1997 Asian Financial Crisis PDF

1997Asian
FinancialCrisis
EdVallorani
12/14/2009
1997AsianFinancialCrisis
TableofContents
Background
JapanTheLostDecade
CountryInformation
EdVallorani
China
HongKong
Taiwan
Indonesia
Japan
Korea
Philippines
10
Singapore
10
Thailand
11
CountrySummary
12
LessonsLearned
13
Notes
17
Sources
18
December14,2009
Contents
AsianCrisisBackground
NineAsiancountries,SouthKorea,Japan,China,HongKong,Taiwan,Singapore,Malaysia,
IndonesiaandthePhilippineswereconsideredasAsianTigersintheearly1990s.These
economieswererapidlygrowingduetotheinflowofinvestments,improvementsin
technology,increasesineducation,areadysupplyoflaboraspeoplemovedfromthe
countrysidetothecitiestoworkinfactories,andreducedrestrictionsontradeandcommerce
leadingtofreemarketeconomies.
Inthebuilduptothe1997crisistherewasexcessiveborrowing.Thisborrowingtended
tobeforspeculativepurposesinprojectssuchasretailspace,officebuildings,hotels,otherreal
estateandotherassets.Thegreatinflowsofmoneyintotheseassetscausedtheirpricestorise
dramatically,creatingabubble.Thisspeculationwasfueledbynationalbanksborrowing
excessivelyfromabroadandlendingexcessivelyintheirhomecountries.Deregulationinthe
financialsectorledtoeasymoney,whichcausedmanyspeculativeandbadloanstobemade.It
alsoledtolargedebtburdens.Sincehotmoneytendstofollowhotmoney,afeelingof
euphoria,anIcantlosementality,pumpedmoneyintoalreadyovervaluedsectors,leading
tovaluationsthatcouldnotbesustained.Italsoledtoamisunderstandingoftherisksinvolved
withtheseinvestments.
Aslongasassetpricescontinuedtorise,thespeculationcontinued.Inthecaseofthese
Asiancountries,rapidlygrowingGDPandstableexchangerateskeptthespeculationgoing.In
theboomyears,speculativeloansweremadetobusinesseswhosecreditworthinessdidnot
warranttheloans.Asthecrisisbegan,thesebusinessescouldnotrepaytheirloans.
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December14,2009
Page1
Astherealizationstartedtospreadthatloanscouldnotberepaid,currencyspeculation
began.TheThaibahtwasthefirstcurrencytoexperienceproblems.Expectingthecurrencyto
devaluebecausemacroeconomicconditionsdictatedthattheexchangeratecouldnotbe
maintainedatcurrentlevels,speculatorssoldthebaht.Inanalmostselffulfillingprophecythe
bahtdevaluedrapidly.Thisonlyexacerbatedthatsituation.SinceThailandsdebtwas
denominatedinU.S.dollars,injustafewmonthsitrequiredtwiceasmanybahttorepaythe
dollardenominateddebt.Ineffect,thecurrencydevaluationdoubledthedebtofThai
organizations,catchingmoreorganizationsinthedebtcrisis.
Atthistimeanotherphenomenonoccurred.Allofasudden,investorsbegantoreassess
theirinvestmentrisk,notonlyinThailand,butintheentireregionaswell.Asriskwas
reassessed,theeventsinThailandspreadlikeavirustotheothercountriesoftheregion.TheI
cantlosementalityquicklyturnedintoanIamgoingtolosebigunlessIgetoutmentality.
Moneyflowsturnedaroundquickly.Regionalcurrenciesdevaluedrepeatingthesamestressfor
manyofthecountriesthatThailandwassuffering.Asthecrisiscontinued,thefinancial
problemswereworsethanoriginallyexpected.Thecrisisalsoexposedthevaryinglevelsof
politicalriskinherentineachcountry.
Thecrisiscascadedthroughtheregionlikearowofstrategicallyplaceddominosbeing
knockeddownwhenthefirstdominofalls.Onewaytofightthecrisiswouldbethrough
monetarypolicy;however,thiswasnotanoptionfortheseeconomies.Pumpingmoremoney
intotheireconomieswouldonlyputpressureontheircurrenciestodevaluefurther,making
