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 currencies were less competitive against the dollar, but argues persuasively that this was not the root of problem. In the standard model, countries with 'pegged exchange rates' experience currency crises. There is usually government profligacy, which means printing more money to cover a deficit which causes foreign investors to pull out of the market because they speculate that inflation will skyrocket. This in turn will cause foreign exchange reserves to decrease. But in East A...