East Asia's financial market Collapse

In 1997 East Asia's financial markets collapsed causing economic ramifications that just might reverberate throughout the international community for years. The crisis in East Asia has been briefly but well summarized by Lester Thurow, professor of economics at the Massachusetts Institute of Technology (MIT), in terms of short-run opportunities to make a lot of money overwhelming time worn economic realities (Thurow, 1998, 22). The situation is analogous to a barber's chair. It slowly gets pumped up ever higher, then with a push of a pedal the pressure is released. The chair falls until it returns to the floor.

The symptoms of the 'Asian flu' could just as easily be called the consequences of bad banking. They include a collapse in asset prices (particularly land, because rent is a reflection of the land's potential to turn a profit, a good economic indicator of economic health), the extent of financial and corporate insolvency, and a marked slowdown in economic growth. When signs of a crisis loom, investors tend to convert their holdings into currencies not expected to depreciate. This is referred to as capital flight. Such was the case in East Asia, whose financial exchange reserves dried up and currencies plunged as a result of money leaving the country.

Paul Krugman, another MIT professor of economics, posits that the currency crisis was more a symptom than a cause of the crisis in East Asia. Krugman recognizes that these countries currencie

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ook at some of the different economic conditions in each of these countries immediately prior to or following the crisis before. For example, in Indonesia, political uncertainty is paralyzing reform efforts, but this does not accurately describe the situation in, say, Japan. In Thailand, 'finance companies,' which are nonbank intermediaries that borrow short-term money (often in dollars) then lend it to speculative investors who put it largely toward real estate, were instrumental in the crash in Thailand. These institutions played a role in some way in each of these countries, but it was more prominent in Thailand. In response to the crisis, Thailand devalued its currency, receiving widespread international criticism for this action and its impact on the global market. Thailand is also having problems instituting bank reforms. Japan has the world's second largest economy and has a stable government. It should have been at least able to rise above the crisis, if not help its neighbors out of it. Instead, Japan is mired in many of the same problems. Japan still has a huge trade surplus and substantial foreign exchange reserves, but the country is in desperate need of restructuring, particularly its international banking

Category: Economics - E