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December14,2009
Page2
thedebtcrisisworse.TheseeconomiesneededhelpfromtheIMF.WhentheIMFgetsinvolved,
ithasstringentrules.Oneisitsinsistenceontheraisingofinterestrates.Unfortunately,inthe
shortterm,thisonlydeepenstherecession.
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December14,2009
Page3
JapanTheLostDecade
WhiletheAsiancrisisstartedin1997,Japansbubbleburstin1989.ForJapan,theentire
decadeofthe1990swasdifficult.Itwasconsideredalostdecade.Thelate1980ssawan
unprecedentedriseinassetprices.Inthefiveyearsbeforeits1989peak,theNikkeistockindex
rose275%to38,916.Propertyvaluesalsoreachedstratosphericheights.Thesevaluescould
notbesustained.Whenthebubbleburst,itbursthard.Fromthepeakin1989,theNikkeiindex
dropped80%byearly2003.1TheNikkeiclosedonFriday,December11,2009at10,108.After
20years,theNikkeiisstill74%belowitsalltimehigh.
Landpricesplummeted.Banksthathadmadeloansoninflatedrealestatevaluessoon
foundthemselvesintrouble.Manyloansbecameuncollectable.InresponsetheJapanese
centralbankkeptinterestrateshigh.Bythetimeitloweredratestonearzero,theeconomy
wasinadeflationaryspiral.2
JapanesebanksborrowedheavilyintheEurodollarmarket.Borrowingwassoextensive
thattheywerechargedapremium,thesocalledJapaneserate.Proceedsfromtheborrowing
wereusedtofinanceleveragedbuyoutsandrealestatepurchasesintheU.S.Thelendingcame
whentheU.S.realestatemarketwasatapeak.Inadditiontothecollapseoftherealestate
marketinJapan,thecollapseintheU.S.marketatthetimemademanymoreloans
uncollectable.
ThecollapseoftheJapanesestockmarketputotherpressuresonJapanesebanksdue
totheircapitalstructure.TheBankofInternationalSettlements(BIS)definesTier1capitalas
moneyfromstockholdersandretainedearnings.Tier2capitalincludesbadloanreservesand
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December14,2009
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JapanTheLostDecade
hiddenassets.45%ofunrealizedcapitalgainsonstockscouldbeconsideredhiddenassets;
therefore,theycouldbecountedasTier2capital.Whenthestockmarketcollapsed,sodidthe
capitalstructureofthebanks.Mostwerenotabletomeettheircapitalrequirements.Theyhad
toresorttosellinghighcostjunkbondsorsellingassets.Inmanyinstances,theseassetswere
soldataloss.3
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December14,2009
Page5
AsianCrisisCountryInformation
China
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
GDP
390
409
488
613
559
728
856
953
1019
1083
1198
CA
12.0
13.3
6.4
11.8
7.7
1.6
7.2
37.0
31.5
15.7
20.5
CA%toGDP
3.1%
3.2%
1.3%
1.9%
1.4%
0.2%
0.8%
3.9%
3.1%
1.4%
1.7%
U.S.dollars(billions)
FDI
FDI%toGDP
Exports
Exports%toGDP
11
28
34
38
42
45
45
40
41
0.9%
1.1%
2.3%
4.5%
6.0%
5.2%
4.9%
4.8%
4.5%
3.7%
3.4%
62
72
85
92
121
149
151
183
184
195
249
15.9% 17.6% 17.4% 15.0% 21.6% 20.4% 17.6% 19.2% 18.0% 18.0% 20.8%
Source:IMFWorldEconomicOutlookDatabase,U.N.ConferenceonTradeandDevelopment,IMFInternationalFinancialStatistics
Chinawasoneofthecountriesthatwasleastaffectedbythe1997Asiancrisis.GDP
continuedtorisethroughthelate1990s,althoughnotatasfastarate.FDIwasfairlylevel
from1996through2000.Exportswererelativelyflatfrom1997through1999;however,the
currentaccountbalanceimprovedin1997.TheChineseyuan,whichispeggedtothedollar,
appreciatedslightlyfrom8.30yuanperU.S.$1on3/1/97to8.28yuanperU.S.$1on6/1/98.
Attheendof1999,theyuanremainedat8.28yuanperU.S.$1.4
HongKong
GDP
CA
CA%toGDP
FDI
FDI%toGDP
Exports
Exports%toGDP
1990 1991 1992

