tariffs and all of that stuff. These big trade agreements, the GATT agreements that come along every few years. But also liberalizing financial systems, breaking open each nation's banking system, capital markets, stock markets, bond markets, the whole smear, to foreign investment without any barriers or rules or whatever, and basically to harmonize the whole world in its national financial system rules.

Along with that comes an economic component, which is a very conservative, finance driven economic policy and orthodoxy which says, "You have to balance your budget ... You can't have an industrial policy for development. Basically, you've got to give up your sovereign government powers to this global system and trust the global system to lift you out of poverty."

The U.S. government and the IMF and the World Bank were wildly premature in suggesting that the rest of the world bought into the so-called "Washington consensus." It's true that Mexico and Latin American debtors and a lot of others, because they were in these desperate debt default situations, agreed under duress to do a lot of what the Washington consensus wanted. Mexico led the way in that and so did Brazil and some others. In Asia, there was more of a desire to cooperate with the Washington model of how things ought to work. But they were not so keen on surrendering their governing controls over economy and governing policy over which way the economy ought to go.

In any case, this laissez faire--in the rest of the world, it's called the neo-liberalism of the United States--has now met its great crisis because it demonstrably led to the present moment in which not only are countries collapsing, but the IMF itself doesn't have a very good idea of what to do about it. In fact, there are some destructive things in the pursuit of maintaining its orthodoxy, the Washington consensus. So one element of the debate underway now is surely it doesn't make sense for the entire world to play out of one playbook designed out of a particular history and culture called the United States, that surely there ought to be room for some variation ...

But take the Washington consensus ... the U.S. has been the lead preacher and this administration particularly so?

This administration is unique because it's a Democratic administration that totally embraced from the beginning not only the model of the Washington consensus and its principles, but the major constituencies for the Washington consensus--which are banking and finance, that is brokerages and so forth, and the multinational companies of the U.S., the Business Roundtable, the Fortune 200.

I think partly to demonstrate its sincerity, Bill Clinton and his Treasury secretary and his Commerce secretary and the whole bloody government were like cheerleaders at a football game as the booming Asian countries and others became targets for their policies.

I can't think of a single instance, of any importance anyway, in which the Clinton administration went against the desires of the private sector that it was trying to woo as constituents. That is, bankers, Wall Street finance, the Motorolas, Boeings and AT&Ts, and long list of major American multinationals. That was its trade policy. That was its global economic policy and in some ways, still is, despite the setbacks.

The Clinton administration coincided roughly with the end of the Cold War ...

There's a longer history that really starts 15 or 20 years ago, but what happened is the Clinton administration came to power, is that the fruits of breaking down financial controls in other countries, liberalizing some markets and lots of things, convinced Wall Street and global investors generally that this is the moment and we have to get into those developing countries ... and seize the opportunity.

So that sets off this huge flow of overseas investment. It's doubled, tripled in a matter of four, five years. The banks and the hedge funds and all the others are going the same way. This is just beginning as Bill Clinton comes to power. I don't know the inside discussion, but I read it as those people saying, "Here's the wave of our time. Let's get aboard and we'll ride and we'll transform not only the U.S. position in the world, but we'll also transform maybe domestic politics. We'll have a whole lot of supporters the Democratic Party didn't use to have."So it's a little bit opportunistic and it's probably also quite sincere and idealistic in that they thought this was the answer that they were going to embrace.

The assumption or the claim, right or wrong, that capitalism had in fact defeated communism ...

The investment boom, actually, was going to happen anyway in Asia. But it did coincide with the collapse of the Berlin Wall and the break up of the Soviet Union. This sort of big banner that everybody in the world could see, "State centralized communism is over." I actually think it had been over for some years as a functioning economy, but nevertheless that was the banner.So that you could look around the world and say, "Well, what's next?" What's next is pumping up these emerging markets and planting the U.S. flag and getting our American factories over there in China and doing whatever we can to advance that globalization process as the best, virtuous opening that capitalism has had for really 60, 80 years. That was the sort of historical motivation for a lot of enthusiasms that were quite shallow in terms of their understanding of what the rest of the world was like and what they were setting off.

