The Causes for the 1997 Asian Financial Crisis and Current Economic Meltdown - Essay Example

Executive summary The current global economic meltdown commenced in the year 2007 when investors lost their confidence in the value of a pool of securitized mortgages in the U.S. triggering liquidity crisis. There are enough evidences suggesting that the markets are volatile and particularly concerned with the health of the banks. Hence, there’s absolutely strong need to design a healthy financial structure, which can forecast and overcome economic crises like the 1997 Asian crises and the current one. Let us examine some of the causes for these economic crises, their aftermath and the significance to design a strong financial system. Table of Contents 1. Introduction 1.1 Purpose of the report 1.2 Issues to be discussed and their significance 2.0 Review of literature 2.1.1 Issue 1 2.1.1 Issue 2 2.1.1 Issue 3 2.2 Method 2.3 Discussion and Analysis 3.0 Key Challenges 4.0 Conclusions 5.0 Recommendations 6.0 References 1.0 Introduction The current global economic meltdown is reckoned to be a crisis of confidence. However, the roots of the crisis have a lot to do with vulnerable dual deficits, both fiscal and trade, that have resulted in gigantic levels of U.S. debt. Even the 1997 Asian financial crisis underwent similar financial turmoil and took quite some time to climb the growth path (Frederic S. Mishkin 1992). Let us examine some of the possible similarities and differences between the current economic crisis and 1997 Asian financial crisis. It is to be understood that financial system or fiscal policies that are built on credit cannot endure if the issuer of that credit continues to pile up debt (Mahmoud El-Gamal 2008). In the long run, a solution would be only the one that would come from cautious rebalancing of global production and consumption patterns. 1.1 Purpose of the report The purpose of this report is to discuss the causes for the 1997 Asian Financial Crisis and current economic meltdown. And identify and some similarities and differences between the periods. 1.2 Issues to be discussed and their significance The ongoing (current) financial crisis and the Asian crisis of 1997 have a lot in common, notwithstanding the major differences. Let’s discuss the major causes for these two crises, their aftermath and a well balanced approach towards recovery. 2.0 Review of literature (Tomita 2000) opined that the 1997 Asian Financial Crisis suffered a series of severe international financial crises starting in Mexico, then Thailand, and finally hitting Russia. And importantly, all these countries were emerging markets. Albeit some similarities, (Bustelo 2000) argued that the 1997 Asian financial crises had considerable differences to the current economic crisis - the crisis was an aftermath of private over-investment. This paper examines the possible causes and consequences of current economic meltdown and 1997 Asian financial crisis. And advocate some recommendations to overcome such turmoils. 2.1.1 Issue 1 The first thing to be discussed is the dearth of foreign exchange that has caused the value of currencies and equities amongst Asian countries to fall radically. Should the inadequately developed financial system that allocated capital in the troubled Asian economies be blamed? 2.1.1 Issue 2 Examine the causes and the aftermath of both the crisis that has shook the developing economies. And make out how future policies needs to be framed and controlled in such a way that credit and equity cultures are not blended. 2.2 Method The data collected for this analysis is based on secondary data taken from standards journals and magazines, and excerpts by experts at various international summits. 2.3 Discussion and Analysis 1997 Asian Financial Crisis - Asian country giants like South Korea, Thailand, Indonesia, Singapore and Hong Kong suddenly witnessed a bitter dent and experienced crises. The potencies of these economies masked their weaknesses and the ways challenges were tackled, flaws in the quality of investment as well as in fiscal system and the framework of ASEAN governments’ macro policy (Michael F. Chircop 2001). So what were the reasons for these drastic events? Albeit undetected, the basic trends were changing significantly by 1995-1996 like the volume export growth stalled in Indonesia, Thai export growth suffered a macroscopic reversal of -9.4% (Enzo Grilli 2002). Many attributed this slump to inconsistent government macroeconomic policies like too small tax slabs, which cannot sustain a fixed exchange rate (John B. Taylor, 2008). (S. Stanley Katz, 1999) Scores of banks and corporations have gone bankrupt, per captia income has plunged, billions in savings have