77
89
104
4.8
3.8
3.1
6.2% 4.3% 3.0%
3
1
4
4.3% 1.1% 3.7%
82
99
119
107% 111% 115%
1993 1994 1995 1996 1997 1998 1999 2000

120
136
144
159
176
167
163
169
5.7
1.1
9.1
4.0
7.7
2.5 10.3
7.0
4.8% 0.8% 6.3% 2.5% 4.4% 1.5% 6.3% 4.1%
7
8
6
10
11
15
25
62
5.8% 5.8% 4.3% 6.6% 6.4% 8.8% 15.1% 36.6%
135
151
174
181
188
174
174
202
113% 112% 120% 114% 107% 104% 106% 119%
EdVallorani
December14,2009
Page6
On7/1/97,HongKongrevertedbacktoChinesecontrolfromBritishcontrol.Hong
KongsGDPdippedalittlein1998and1999beforereboundingin2000,althoughthe2000GDP
hadnotreached1997levels.FDIremainedfairlyconstant,butrosedramaticallyin1999and
2000.Exportsdecreasedslightly.Thecurrentaccounttookahitin1997,althoughitwasnotas
negativeasitwasin1995.TheHongKongdollar,whichwasalsopeggedtotheU.S.dollar,
maintaineditsvaluefrom3/1/97to6/30/97at7.75HongKongdollarsperU.S.$1.Attheend
of1999,theHongKongdollarremainedalmostunchangedat7.77HongKongdollarsperU.S.
$1.5
Taiwan
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
GDP
165
184
219
231
252
274
289
301
276
299
321
CA
10.9
12.5
8.6
7.0
6.5
5.5
10.9
7.1
3.4
8.0
8.9
CA%toGDP
6.6%
6.8%
3.9%
3.0%
2.6%
2.0%
3.8%
2.3%
1.2%
2.7%
2.8%
1.3
1.3
0.9
0.9
1.4
1.6
1.9
2.2
0.2
2.9
4.9
0.8%
0.7%
0.4%
0.4%
0.5%
0.6%
0.6%
0.7%
0.1%
1.0%
1.5%
67
76
81
85
93
112
116
121
111
121
148
FDI
FDI%toGDP
Exports
Exports%toGDP
40.7% 41.3% 37.2% 36.6% 36.8% 40.7% 40.0% 40.3% 40.0% 40.7% 46.0%
TaiwansGDPsufferedin1998beforereboundingin1999and2000.Throughoutthis
time,Taiwanwasabletomaintainapositivecurrentaccountbalance,althoughthesurplus
shrankin1998.Exportsalsodecreasedin1998beforereboundingin1999.TheTaiwandollar
depreciatedfrom27.5TaiwandollarsperU.S.$1on3/1/97to34.95TaiwandollarsperU.S.$1
inmidJune1998,atotalof21%.Bytheendof1999theTaiwandollarhadreboundedslightly
to31.5TaiwandollarsperU.S.$1.6
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December14,2009
Page7
Indonesia
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
GDP
126
141
153
175
195
223
251
238
105
155
166
CA
3.2
4.4
3.1
2.3
6.8
7.3
3.8
5.8
8.0
2.6%
3.1%
2.0%
1.3%
1.5%
3.0%
2.9%
1.6%
3.8%
3.7%
4.8%
FDI
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
FDI%toGDP
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
26
29
34
37
40
45
50
56
50
51
65
CA%toGDP
Exports
Exports%toGDP
20.4% 20.7% 22.2% 21.1% 20.5% 20.3% 19.9% 23.6% 47.8%
33.1 39.5%
IndonesiasawitsGDPdropby55%inU.S.dollartermsin1998.Thiswasdueinlarge
parttothemassivedevaluationoftheIndonesianRupiah.TheRupiahdepreciatedby85%from
2,398perU.S.$1on3/1/97to16,475perU.S.$1inmidJune1998.TheRupiahdidreboundin
1998reaching6,700perU.S.$1inmidJuly1999.Bytheendof1999theRupiahhadfallen
againto7,150perU.S.$1.7Exportsheldfairlyconstantduringthistime.Thecurrentaccount
actuallyturnedfromnegativetopositivein1998.TherewasnoinformationavailableforFDI.
