Asian Financial Crisis Versus Global Financial Crisis - Term Paper Example

Introduction This paper is about the ongoing Global Financial crisis and the Asian financial crisis of the late 1990’s. The paper attempts to study the similarities between these two crises and the differences between them along with an analysis of the causes, effects and recovery strategies used by the various governments in the aftermath of these crises. The role of the regulatory agencies has come under scrutiny in both the crises and they have been criticized for turning a “blind eye” to the rampant financial speculation and when the crisis struck, acting in haste which led to some undesirable consequences in both the cases. The paper also discusses the differences in approach from policymakers in the aftermath of the twin crises with emphasis on highlighting the different approaches taken by the leaders of the Asian countries and the stance adopted by the G-20 in the case of the ongoing global financial crisis. The position that is taken in this paper is that the role of ethics, corruption and the absence of proper regulatory frameworks were the main reasons for these two crises. The paper suggests some regulatory and systemic changes that can help us avoid future occurrence of such crises. Methodology This paper makes use of the available literature on the global financial crisis in the form of books written by experts on the financial system, economists and commentators who follow such crises. The books by Kevin Philips, Simon Johnson and Joseph Stiglitz are used as primary sources along with expert analysis from some of the popular websites like Huffington Post etc. There are several books on the topic of Corruption in South East Asia. This paper utilizes a few of them and the list includes Fighting Corruption in Asia, Capitalism’s Achilles Heel and The Blood Bankers. The list is illustrative of the kind of books that have been used as sources for this paper. Apart from these, I have referred to several journal articles that talk about the phenomenon of corruption in South East Asia. Most of these are reputable sources and provide valuable insights into the problem. Hence, the methodology followed is by conducting the literature review of the material available on these twin crises. Though there is abundant material on the topics, care has been exercised to refer to only the well known literature in order not to distract from the real sources of the crises and digress into “fluff” about the causes and effects of the crises. Causes of the Global Financial Crisis Much has been written about the bailout package and the stimulus packages announced by the US government to provide relief to the banks and financial institutions having toxic assets on their balance sheets. Since the beginning of the housing market crash in fall of 2006 and the systemic crisis in 2007 and 2008, the government has been active in devising strategies to meet the capital and liquidity requirements of the banks. Matters came to a head in September 2008 when Lehman Brothers filed for bankruptcy and other banks had to be bailed out under the Emergency Economic Stabilization Act of 2008, otherwise known as the bailout of the US financial system. This act gave sweeping powers to the Fed and the Treasury secretary to help troubled banks and financial institutions with up to $700 Billion of liquidity made available to them. The origins of this crisis began in the housing market when the sub-prime borrowers or the borrowers with poor credit history were given access to cheap credit and mortgages to finance their home purchases. (Stiglitz, 2010) As the value of the homes depreciated and the housing market began to bottom out, banks were left with billions of dollars worth of mortgages that were foreclosed resulting in losses to the banks. And because these assets were bundled together and re-packaged as securities and then sold to different investors, who in turn created derivatives on top of these assets, there was a systemic component to the whole crisis. Hence, what started in the Housing market quickly spread to the rest of the global financial system and posed a systemic risk to the global economy. (Roubini, 2010) With the US economy undergoing a crisis of epic proportions, several sectors suffered from the credit crunch and were left without access to credit that they were previously used to. Further, the corporations made several bad loans and resorted to business practices that led to them being in dire straits as far as the financials are concerned once the crisis broke out. The bad state of the economy is cited as one of the reasons for the victory of Barack Obama in the presidential elections of 2008. Subsequent to his election, there was lot of hope and anticipation regarding the kind of stimulus package that his administration would provide to the beleaguered sectors of the economy. (Philips, 2009) Causes of the Asian Financial Crisis The issue of corruption in South East Asia was not studied in detail for a long time. This was because of a host of factors that have been explained in the following excerpt, “Until the recent crises in the region, corruption had often been marginalized in East Asian studies. In the case of the development of South Korea and Taiwan, this was apparently based on the assumption that their successful development was free of corruption, or that corruption existed but occurred at a low level. (Henry, 2003) In Thailand and Indonesia corruption was studied, but has not been fully integrated into accounts of national political and economic development, for example regarding resource based corruption, or corruption and prostitution. Part of the difficulty, particularly in East Asian studies, has been the influence of structuralism in explaining fundamental social change. Structural categories such as state-society or state-business relations can `box off’ phenomena such as political violence or corruption” (Moran, 1999) It is the absence of definitive literature on corruption in the South East Asian countries that has been the norm till the Asian Financial Crisis of 1997. The crisis was a wakeup call to the countries of the region as well as to the international community about the need for reform in these countries. The crisis fundamentally altered the perception about the growth rates of the so-called “Asian Tigers”. Much like the recent global financial crisis exposed the myriad “Ponzi” schemes going on in the developed world; the Asian Financial Crisis brought home the reality of crony capitalism and corruption in these countries. (Eliot and Atkinson, 2008) It is a well known fact that corruption in South East Asian countries has reached a point where it has become difficult to ignore and brush it away under the carpet. The scale and scope of corruption in these countries is so mind boggling and the numbers run into the billions of dollars. This has led to serious attempts to study the problem of corruption in these countries and the resulting literature has indeed provided us with a trove of information about the menace. (Mark, 2006) Findings This section looks at the similarities and the differences between these two crises and suggests some methods by which we can avoid the recurrence of such crises in the future. For starters, both the crises were a result of rampant financial speculation – in the form of exotic financial