evaporated, several employees received pinkslips. Prof. Dr. Ir. Ginandjar, Chairman, Indonesia-Japan Friendship Association, (PPIJ) pointed out that despite some similarities between the two crises such as collapse of the financial system and temporary nationalization of financial institution, there were marked differences in terms of origin, causes and extent. Background for 1997 Asian Financial Crisis The causes can be ascribed to excessive foreign borrowing and undue over-lending. Further, 3 month LIBOR interest rate and non-performing bank loan rates are found to be the major determinants of the Asian Financial crisis (Sung Yeung Kwack, 2000). Other factors include: Private-sector debt predicaments and low loan lending quality Increasing external liabilities from borrowing countries Close association between the local currency and the dollar Currency speculation Governments’ incapacity to tackle problems effectively Causes for current financial crisis Lower interest rates around 2004 and 2005 helped develop the housing bubble. In the case of Japan, it was the fall in the prices of commercial real estate, and, currently in North America and Western Europe, it is the fall in the prices of residential real estate. (Gonzalo Fernández de Córdoba, 2009). Economists consider that because of the contraction in the housing market and problems in financial markets, the magnitude of the current recession could be the most severe of all (Charles S. Gascon, 2009). An escalating foreclosure rate threatened several monetary institutions; banks and hedge funds, later realized that they are on the anvil of facing huge losses. To be exact, the current decline is about half that of the 1981-82 recession and about a third that of the 1974-75 recession. (Daniel L. Thornton, 2009). And the aftermath – A $700 billion bailout, and bankruptcies of Lehman Brother, Bear Stearns, AIG, Freddie Mac, and Washington Mutual and many more across the globe. Global effects A number of economists advocated that if the liquidity crisis continues, it could lead to an extended recession or perhaps worse. Investment bank UBS stated on October 6 that 2008 would see a clear global recession, with recovery unlikely for at least two years. Few days after (UBS Report, 2008), UBS economists declared that the "beginning of the end" of the crisis had begun, with the world starting to make the necessary actions to fix the crisis: capital injection by governments; injection made systemically; interest rate cuts to help borrowers. In March 2009, the Arab countries and its alliances lost close to $3 trillion due to this financial crisis. Comparison of the Asian Financial Crisis and the Current Economic Crisis Spread Factor: The 1997 Asian financial crisis was different to the current global meltdown in terms of spread (Rajat M. Nag 2009). It was confined only to a few countries and particularly in one region. It started from Thailand in mid-1997 and swiftly spread across to a number of South-East Asian countries. However, by 2000 these countries were all poised for rapid growth. The current global economic crisis has affected several countries across the globe, and not quite sure, whether worst is yet to come or not. External resources: In both Indonesia and Thailand, significant programmes like public works and the Social Investment Fund heavily relied upon the availability of external assistance. And it is increasingly intricate to bail out developed economies that are deep in recession. All these crisis were unexpected and something which the governments were not used to (Marcel P. Timmer, 2001) Trade regimes The current economic crisis, unlike the 1997 Asian financial crisis, is not just confined to a particular or one country. Predominantly commodity prices are falling out sharply. From a low of about $20 per barrel in 2002, oil prices peaked at more than $140 per barrel during the summer of 2008. (Charles I. Jones, 2009). Considering falling prices and demand, neither currency depreciation nor export promotion stratagem would do the trick for individual countries. The amount of currency outstanding, for example, is higher by only about 10%, or $75 billion (Charles I. Jones, 2009). And the sharp devaluation in Thai baht and the Indonesian rupiah lent a major stimulus to the growth of exports, as rest of the world was not witnessing crisis or implementing defensive measures. But today, tariff and non-tariff barriers in advanced economies are going up. Similarities between 1997 Asian current crisis and current global economic meltdown While the two financial crises (Asian and current) cannot really be compared, similarities do echo between these two. There’s a common backdrop to both the crises in the form of copious liquidity