Japan
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
GDP
3,032
3,454
3,770
4,337
4,767
5,278
4,638
4,264
3,872
4,384
4,669
44
68
112
132
131
111
66
97
119
115
120
1.4%
2.0%
3.0%
3.0%
2.7%
2.1%
1.4%
2.3%
3.1%
2.6%
2.6%
13
0.1%
0.0%
0.1%
0.0%
0.0%
0.0%
0.0%
0.1%
0.1%
0.3%
0.2%
288
315
340
362
397
443
411
421
388
419
479
9.5%
9.1%
9.0%
8.4%
8.3%
8.4%
8.9%
CA
CA%toGDP
FDI
FDI%toGDP
Exports
Exports%toGDP
9.9% 10.0%
9.6% 10.3%
EdVallorani
December14,2009
Page8
Asmentionedearlier,Japanwasinadecadelongslump.GDPincreaseduntil1995,and
thendecreaseduntil1999.Thecurrentaccountremainedpositiveandexportsheldupalso.
TheJapaneseyendepreciatedby18%from3/1/1997untilmidAugust1998,120.4yenperU.S.
$1and147.26yenperU.S.$1,respectively.Bytheendof1999,theyenhadreboundedto
102.23yenperU.S.$1.8
Korea
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
GDP
275
321
344
378
441
539
582
550
363
464
534
CA
2.0
8.4
4.1
0.8
4.0
8.7
23.1
8.3
40.4
24.5
12.3
0.7%
2.6%
1.2%
0.2%
0.9%
1.6%
4.0%
1.5% 11.1%
5.3%
2.3%
10
0.3%
0.4%
0.2%
0.1%
0.2%
0.2%
0.3%
0.5%
1.4%
2.1%
1.7%
65
72
77
82
96
125
130
136
132
144
172
CA%toGDP
FDI
FDI%toGDP
Exports
Exports%toGDP
23.6% 22.4% 22.3% 21.8% 21.8% 23.2% 22.3% 24.8% 36.4% 30.9% 32.3%
KoreatookabighittoitsGDPin1998withadecreaseof34%.Exportsheldrelatively
steadyandthecurrentaccountimprovedfrom1996through1998.TheSouthKoreanwon
depreciated55%from864.4wonperU.S.$1on3/1/97to1,967wonperU.S.$1attheendof
1997.Bytheendof1998,thewonhadrecoveredto1,195yenperU.S.$1.Bytheendof1999,
thewonhadrecoveredto1,142.50wonperU.S.$1.9
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December14,2009
Page9
Philippines
GDP
CA
CA%toGDP
FDI
FDI%toGDP
Exports
Exports%toGDP
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
44
45
53
54
64
76
84
84
67
76
76
2.7
0.9
1.0
3.0
2.8
2.0
3.9
4.3
1.5
2.9
2.2
6.1%
2.1%
1.9%
5.5%
4.4%
2.6%
4.6%
5.2%
2.3%
3.8%
2.9%
1.2%
1.2%
1.5%
2.3%
2.5%
1.9%
1.8%
1.5%
2.6%
1.6%
3.0%
10
11
13
18
20
25
29
37
40
18.4% 19.4% 18.4% 20.5% 20.8% 23.2% 24.2% 29.7% 44.2% 48.0% 52.4%
ThePhilippinesGDPwasflatfor1997anddecreasedby20%in1998beforerecovering
in1999.Amazingly,exportscontinuedtorisethroughoutthisperiod.Thishelpedtomovethe
currentaccountbalancefromanegativenumberin1997toapositivenumberin1998.The
Philippinepesodevaluedby43%againsttheU.S.dollar,fallingfrom26.3pesosperU.S.$1on
3/1/1997to46.1pesosperU.S.$1inearlyJanuary1998.UnlikeotherAsiancurrencies,bythe
endof1999,thePhilippinepesohadonlyreboundedslightlyto40.4pesosperU.S.$1.10
Singapore
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
GDP
37
43
50
58
71
84
93
96
82
83
93
CA
3.1
4.9
5.9
4.2
11.4
14.4
13.9
14.9
18.3
14.4
10.7
CA%toGDP
8.5% 11.3% 11.9%
FDI
FDI%toGDP
Exports
Exports%toGDP
15.1% 11.3%
4.4%
7.2% 16.1% 17.1% 15.0% 15.5% 22.2% 17.4% 11.6%