What's an emerging market?

Emerging market is just Wall Street buzz talk. That's all it is. I mean ... you could argue whether there were 8 or 10 or 15 of them. It really only meant a financial market that was opened up enough so that you could go over there with a mutual fund or a brokerage and put some money down and have a fair prospect of a good return and that the money wouldn't somehow be confiscated. That the real economies in those countries were in gross patterns that looked very promising. They were going to be building all the roads, telephone systems, new factories, water systems, railroads. So that's all the emerging market means is a very poor country that's in the take-off stages of industrialization.

But it did become the buzz word in the ...

Well, it was a buzz word among financial investors, mutual funds, before it was embraced by Wall Street. But what happened is, government policy makers always have to put it in capital letters. So the Clinton administration, one of the first things they did, and it seems ludicrous now, was to create a list of BEMs (big emerging markets). This came out of the Commerce Department. I remember wading through the stacks of papers ... in which they were convincing themselves that this was the strategy of the future, the big emerging markets. They had 10 at first. You can look back nostalgically at that list, because I don't know how many of them are now gone blooie. The first one Mexico, then Brazil or Indonesia. India's still upright. Russia was on the list. I'm forgetting some. China is still standing, but wobbly.

So it's probably now, at best, five BEMs instead of 10. But not to make light of their purposes, they had all of this documentation, some of which was undoubtedly true, about the prospects for sales in those countries ... It was that energy that the Clinton administration picked up on and crystallized in their own strategy, which was simply a strategy of we'll do whatever it takes to help the multinationals and the brokerages and investors and banks get into those countries and make hay while the sun was shining.

[Mexico] was one of the early darlings of the financial markets. What was the simple basis of the financial boom there?

The explosion in Mexico of economic boom as it was called--the Mexico miracle, remember that? [It] was not exactly total fiction, but it was never quite what [was] described by financial cheerleaders, including a lot of the media. There was certainly a surge in foreign investment. That is, our financiers sending money to Mexico. Mexico, it was true, had liberalized. That is, it accepted the rules of the global economy, partly to get out from under its debt problems in the late '80s. Then we were negotiating NAFTA, which was really not as much about trade as about financial rules. It was opening Mexico to American banks and American brokers, investors with some guarantees.

So you've got this run-up of financial crisis in their markets and fabulous returns for two or three years to mutual funds. If you parked some money in a mutual fund in 1989 and took it out in 1992, you might get an enormous return, 30%, 40%, 50% maybe. So that was real. Underneath it, however, was a very antiquated, disorganized, not modern economy. Anybody who knew anything about Mexico understood that. So governed by a one-party political system, full of corruption, in which drugs were only the latest variation, the political mix with the companies and the banks, was and is quite intense. That's the way Mexico operated ...

So into this stew comes this American enthusiasm. A lot of Mexicans bought into it, too. But when you look back, it didn't take a lot of hindsight. And smart financial people understood it when it was happening. The real fuel for that boom was a very simple reality in global finance, which is called interest rate arbitrage. We had at that moment in the early '90s lower, relatively low interest rates in the United States because the Fed was still trying to help banks get out of their troubles, our banks, and also get the economy going again. So if you borrowed money in New York at 3% and took it to Mexico and invested it in stocks or bonds or even directly in companies, you could expect a return of at least 8%, 10%, and maybe 20% or 30% if you hit the right bells. So, of course, people did that. The more they did that, the more Mexico boomed.

When did the boom begin to break up? In 1994, when the Federal Reserve started raising U.S. interest rates. As the 3% rate became 4%, then 5%, then higher, that profitable gap for investors simply disappeared. By the end of the year, it was virtually gone. It took some months for that to happen. When it was gone, people said, "I think the bloom is off the boom." At that point, the peso collapses. It tried to devalue it a little bit and it collapsed a lot because everybody wants out of Mexico.