and excessive, thoughtless credit expansion (Dr. Amaresh Samantaraya 2008) Search for returns by lenders was also on and the abundance of liquidity prompted a lax credit standards. Another clear signal prior to both crises was the rapid rise in property and asset prices (Khor Hoe Ee and Kee Rui Xiong 2008). The steep rise in prices has not alarmed many people or reminded them of the 1997 Asian crises in the current scenario. However, the economic responses were very similar in all two crises - currencies plunged, Gross Domestic Product took a dent and stock markets lost footing (Dongchul Cho 2009). Also, prices of assets including real estate and automobiles came down sharply and interest rates dropped stridently. 3.0 Key Challenges Another significant fundamental point to address the current crisis is that people don’t lose sight of our longer term structural challenges. The crisis is taking a lot of efforts from regulators, new-fangled policies, regulations and extra reforms. And all these newly defined measures cannot be disconnected from our global structural challenges, like reducing poverty, liberalizing trade, plummeting global fiscal imbalances or fighting climate change. One of the biggest challenges is the lack of tuning and coordination between countries whilst framing and applying solutions (Aart De Geus, 2009). This is because the highly integrated global economy needs an effectual mechanism of worldwide regulation to address the business deficiencies. But on the flip side, this crisis can be seen as a great prospect for a change to bring out a greener economic growth to address these challenges frontally (Simon Johnson 2008). 4.0 Conclusions The financial crisis, like a mirror, exposed the vulnerability of a global financial system; the threats of excessive deregulation with poor regulation and administration; the susceptibility of a global economy that for eternity embark on increasing production and consumption. It is time for a change to re-script the rule books of a more reliable and balanced globalization. And all this does not just require merely top notch organisations and better global governance, but also demand a change of attitude and culture. The most important lesson to be learnt in crisis is that all are one and united (Edwin M. Truman, 2009). And this interdependence is a great chance to amend our theories, businesses in sync with the economy. 5.0 Recommendations Yes, there would be certain risks to manage and challenges to overcome. For instance, unite stakeholders in confronting the problems necessary to enhance competitiveness, including undertaking large restructurings. It’s time to build and maintain a strong financial forecast, which identifies key risks, and give us the knack to succeed any contingencies. Further, there’s also a strong need to ensure that adequate sources of liquidity would surely get us through the crises. Governments should force efficiency in operational capital processes and systems and at the same time exercise regulation in financial and capital investments. 6.0 References Frederic S. Mishkin, 1992, Anatomy of a Financial Crisis, Journal of Evolutionary Economics, U.S. Mahmoud El-Gamal, 2008, Science Daily Tomita, Toshiki, 2000, The Mechanisms of “21st-Century-Type” International Financial Crises, Research Paper. Nomura Research Institute, Japan Bustelo, Pablo 2000, Novelties of Financial Crises in the 1990s and the Search for New Indicators. Emerging Markets Review. Michael F. Chircop, 2001, Asian Crisis: How and Why? The Secured Lender Enzo Grilli, 2002, The Asian Crisis: Trade Causes and Consequences, Blackwell Publishers S. Stanley Katz, 1999, The Asian Crisis, The IMF and the Critics, Eastern Economic Journal Prof. Dr. Ir. Ginandjar Kartasasmita, 2009, Report on the 12th GRIPS Forum special lecture Sung Yeung Kwack, 2000, An empirical analysis of the factors determining the financial crisis in Asia, Journal of Asian Economics Gonzalo Fernández de Córdoba, 2009, The Current Financial Crisis: What Should We Learn from the Great Depressions of the Twentieth Century? Federal Reserve Bank of Minneapolis Charles S. Gascon, 2009, The Current Recession: How Bad Is It? Economic SYNOPSES Daniel L. Thornton, 2009, A Perspective on the Current Recession: It’s Not the “Worst Case” Yet, Federal Reserve Bank UBS Report, 2008, National Seminar, Global Financial Crisis: Implications for India Rajat M. Nag, 2009, Impact of the Global Economic Crisis on Asia's Developing Economies, Asian Development Bank. Marcel P. Timmer, 2001, Financial Crisis and Economic Crisis in Asia, Review of Income and Wealth Series Charles I. Jones, 2009, The Global Financial Crisis of 2007–20?? 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