International Financial Crises Increasingly Take Priority Over Most Traditional Security and Foreign Policy Problems, Concludes New Council on Foreign Relations Book

January 8, 2003

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September 7, 2001 - What if you took seventy-five of the most experienced professionals in the fields of finance, economics, foreign policy, and national security and confronted them with two dozen policy problems triggered by a massive contraction in the stock markets? That was the premise of an unprecedented simulation conducted by the Council on Foreign Relations, and the subject of Council Fellow Roger Kubarych’s new book Stress Testing the System: Simulating the GlobalConsequences of the Next Financial Crisis. This book captures the way in which the simulation was organized and played out at a time when the U.S. stood at the pinnacle of the 1990s high-tech boom.

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The major conclusion that flows from the work of Kubarych and his colleagues is this: when there is a shock to the international financial system, U.S. policymakers will deal with the financial crisis first, even when there are other foreign policy and security concerns at stake. Because the strength of the U.S. economy is so critical to global prosperity and to the financial health and political stability of most nations, without first restoring stability in the markets and reducing the potential for subsequent negative economic consequences, policies to address other problems will be less effective.

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This hypothetical crisis helps us better understand the ripple effects of recent financial troubles. Crises reverberated through Mexico in 1994-95, Asia in 1997-98, Russia and Brazil in 1998, and, just recently, Argentina and Turkey. In every case, what began as financial traumas soon broadened out to infect the economies, and almost always the political systems, of these countries. Even the United States, largely spared financial trauma during the past ten years, is beleaguered by the precipitous drop in the high-tech equity sector, and people are uneasy about the U.S. economic outlook.

The Council’s simulation was an exploration of financial vulnerabilities and their connections with broader economic, foreign policy, and national security considerations. It assumes that economic and market forces will play an increasing role in the setting of policy objectives, priorities, strategies, and responses. The aim was to challenge a group of experts to work through the options and constraints facing the U.S. government in the aftermath of an unforeseen financial crisis beginning in the United States and spreading throughout Latin America, Europe, Asia, and the rest of the world.

This book is more than a revealing account of the lessons and implications of time - and crisis-pressured decision making: it is an instructive guide for how best to organize business and financial "war-gaming." Kubarych provides an insider’s look at the collaboration among great minds that led to a successfully crafted scenario that was played out with real-world accuracy.

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Stress Testing the System: Simulating the Global Consequences of the Next Financial Crisis is a Council on Foreign Relations book.

SIMULATION PARTICIPANTS

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Elizabeth Allen
Zurich Scudder Investments

Diego Arria
The Columbus Group

Mario L. Baeza
TCW/Latin America Partners, L.L.C.

Brandon Becker
Wilmer, Cutler & Pickering

Nicholas F. Beim
Matrix Partners

Richard K. Betts
Council on Foreign Relations

Kathy Finn Bloomgarden
Ruder Finn

Nicholas A. Bratt
Zurich Scudder Investments

Deborah K. Burand
Finca International

Robert Carswell
Shearman & Sterling

Derrick Cephas
Wickersham & Taft

William Clark
The Japan Society

Sam Y. Cross
Columbia University

Jack David

Hans W. Decker
Columbia University School of International & Public Affairs

Robert E. Denham
Munger, Tolles & Olson

David A. Duffié
USN Military Fellow 1999-2000

Simulation Assistant Project Director

Thomas R. Donahue
Work in America Institute

Jessica P. Einhorn
Clark & Weinstock

Hani K. Findakly
Potomac Capital

Peter R. Fisher
U.S. Department of the Treasury

Benjamin M. Friedman
Harvard University

Richard N. Gardner
Morgan Lewis & Bockius

Leslie H. Gelb
Council on Foreign Relations

Richard K. Goeltz
American Express Company

David F. Gordon
National Intelligence Council

Martin J. Gross
Sandalwood Securities, Inc.

David D. Hale
Zurich Financial Services

Charles B. Heck
Trilateral Commission

Paul Heer

John G. Heimann
Merrill Lynch & Co., Inc.

Robert Helander
Kaye, Scholer, Fierman, Hays & Handler

Andrew Hilton
The Centre for the Study of Financial Innovation

George Roberts Hoguet
State Street Global Advisors

Gary N. Horlick
O’Melveny & Myers

Robert D. Hormats
Goldman, Sachs & Company

Yves-Andre Istel
Rothschild North America, Inc.

Jerome Jacobson
Economic Studies, Inc.

Merit E. Janow
Columbia University

James R. Jones
Manatt, Phelps & Phillips

David Kellogg
Council on Foreign Relations

Brian Kenny
W.R. Grace & Co.

Andrew B. Kim
Sit/Kim International Investment Associates, Inc.

Lawrence J. Korb
Council on Foreign Relations

Roger M. Kubarych
Council on Foreign Relations

Simulation Project Director

Edward A. Kwalwasser
New York Stock Exchange

Roger S. Leeds
Paul H. Nitze School of Advanced International Studies

John A. Levin
John A. Levin & Co., Inc.

Marc Levinson
J.P. Morgan Chase & Co.

Bevis Longstreth
Debevoise & Plimpton

Omotunde A.J. Mahoney
International Asset Transactions

Martin Mayer
The Brookings Institution

Walter Russell Mead
Council on Foreign Relations

Irene W. Meister
Irene Meister & Associates

Nancy S. Newcomb
Citigroup

Seamus O’Cleireacain
Columbia University

Scott E. Pardee
Middlebury College

Ernest T. Patrikis
American International Group, Inc.

Michael P. Peters
Council on Foreign Relations

Peter G. Peterson
The Blackstone Group

Gerald A. Pollack

Richard Ravitch
Ravitch, Rice & Co.

Gideon Rose
Foreign Affairs

Hal Scott
Harvard Law School

David Shirreff
Euromoney

Robert Solomon
The Brookings Institution

Maurice Sonnenberg

Benn Steil
Council on Foreign Relations

Gordon C. Stewart
Insurance Information Institute

Bruce Stokes
Council on Foreign Relations

Cynthia A. Tindell
Credit Suisse First Boston Corporation

Bernard E. Trainor
Council on Foreign Relations

Edward E. Waitzer

Tatsuo Watanabe
Ministry of Finance

John C. Whitehead
AEA Investors Inc.

Melvin F. Williams
Salomon Smith Barney Inc.

Alan Wm. Wolff
Dewey Ballantine

R. James Woolsey
Shea & Gardner

Guy Patrick Wyser-Pratte
Wyser-Pratte Management Co., Inc.

Fareed Zakaria
Newsweek International

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