I'm not suggesting that every investor was conscious in a rational way of the dynamics underneath their investments. Of course, they weren't, or they would have been wiser about it. But that was the driving fuel for the whole episode ...

So the American investors, financiers, basically they're not making these huge profits that they were making. So they just start looking around for someplace else to go.

Yeah, what happens when you lose that free ride of interest rate differences around the world, it begins to evaporate on you, you simply look around for better opportunities. Sooner or later, somewhere you find one. So you pull out of Mexico, or you stop sending more money to Mexico.

Fundamentally at that point, Mexico, both government and private enterprise, had built up this huge accumulation of debt, especially short-term debt, on the belief that this will last forever and there will be more money coming from Washington or New York, wherever. So when the flow turns into a trickle, they've got big problems. That's essentially the trigger for the collapse of the peso and all of the other economic ruin which followed.

The trigger had nothing to do with Mexico. It was a financial adjustment in the United States.

You know, if Mexico were a different kind of government and the banking system were more diverse and honest, to be blunt, they would have had more sense of what was happening and probably been more prudent, but they weren't. They had this big guarantor who stood by them for the last 20 years and protected them and bailed them out a couple of times called the U.S. government.

So I can't blame them for being euphoric about their situation. They were going to ride it as long as they could. I mean, in fairness, the Mexican government did see this coming. They thought, "Well, we'll wait until after the 1994 election and then we'll devalue it," sort of tell the truth to the folks a little bit at a time.

What happens then is that the Wall Street investors, including some very big brokerages and banks, who don't understand what's going on, who think this really is a new age, suddenly wake up and see their investments in Mexico cut in half or 20% or 30% overnight and they want out. So they're all running for the door, pulling their money out. That really collapses the peso and the Mexican economy.

At that point, who enters but the U.S. government and the Federal Reserve through the good offices of IMF to rescue Mexican financial markets and their currency. Really, I have to say bluntly, [it was] for the benefit of those U.S. investors so they can get their money home without horrendous losses. Mexico was a pretty good model for everything else that's followed in the last three years.

The only thing that's different is that because investors got out of Mexico safely and the Treasury and the White House congratulated themselves on their sound management of this crisis--it sounds so unreal now--but they literally convinced themselves that, "Well, we're the managers of the world and we're doing a pretty good job. So we've taken care of that. That won't happen again." When, in fact, the message was the opposite. If you're going to step in and bail these guys out who made bad bets in overseas investing, you simply encourage them to do it again.That is the predicate that leads to the breakdown of Southeast Asia in 1997 and that spread throughout the world and in some ways it's still spreading.

Explain how the bailout allows the investor to go scot-free or get their money out.

Every case is a little bit different. So it's hard to know who got home scot-free and who lost some money. But it's very clear that if the U.S. and its agency, the International Monetary Fund, hadn't intervened with lots of big loans to Mexico, most all of those investors would not have been able to get out at all.

The reason for that is when you're going from, say a U.S. investment to, say a Mexico investment, you're basically changing dollars for pesos. So you've got that money parked in Mexico City as pesos. It loses half of its value relative to the dollar. So when you want to take it out, you lost 50% of your original wealth.

In a crisis like that, however, the Mexico ... government has reserves which facilitate that transaction and make good on it ...

That's what we lent to, principally, was to the reserve funds in Mexico so that they could ease people's way out the door. Also build enough confidence in financial markets worldwide so that the peso would (a) stop falling and (b) come up not all the way to whole, but at least some of it up ...

So there's a little bit of truth to that objective, right? If the governments do nothing, the system could indeed unwind and just freeze up and stop functioning all together. On the other hand, the government doesn't say that about anybody else in this society. It doesn't say that factory workers who are laid off or farmers. It doesn't say that to small businesses that go down.