5
12
10
14
8.1% 12.1% 13.7% 10.5% 14.3%
17
16
8.9% 20.1% 17.8%
53
59
63
74
97
118
125
125
110
115
138
143%
137%
128%
127%
137%
140%
135%
130%
133%
139%
149%
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December14,2009
Page10
SingaporesGDPdroppedby14%in1998andremainedflatin1999beforerecoveringin
2000.Exportsdecreasedin1998,butby2000theyhadsurpassedprecrisislevels.FDIwasoff
in1998,butotherwise,remainedfairlyconstant.Thecapitalaccountremainedpositive
throughoutthetimeperiod.TheSingaporedollardepreciatedby20%from1.425Singapore
dollarsperU.S.$1on3/1/1997to1.793SingaporedollarsperU.S.$1inmidJanuary2008.By
theendof1999,theSingaporedollarmadeonlyaslightrecoveryto1.668Singaporedollarsper
U.S.$1.11
Thailand
GDP
CA
CA%toGDP
FDI
FDI%toGDP
Exports
Exports%toGDP
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
86
96
109
122
144
168
182
151
112
123
123
7.1
7.2
6.0
6.1
7.8
13.2
14.4
3.1
14.3
12.5
9.3
8.3%
7.5%
5.5%
5.0%
5.4%
7.9%
7.9%
2.1% 12.8% 10.2%
7.6%
3.0%
2.1%
2.0%
1.5%
0.9%
1.2%
1.3%
2.6%
6.7%
5.0%
2.7%
23
28
32
37
45
56
56
57
54
58
69
26.9% 29.6% 29.7% 30.4% 31.4% 33.6% 30.6% 38.0% 48.7% 47.7% 56.2%
Thailandwasthefirstcountrytohaveacurrencycrisisin1997.Thebahtfellby54%
from25.9bahtperU.S.$1on3/1/1997to55.8bahtperU.S.$1inmidJanuary1998.Bythe
endof1999,thebahthadrecoveredto37.6bahtperU.S.$1.12GDPsufferedin1997and1998
falling39%fromU.S.$182billiontoU.S.$112billion.Recoverywasmodestin1999,andthere
wasnofurtherimprovementin2000.Exportsheldsteadythroughthisperiod,andthecurrent
accountturnedfromnegativetopositivein1998.
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December14,2009
Page11
CountrySummary
Thecountryanalysisshowsthateachcountrywasaffecteddifferentlybythecrisis.For
some,thecrisiswasnotasdeepanddidnotlastaslong.ThisisevidentintheGDPnumbers.
ExportsandFDIhelduprelativelywellthroughthecrisis.Thebiggestissuewasthecurrency
devaluations.Assetbubbles,highdebtandbadloansputpressureonthesecurrencies.Asthe
currenciesdevalued,itwashardertopaybackthedollardenominateddebt.Notallcurrencies
wereaffectedthesame.Somefellharder.Somerecoveredmorequickly.Belowisachartthat
highlightsthekeycurrencymovementsfrom3/1/1997totheendof1999.
Country
Currency
3/1/97Rate
LowestRate
Maximum
Depreciation
Ending
Change
Rate1999 1997to1999
China
Yuan
8.30
8.30
0.0%
8.28
0.2%
HongKong
HongKongDollar
7.74
7.77
0.3%
7.77
0.3%
Taiwan
TaiwanDollar
27.50
34.95
21.3%
31.50
12.7%
Indonesia
Rupiah
2,398.00
16,475.00
85.4%
7,150.00
66.5%
Japan
Yen
120.40
147.26
18.2%
102.23
17.8%
Korea
Won
864.40
1,967.00
56.1%
1,142.50
24.3%
Philippines
PhilippineDollar
26.34
46.10
42.9%
40.40
34.8%
Singapore
Peso
1.43
1.79
20.5%
1.67
14.6%
Thailand
Baht
25.90
55.80
53.6%
37.60
31.1%
Source:OandaHistoricalExchangeRates
EdVallorani
December14,2009
Page12
AsianCrisisLessonsLearned
TherearemanysimilaritiesbetweentheAsiancrisisof1997andtheU.S.financial
meltdownof2008.Bothwerefueledbyspeculation,overenthusiasmintherealestate
segmentleadingtounsustainableprices,riskyloansthatturnedintobaddebtwhenthereal
estatebubbleburst,andalackoftransparency.
TheU.S.crisisalsoincludedamoraldilemma.Thecrisisstartedinthesubprimelending
market.Mortgagebrokersdidanythingpossibletoqualifypeopleforloans.Backgrounds,
salaries,credithistoriesandotherassetswerenotfullychecked,iftheywerecheckedatall.