products during the present crisis and currency speculation in the time of the Asian Financial crisis. What added to the lethal mix of rampant speculation and poor regulation is the aspect of unethical business practices in the US and elsewhere. In the case of the current crisis, the instances of poor lending practices without checking the antecedents of the loan applicants and in the case of the Asian financial crisis, crony capitalism that led to building of huge inventories of real estate by the relatives of the politicians without checking the demand for those led to a huge property bubble that eventually burst when the currencies of the East Asian countries came under speculative attack. (Stiglitz, 2010) It is interesting to note the similarity in both the crises with the property bubble being common to them. In the case of the Global Financial crisis, the sub-prime property market was overheated leading to a catastrophic crash when the housing prices began to bottom out. In the case of the Asian Financial crisis, massive investments in the real estate sectors of the countries affected by the crisis were due to unbridled flows of “hot money” or foreign exchange flows that poured into these countries. In a manner reminiscent of the current crisis, the real estate sector began to cool down leading to losses for the speculators in billions of dollars. What sparked the Asian financial crisis was the speculative attack on the currencies of the region whereas the bust in the housing market led to the global financial crisis. (Johnson, 2010) The difference between these two crises is the effect they had on the regions affected by the crises. In the case of the Asian Financial crisis, the leaders of the countries imposed capital controls on the movement of the currencies particularly restricting the flow of hot money into these countries. Contrast this with the ongoing global financial crisis, where the trade in OTC or the Over the Counter Derivatives is still going and the half-hearted efforts by the G-20 to impose some sort of regulatory order on the global financial system. In particular, the charismatic leader, Mahathir Mohammed of Malaysia acted swiftly to stem the fallout of the Asian Financial crisis on his country whereas in case of Greece and other countries that have been worst hit by the recent crisis, there has been no noticeable movement towards putting in place strict regulatory regimes that are needed to halt the further slide towards market anarchy. (Stiglitz, 2010; Kidd, 2005) Another difference between the global financial crisis and the Asian financial crisis was the structural nature of the crisis in the US economy with the financial sector gaining a disproportionate share of the overall economy compared to the Asian case that was caused by external factors beyond the control of many of the countries that were the victims of the crisis. Further, the fact that the rest of the world was “subsidizing” consumption in the US as opposed to capital in search of better returns in the case of the Asian countries was another marked difference. (Baker, 2005) Finally, the way in which the Asian countries recovered anaemically should hold lessons for the US and other western countries which are hoping for a quick recovery from the crisis. Hence, the point here is that the West must be prepared for a prolonged and sustained period of weak economic growth if the example of the Asian countries is anything to go by. Before concluding this section, it is worth repeating the main reasons for both the crises that have their origins in the way regulators should have nipped the crises in the bud rather than allowing them to become what they were. While crony capitalism was the chief culprit in the Asian case, the excessive risk taking and the issues of Moral Hazard dominated the global financial crisis. (Roubini, 2010) Conclusion It is apparent that corruption is indeed a problem in many South East Asian countries. From the various viewpoints presented in this paper, it is clear that corruption has spread its tentacles in a hydra like way to all sectors in these countries. It is often said that even personnel of private sector companies need to be bribed in countries in Indonesia. This proves the fact that no one is immune from this menace and unless steps are taken to combat this menace, the monster would threaten everybody in the process. (Philips, 2008) Despite several attempts to mitigate the effects of corruption and fight the menace, most of them have fallen short of the promise for which they have been setup mainly because of the lack of political will and resolve to fight corruption. This has led to a steady deterioration in the living conditions in most of these countries leading to angry protests by citizens and other stakeholders who are affected by the process. Before the situation gets out of hand, it is pertinent for the authorities to take steps that would address the issue of corruption and its causes. Likewise, the way in which the financial sector has been allowed to grow in a “monster” like fashion without regulation is a worrisome trend for the US and those countries that permit trade in exotic financial instruments. Hence, the immediate task before the regulators and the policymakers in the West as well as the East is to promote safe lending practices and ensure that predatory lending as well as rampant speculation is discouraged. This can be done by a proper assessment of risk and return and without recourse to unethical business practices. In conclusion, it is the urgent need of the hour that policymakers all over the world act in concerted and unified fashion to stem the fallout from the present crisis. After the Asian financial crisis, there was a remarkable show of solidarity between the East Asian countries. It is hoped that such unified action is taken when the G-20 (The Group of 20 countries that represent the developed world as well as the developing world) meets in South Korea later this month and instead of bickering over who is responsible for the crisis, the leaders of the G-20 show real “leadership” in resolving the crisis. It is indeed the urgent need of the hour that leaders of the world community move towards a new financial architecture that take into account the needs of the entire financial system instead of those on the top alone. Bibliography Almond, Mark. 2006. "Corruption, Cronyism and the Man Who Split a Nation." The Daily Mail. Baker, Raymond W. 2005. CAPITALISM’S ACHILLES HEEL. New York: John Wiley and Sons. Elliott, L & Atkinson D.2008. The Gods that failed. Bodley Head: London Henry, James S. 2003. THE BLOOD BANKERS. New York: Four Walls Eight Windows, Johnson, Simon. 2010.13 Bankers: Wall Street Bankers and the Next Financial Meltdown. New York: Pantheon Books. Kidd, John, 2003, Fighting Corruption in Asia. New York: World Scientific Publishing Co. Pte. Ltd Moran, Jon. "Patterns of corruption and development in East Asia." Third World Quarterly (1999): 569-587. Philips, Kevin 2008, Bad Money. Simon and Schuster: London. Philips, Kevin.2009. After the fall: The inexcusable failure of American Finance. Simon and Schuster: London. Roubini, Nouriel. 2010. Crisis Economics: A Crash Course in the Future of Finance. New York: Penguin Press. Stiglitz, Joseph. 2010. Freefall: America, Free Markets and the Sinking of the World Economy. New York: W.W. Norton and Company. Read More