So as a political system, it is very one-sided. These high flyers from Wall Street go around the world sniffing out hot prospects, make their money. Then if they're wrong, if they get burned for any reason, our government, the Federal Reserve, the IMF feel a responsibility to help them out of their troubles.

That, of course, is one of the things that's got to be reformed. You can't go on like this. As long as these big banks and other major investors feel that, in the end, they're going to be covered by not just the U.S. taxpayers, but the German taxpayers and the Japanese taxpayers, pooling their money, they will continue to do reckless things because they're not taking the full price of their risk.

Who ends up having to pay back this loan, which we have so generously organized for the Mexican government?

By my lights, the biggest injustice, the cruelest injustice of the present system is not to the U.S. taxpayer. Americans are relatively pretty wealthy. It's to the people in those developing countries. They're the ones who pay the price for all this. Indirectly, to be sure, because their factories are closed, their wages have fallen because of the devaluation, their economy goes into a recession or maybe worse. They take years to get back to where they were before this bubble burst ...

In the other sense, the IMF comes in and makes it even worse by telling these governments, "In order to get back in the good graces of the global financial markets, you've got to do the following things. Lay off more workers, close down more social programs, cut off government spending for things we don't regard as worthwhile." That, of course, just spills the pain deeper on the people, but also on the economy. It just guarantees that the economic recession that was probably now baked in the cake anyway will now go much deeper.

In the present crisis, the IMF has demonstrably deepened the pain and the economic loss, real loss, accountable losses, for all of these developing countries than was probably necessary. It did that because it was following the Washington consensus, notions of how do you balance financial accounts? How do you get things right so that the bankers will trust you again?

If that were the only thing that mattered in the world, as they pretend, you could accept their logic maybe. But, of course, it's not. What happens is they hammer the economies down further than was really called for. Leave aside the pain and suffering of people, real people, because of that, you have now made it harder for that country to get back to a viable, balanced financial system ...

Who does the IMF represent? You have this phrase that they're the "bankruptcy cops" ...

The IMF, in theory, is responsive to all of the economies of the world, and especially, of course, the wealthier economies like ours, which fund it. The U.S. is the biggest funder. In reality, it really has worked for the last 25 years as a kind of bankruptcy cop for investors from the wealthiest countries, the U.S. and Europe and to a lesser extent Japan.

A country gets into trouble, whether it's deficits or inflation or debt or a currency that's devalued, and the IMF comes in with its program and says we'll lend you money if you'll do the following things. Very much like a bankruptcy judge who says to the debtor who's filed for Chapter 11, "You can keep your business open" or "We're not going to take away your house, but you've got to do the following things." Those rules are to get the money back for the creditors. That's exactly what the IMF does. Except it then lends a big batch of money and enforces these rules by doling the money out a bit at a time.

So that it becomes this, I think, quite lopsided and perverse relationship where the IMF officials fly in every couple of weeks, or if not more often, and check the books and check the country and say, "You're not doing this right. Close those banks. Close these companies." Very kind of imperial relationship really [between] Western capital, including the U.S., and these poor developing countries. Believe me, that's the way it's seen in a lot of these countries.

What is the relationship between the IMF, the United States and the United States Treasury?

Well, the Treasury and the White House always, of course, deny this, but the reality that everybody understands in this field of global finance, is that the IMF takes instruction from the U.S. Treasury secretary. That is because we were the founder of the institution 50 years ago with Bretton Woods and because we are the principle financier, not the only one that funds it. Because this relationship accompanied the Cold War for so many years. Others deferred to the U.S. view of things ...