Themortgagebrokerwasassumingnorisk.(S)Hewaspaidafeefororiginatingtheloan.The
lendinginstitutionwasalsoassumingnorisk.Mostloansweresoldto3rdpartyentities.The3rd
partieswereassumingnoriskeither.Theysimplypackagedtheloansintomarketable
securities.RatingagenciesgavetheseinstrumentsAAAratings.Everyoneassumedthatevenif
afewloansdefaulted,therewasplentyofmoneytobemadeontheloansthatwerenotin
default.Intheeventofadefault,therealestatethatwasusedascollateralontheloanwould
beworthmorethanthebalanceontheloan.Everyonewashappy,andtheseinstrumentswere
soldaroundtheworld.
Thisschemecontinuestoworkaslongasrealestatepricescontinuetorise;however,
toomuchmoneywaschasingtoolittlerealestate.Thebubbleburst.Loansdefaultedinrecord
numbers,andmanytimes,therealestatethatbackedtheloanwasnotworthasmuchasthe
outstandingbalance.Financialinstitutionsheldalotoftheseinstrumentsintheirportfolios.All
ofasudden,nooneknewthetruevalueoftheseinstruments.Marktomarketrequiredthat
EdVallorani
December14,2009
Page13
thetruevalueberecordedofthebookofthefinancialinstitutions,causingcapitalizationissues.
Theuncertaintycausedfinancialinstitutionstohoardcash.Thefinancialsystemoftheentire
countrywascomingtoagrindinghalt.Ifthishappened,thefinancialsystemoftheU.S.and
muchoftheworldcouldhavecollapsed.
LiketheAsiancrisisbeforeit,theU.S.crisiswasnotcontainedwithinitsborders.It
quicklyspreadaroundtheglobe.Thisoccurredfortworeasons.First,muchoftheworldhad
purchasedthesametroubledassetsthatwereheldbyU.S.financialinstitutions.Second,the
U.S.isalargeimporterofgoodsandservices.AstheU.S.economyslowedrapidly,sodidthe
paceofimports.Exportdrivencountriessufferedasthelargestmarketintheworldcutbackits
spending.
UnliketheAsiancrisis,theU.S.movedquicklytousemonetarypolicytolessenthe
impactofthecrisis.Japanwaiteduntilwellintothe1990storeduceinterestrates,eventhough
theireconomictroublesbeganin1989.TheU.S.FederalReservemovedquicklytolower
interestratesinanattempttoloosenthetightcreditsituation.TheFederalReservealso
pumpedhundredsofbillionsofdollarsintotheU.S.economy.Thetroubledassetrelieffund
(TARP)wasusedtostabilizethefinancialsector.Ahugestimuluspackagewaspassedby
Congressinanattempttojumpstarttheeconomyandtostemthetideofjoblosses.
TheU.S.wasabletotaketheseactionsbecausethedollaristheworldsreserve
currency.TheU.S.isinauniquepositionofhavingallofitsdebtdenominatedinitsown
currency.TheU.S.didnothavethemoneytopayfortheprogramsthatitinstitutedasaresult
EdVallorani
December14,2009
Page14
ofthecrisis.TheU.S.hadtoincurmoredebttopayfortheseinitiatives.SincetheU.S.already
hasahighdebtload,thisshouldhaveputtremendouspressureonthedollartodevalue.The
Asianeconomiesstruggledin1997becausetheirdevaluedcurrenciesincreasedtheirdollar
denominateddebtload.Ifthedollarhaddepreciated,itwouldnothavechangedthedebt
burdensinceitwouldnottakeanymoredollarstopaybackthedollardenominateddebt.
DuringtheAsiancrisis,peoplesoldAsiancurrencies,andtheydepreciated.Duringthe
U.S.crisisof2008,peopleboughtdollarsandthedollarappreciated.Sincetheworldeconomy
wasinturmoil,itwasperceivedthatthesafestplacetoputmoneywasinthecurrencyofthe
worldslargesteconomy,theU.S.dollar.Thisbenefit,whichisenjoyedbytheUnitedStates,is
notenjoyedbyanyothereconomyatthistime.Aspeoplestoleranceforriskhasincreased,the
