Compare and Contrast: The 1997 Asian Financial Crisis and the 2008 American Economic Crisis - Coursework Example

Compare and Contrast: The 1997 Asian Financial Crisis and the 2008 American Economic Crisis The 1997 Asian Financial Crisis After almost a decade of prosperity that started in the early 1990, the South East Asian countries comprised of Thailand, Malaysia, Singapore, Indonesia, Hong Kong and South Korea were plunged into an economic crisis. The local stock markers and currency markets fell. The local currencies of each South East Asian nation was devalued against the United States dollar. Prices of basic commodities and goods were high while the standard of living became low due to the high value of the dollar against the local currency. The economic growth experienced by the aforementioned countries before the 1997 economic crisis was quite impressive as shown by a GDP of 6% to (% annually. The drastic turn of events could be attributed to common economic factors that held the economy together for quite a while. These factors are (Hill, pp.1-20): 1. A combination of inexpensive and well educated labor force. 2. Export oriented economies. 3. Falling barriers to international trade. 4. Heavy inward investments by foreign companies. 5. Government directed investments. 6. Poorly regulated financial system that led to over investment, excessive debts and financial crisis. The outsourcing of foreign companies that invested its operations in many Asian nations has transformed them into “export power houses” in the South East Region (Hill, pp. 1-20). As expected there was an investment boom from within and outside the countries due to the jobs it created and the exports made outside the countries. Residential and commercial real estates soared and construction of infrastructures like office buildings and apartments were mushrooming on the entire region. Likewise heavy borrowings from banks to finance said construction were made and the banks and other financing institutions were open to lending so long as the property values continued to rise. In the industrial sector, the Asian exporters who were emboldened by their continuous success made more bigger financial investments. Alongside this is the intrusion of government funded projects that were made up of large infrastructures, while encouraging private entities to invest in various sectors of the economy to attain industrialized goals. While Korea did enjoy an unequaled economic boom from 1994 to 1995, they were often reliant in heavy borrowings or loans that were actually four times bigger than their actual equity or capital. In Malaysia, the governments has likewise encouraged investments on semi-conductors and automobile industries. Indonesia on the other hand had its governments network of business ventures that were supported by the Indonesian banks in the form of loans. Thus, majority of the up and running businesses were financed by borrowed money. As a consequence, the heavy investments on industrial assets and real properties has created a phenomenon of excess capacity and decreasing prices, which left companies who made huge investments with large debts and overhead costs that they cannot meet. And since most of the loans borrowed were paid out in United States dollars, the original size of the debt was made larger due to the depreciated value of the local currencies in the region. When the Asian economic crisis started in Thailand on February 5, 1997, it had a domino effect on the other countries in the whole region. Currencies were made to float against the dollar thereby losing a valuable percentage of their buying power, while others continued to have a depreciated value against the US dollar. The impact of the Asian financial crisis in 1997 posses a risk for investors to invest in a developing country (Hill, pp. 1-20) because before the economic crisis happened in 1997 the region was consider to be a typical economic hub. The negative effects will have a tremendous impact on the companies which have major operations and investments in the region. However, the crisis aftermath would provide the South East Asian countries a new avenue of reforming their respective economies and to initiate needed restructuring meted by the IMF (IMF, pp.1-10) While the setback has put a large dent in the regions economic growth, the experience if any would aid in the pursuit to gain a more sustainable economic growth in the future (Hill, pp.19-20). The 2008 American Economic Crisis According to the IMF (pp.1-10), the united states would fall into a “mild recession.” the mortgage crisis that started last August 2007 and is estimated to overflow on the global economy in the next twelve months (Stewart, pp1-2). The US sub-prime mortgage market was hugely affected by the continuous fall of housing prices. Banks who backed up or provided the loans that were invested in the building of homes or houses were vastly affected by the economic down drain (Stewart, pp.1-2). According to Steffy ( pp.1-2), the current American crisis is a systemic failure that is caused by a combination of three or more economic factors such as: 1. Collateralized-debt obligations 2. Credit default swaps 3. Flimsy market regulation and 4. Credit ratings In relation to the above,the following causes according to Miller et al, (pp.5-6) are the true causes of the present economic crisis being faced by the United States: 1. The Federal Reserve – it slashed interest rates after the co-com bubble burst forcing credits to become cheap. 2. Home Buyers – people or homeowners who took advantage of having an easy credit to cause the bid on home prices to rise excessively. 3. Congress – the House continues to support a mortgage tax deduction which provides consumers to buy more expensive homes 4. Real Estate Agents – who work for the sellers and who earned high commissions from the sales of an expensive house. 5. The Clinton Administration – because it paved the way for less tight credit and down payment requirements for working and middle class families. 6. Mortgage Brokers – who offered less credit worthy houses and homes; adjustable loan rates and low initial down payments, but has high interest rates. 7. Former Federal Reserve chairman Alan Greenspan, who encouraged Americans to take out adjustable rate mortgages. 8. Wall Street firms, who did not consider the quality of the risky loans that they bundled into Mortgage Backed Securities (MBS), and issued bonds using those securities as collateral. 9. The Bush administration, which failed to furnish appropriate information on the increasingly unsafe mortgage-backed securities market. The 2008 United States sub prime mortgage financial crisis is more or less like the 1997 Asian Financial Crisis in terms of causative factors. The sub prime crisis is defined by lessened or narrowed liquidity in the global credit market and banking system. The presence of the crisis may have been present for an extended period of time and has just blown over due to risky practices in lending and borrowing and excessive individual and corporate debt. As a result of these hazardous economic activities, homeowners were unable to pay their monthly or scheduled mortgage payments that is why they have have to give up their homes by selling them or through foreclosures. The poor judgment of the borrower and lender or both due to the speculation that the market s price will continue to rise and the policies and regulations of the banks and other lending institutions were quite lax. Thus, they have not rebounded quickly because of the large amounts of investments that were made. And just like any other forms of financial crisis, this phenomenon will level out in time. Although huge losses in terms of investments is a normal consequence of a crisis, after the United States had its period of adjustment, the US economy and the world economy in general will be better. References Hill, Charles W.L. The Asian financial Crisis: University of Washington. October 12, 2008. http://www.wright.edu/~tdung/asiancrisis-hill.htm IMF. January 1999. The IMFs Response to the Asian Crisis: A Factsheet. October 12, 2008. http://www.imf.org/external/np/exr/facts/asia.htm Miller, Joe, Jackson, Brooks. October 1, 2008. “Who Caused the Economic Crisis?” October 11, 2008. http://www.factcheck.org/elections-2008/who_caused_the_economic_crisis.html Steffy, Loren. October 1, 2008. “Blaming Fannie and Freddie Ignores the Real Cause of Crisis.” October 11, 2008. http://blogs.chron.com/loresteffy/2008/10blaming-fannie_1.html Stewart, Heather. April 9, 2008. IMF says US Crisis is “largest financial shock since Great Depression”: Guardian.co.uk. October 11, 2008. http://www.guardian.co.uk/business/2008/apr/09/useeconomy.subprimecrisis Read More