Nothing the IMF does of any importance happens without Robert Rubin checking off and saying, "Yes, I accept that or I don't," or whatever. Of course, that often ends up at the White House as a decision of the President, because the U.S. government, especially Bill Clinton, but his predecessors as well, are so committed to this laissez faire orthodoxy for the world, the Washington consensus and the notion that we all win if we just keep taking rules off of the table and let the market solve these things. Because we, as a country, are the promoters for that idea, the IMF almost never strays from it as well.I can't read minds at the IMF, but it's conceivable that some people there really do want to do it a bit differently, but that nothing will change until the U.S. government says, okay. That's part of the impasse worldwide. A good many other governments have now started public discussions of, "How should we reform this system?" They have a variety of ideas, some modest, some grand. The U.S. has basically given the back of the hand to all of them.

So we're defending the orthodoxy.

We're defending the status quo, even as it doesn't work ...

What is the attitude in other countries about the Washington consensus?

Well, it's very complicated because there is a sort of love/hate, at least I've found, around the world of people, not just poor people in countries wishing to become less poor, but also in the wealthier countries, France, Britain--not Russia, but Germany and other Europeans, Japan.

The love/hate has a deep ambivalence attached to it. It's admiration on the one hand for the country and its accomplishments and inventiveness and openness and all of the qualities that we value. On the other hand, in many places they would say, "We don't want to become like the United States. We know how your system works. We know the deep inequalities and the fact that you just ignore a lot of social problems and public values. We're not going to become like that."

... It's probably a general feeling among others that we are arrogant towards the rest of the world. I think that's right. We have a kind of virtuous self-congratulatory assumption that we figured out all these things. So, therefore, the other countries will get wealthy and be like us as soon as they start behaving as we tell them to do. I don't think Americans generally feel that way, but I think the people at the Treasury Department and the Federal Reserve and the White House feel that way.

Back up for a second and talk about how these countries become vulnerable because they want into the club, into the system ...

Well, I think typically, not just in the last 10 years, but even the decade preceding, the U.S. has very effectively used the leverage of a creditor to pry open countries that were deeply in debt for whatever reason--Mexico's the best example of that--and say, "If you want to get well, here are the rules you've got to play by." It's done slightly more diplomatically than that, but that's the essence of the transaction.

Likewise in Asia, we have been hammering on a number of countries for years to take our rules, and some of them have resisted for years. What was different in the '90s was that in this investment boom, any of those Asian countries, whether it was Malaysia or Korea or whoever, could look around and say, "Wait a minute. This is really different now. We're really getting flows of foreign capital. If we don't play by the rules, they'll just go to Indonesia or India or Vietnam or China."

So there was a kind of competitive pressure there, which we then exploited as a government. The U.S. government in numerous situations played hardball and said, "Hey, if you want to stay in the club, you better liberalize your banking system along the terms that we say. You better remove your capital controls so that we can go in and out on our terms, not your terms." A lot of other complex changes. That happened in Indonesia, in Malaysia, Thailand, Korea and to some extent in Japan ... But this is a complicated story and you can't lay cause and effect neatly on the table as A caused B, because it's always more complicated than that.

But the fact is, South Korea would have been far, far better off and would have undoubtedly not have had an economic crisis if it had not taken the American demands to open up its capital markets as it did in the 1990s. South Korea's motive was pretty obvious and well understood ... They wanted to be treated like a big boy in the world. They wanted to get membership in the OECD organization of industrialized countries. The price was set for them. "If you want to be one of the big boys, here's what you've got to do" ... So they paid that price. That was the predicate for their financial collapse. It literally made them vulnerable to global financial flows in a way they hadn't been before. There were similar less dramatic transactions in Thailand and Malaysia, very much like that ...

So when the contagion begins to move through the Asian countries, there's Korea wide open.

Yeah. You know, nobody walks away utterly innocent. You can say in Korea's case, well, they borrowed too much money. Yeah, of course. But what gets left out of that discussion is who lent them too much money? There the culpability was international. It wasn't just the U.S. It was Japan. It was Europe, some others. For every failed debtor who was operating on half-baked illusions, there's a banker who was operating on the same half-baked illusions.