U.S.dollarhasdepreciatedsomewhat;however,ithasnotfallentoitsprecrisislevels.
ThebiggestlessonthattheU.S.couldlearnfromthe1997Asiancrisisisthatswift
governmentintervention,withappropriatemonetarypolicy,isnecessarytolessentheimpact
ofafinancialcrisis.Itmustalsorealizethatitspositionastheworldslargesteconomygivesita
significantadvantageduringacrisis.
Thereisanotherkeylessontobelearned.Whileafreemarketeconomyisthemost
productive,lefttoitsowndevices,itcanrunamok.Sincemarketpowercanbecome
concentrated,somelevelofregulationisneededtoensurealevelplayingfield.Financial
institutionsinAsiahadbecomederegulatedbeforethecrisis,leadingtoeasymoney.TheU.S.
hadalsoderegulateditsfinancialinstitutions.Creativenewproductsweredeveloped.Money
EdVallorani
December14,2009
Page15
waseasy.Theeasymoneyledtospeculationwhensoundinvestmentopportunitieswere
notavailableforalloftheavailablemoney.Theriskinvolvedwiththeseinvestmentsisatbest
notunderstood.Atworst,itisignored.
Thelessonthatwasnotlearnedisthatspeculativespending,fueledbyriskyloans,leads
toassetbubbles,andbubblesalwaysburst.TheAsianbubbleburstin1997.The.combubble
burstin2000.TheU.S.realestatebubbleburstin2008.Itseemstobepartofhumannatureto
chasewhatishot,tochasethenextIcantloseinvestment,tonotwanttobeleftoutwhen
everyoneelseismakingeasymoney.Whengreedtakesover,bubblesarebuilt.
Unfortunately,whentheyburst,theytakeeveryonewiththem.
EdVallorani
December14,2009
Page16
Notes
1. Lynch, David J., U.S. can learn from Japan's deflated economy in the 1990s, USA Today, N.p., 25
Jan. 2008. Web. 10 Dec. 2009. http://www.usatoday.com/money/economy/2008-01-21-japanparallels_N.htm.
2. ibid.
3. Watkins, Thayer. The Bubble Economy of Japan, San Jose State University, Department of
Economics, n.d. Publication date not specified, Web. 11 Dec. 2009,
http://www.sjsu.edu/faculty/watkins/bubble.htm.
4. Historical Exchange Rates Oanda, Web. 12 Dec. 2009, http://www.oanda.com/currency/historicalrates.
5. ibid.
6. ibid.
7. ibid.
8. ibid.
9. ibid.
10. ibid.
11. ibid.
12. ibid.
EdVallorani
December14,2009
Page17
Sources
Lynch, David J., U.S. can learn from Japan's deflated economy in the 1990s, USA Today, N.p., 25 Jan.
2008. Web. 10 Dec. 2009. http://www.usatoday.com/money/economy/2008-01-21-japan-parallels_N.htm.
Watkins, Thayer. The Bubble Economy of Japan, San Jose State University, Department of Economics,
n.d. Publication date not specified, Web. 11 Dec. 2009, http://www.sjsu.edu/faculty/watkins/bubble.htm.
Historical Exchange Rates Oanda, Web. 12 Dec. 2009, http://www.oanda.com/currency/historical-rates.
World Economic Outlook Database, IMF, April 2009,
http://www.imf.org/external/pubs/ft/weo/2009/01/weodata/download.aspx.
"FDI statistics." United Nations Conference on Trade and Development United Nations, Web. 10 Dec.
2009. http://stats.unctad.org/FDI/TableViewer/tableView.aspx.
EdVallorani
December14,2009
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1997Asian

1990 1991 1992

1993 1994 1995 1996 1997 1998 1999 2000

20.4% 20.7% 22.2% 21.1% 20.5% 20.3% 19.9% 23.6% 47.8%

8.5% 11.3% 11.9%

7.2% 16.1% 17.1% 15.0% 15.5% 22.2% 17.4% 11.6%

8.1% 12.1% 13.7% 10.5% 14.3%

8.9% 20.1% 17.8%

2.1% 12.8% 10.2%

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