Only the way this world works, the U.S. government, the Federal Reserve, the IMF and others step forward and say, "Well, we have to help this banker get over his pain and suffering. Because if we don't, he won't lend money again and become a player again the way he was." That seems to me utterly illogical as a way to run the world, not to mention unjust, because we don't say to the debtor, "Let's help him."

Part of helping the banker in these situations is, we punish the debtor further. I mean that literally. We then increase the pain for him. Whether that's removing government spending and social subsidies or driving his industry into deeper bankruptcy ...That's the reality that we're seeing around the world now, that you're literally punishing innocent bystanders who didn't borrow the money, who didn't make the deals, who are just trying to make a living in a society that's already not very rich and quite poor, you're punishing them further in order to make global capitalists whole so that they will keep on being global capitalists. There's got to be a better way.

Let's go back, specifically to Thailand ... and how this thing gets started ...

If you look across the '90s, you see this extraordinary boom in lending and investing in these so-called emerging markets. Plus development in the U.S. and Europe and Japan and new production. Some people, myself included, said, "Well before this crisis began, something is going to break down here. This system can't go on like this because they're building too many factories, hotels and office buildings, etc."

In early 1997, investors like George Soros and the hedge funds, who have a sharp eye for instabilities building in the system, focus on Thailand and begin betting that Thailand is going to have to devalue its currency, because it's borrowing too much money. Its exports are falling because its currency is overvalued. Therefore, it's losing market share to Japan or China or whoever.

So they start betting that there's going to be a currency devaluation, at least, if not a collapse. Of course, the fact that the big money starts betting against the currency often has the effect of fulfilling the prediction because it does weaken the currency. The Thai government has to then spend more of its reserves to prop the currency up and eventually it reaches a point of exhaustion and then you get a crisis of collapse. That was the trigger for all of the events that followed. But it wasn't Thailand's fault. It simply happened to be in the crosshairs first.

Soros doesn't act alone ... Soros is shrewd and powerful, but he can't move the system by himself ... his power is amplified because all of these major banks, the ones in Wall Street, the ones in London, Frankfurt, even Tokyo, are putting chips down on his bet.

The system of speculation, in fact, is not just hedge fund rogues. It's the biggest financial institutions in the world. They all make money on it. If you look at the balance sheet of Citigroup or Chase Manhattan, you will see huge profits from speculative play. So they're all in the same world.

So then the run starts on the Thai currency, essentially. What happened?

What happens when a currency like Thailand cracks is that everybody who didn't see it coming suddenly turns white with fear and runs for the door. I mean that almost literally. Their first impulse is to get out. Because they're all trying to do that at once, that drives the currency or the stock market or whatever down even further, more dramatically, and very quickly, in matters of hours or days.

In the case of Thailand, their crisis spreads like a contagion only because these same panicky investors then look around and say to themselves belatedly, "Well, where else do I have some money where this might happen to me?" So they see Malaysia and Indonesia have at least the outlines of similar problems. If not as severe, there are at least questions you could ask. So they just cover themselves. They say, "Well, let's get out of Malaysia and Indonesia." Then they look at Korea. At some point, this is not necessarily a rational calculation. It's simply, "I don't know who's going to be in trouble next. I'm going to get out of all of these developing countries." Or, "I'm just going to reduce my position there until I see where this storm goes next" ...

Are you optimistic or pessimistic in terms of ... the part of our decision makers?

I'm deeply ambivalent about our leaders. Especially the policy debate, because some things I wrote in a book two or three years ago were widely, if not universally, dismissed and disparaged at the time by economists, are now the grist for this debate and get talked about in very conventional places.

On the other hand, America, especially because of the peculiar way we have flourished amid everybody else's trouble, is in danger of its own hubris of getting lost in this sort of self congratulation that, "We're right and everybody else is wrong; therefore, we don't have to worry about this anymore. It's their problem. They'll have to be like us or they'll just suffer." I think that is so wrong, not to mention cruel, way to look at the situation. But it's an easy out for powerful people.

I mean, if you go back to how our government and Wall Street reacted to the crisis that unfolded first in Asia, they plucked a lot of good cover stories to explain this to the American people and to explain it to themselves. They said, "This is crony capitalism. It's because their banking system doesn't have good rules like our banking system. It's because their stock markets are full of fraudulent values, whereas ours is full of sound values," and so forth. The whole argument was, "It's not our fault. It's their fault. We'll just go on without them if they don't want to get with us."

First of all, you can't have been watching American politics for the last 15 or 20 years without recognizing that crony capitalism is very much part of the American system. I'm talking about the close, intimate and financial connection between Wall Street, for instance, and our government. Not just the fact that the Treasury secretary used to run Goldman Sachs, but the fact that the Congress and this president, especially, have been financed in large ways by Wall Street and it shows in their policies. Favors are awarded through the federal government all the time, not to mention state and local governments, to particular industries and sectors. That looks very much like crony capitalism to me.

The second part of that is that it allowed people not to face any of the bigger questions, to say, "Wait a minute. There's something wrong here. Let's start having a serious discussion about what's wrong and argue over how to fix it." The establishment in America, and there is an establishment, has pretty much evaded that debate in public.

Now, it's true that in private some of those people are wringing their hands and worrying sincerely about what has to be done. But I don't think you should reform this system in the back room. It's got to involve not just the American public, but the Europeans and the Japanese and all of those poorer countries that have been dragged down. I don't think we can solve this with a few conferences and discussions in Washington and New York.

But you're not seeing much of admission of our culpability in any of those ...

With a couple of eccentric voices excepted, I don't think any of the elite in America, whether they're academic or government or financial or business, have been willing to face the deep implication that in some ways, despite our good intentions and our beliefs, we helped cause this crisis. By that I mean we pushed the Washington consensus on countries that weren't ready for it. We promoted the stern medicine. We promoted the illusions of these booming emerging markets that were going to make everybody rich if we just got in.

In this new global system, who has the power? Who's in charge?

Once national governments have retreated from exercising power--that is, repealed their controls on capital flows in and out of their economies--the markets are in charge. That started gradually in the early 1980s and then accelerated so that by the time we got to the '90s, it was the big reality. The easy way to see this is the central banks, the biggest ones, are allegedly in control of things and that's the popular mythology.

In the early '80s, the Federal Reserve and the BundesBank and three or four other major central banks had reserve assets ready to deploy to protect currencies or do whatever they had to do. There were probably two times, three times larger than the daily market, financial market activity around the world.

By the early 1990s, the relationship is reversed. The financial activity has grown so ferociously and fast, whether it's currencies or international bonds or lending or whatever, that it now dwarfs those central banks. So that one financial expert said to me, "It's like people going out with a pea shooter to hunt elephants." The central banks have to pretend like the pea shooter is going to hurt.

But, in certain circumstances, the markets will roll over everybody, including even the Federal Reserve. That's yet another reason why we've got to put some moderating controls on this system. Because I think what events have demonstrated clearly is that, by their nature, financial markets are both unstable, that is they're prone to change this way and that.

But also they're not going to make any more political decisions for the rest of us. They can't. Again, that's not what they do. That means you've got to have a government presence, some rules, some operating rules, which at least moderate their excesses and punish them for their recklessness.

So when they all decide to act ... if everybody's in on the same bet ...

Yeah. I mean, George Soros can't topple governments by himself and Citibank can't and Barclay's can't. But what happens when they're all playing in the same direction, betting against a major currency, for instance, they can even overwhelm central banks and even the Federal Reserve in the right circumstances. Because they can literally deploy more investment capital going in one direction than the major central banks have to counter them, that's an unreal situation when all the leading governments of the world have agreed to not exercise their power and turn it over to unregulated financial markets, which is essentially what's happened.