The paper 'The Asian Financial Crisis' is a wonderful example of a Macro and Microeconomics Case Study. Financial crises are not caused by market shortcomings but rather, by market self- correction. Errors caused by speculation are eliminated in this self-correction process to attain market equilibrium where asset prices are not inflated. Generally, financial crises come after a period of remarkable economic growth and follow a defined course. Overspending on investment leads to asset price inflation. As demand for supply declines, the prices start depreciating towards the market equilibrium. Confidence in the markets starts declining and investors start withdrawing capital inflows while liquidating portfolio assets (Mishel, Bivens, Gould, & Shierholz 2012).
The stop in currency inflows creates deficits in trade balances hence a crisis sets in as demand for foreign currency sets in. The 1997 Asian financial crisis and the 2008 financial crisis followed the same path. Analysts argue that with the experience of the 1997 crisis, the 2008 crisis would have been averted or better managed. This essay will look at lessons learned from the 1997 Asian financial crisis in response to the 2008 financial crisis. Causes of the Asian Economic Crisis The Asian economic crisis was caused by both speculations of market trends and poor structures and policies in the region.
Overreactions due to panic and hedging led to the plunging of asset prices and foreign exchange rates. Political regimes in East Asia were pushing firms to ensure and sustain high economic growth rates by encouraging increased investment. Governments offered credits with subsidized interest rates and even promised to bail out those firms that incurred losses while implementing government policies.
Such provisions encouraged massive investments by firms with little regard for risk and cost assessment. In most cases, returns from the new investments were low and loan repayment was a problem. This created deficits in these countries’ balance of payments. Increased defaults in loan repayments and reduced exports due to competition from cheaper alternatives available in other countries played a major role in reducing investor confidence. This was made worse by the appreciation of the US dollar against Asian currencies after 1995. Foreign investors started withdrawing from the Asian markets, by withholding inflows of capital while liquidating fixed and portfolio assets.
These were converted into foreign currencies like the Euro and the US dollar which were considered less vulnerable to depreciation. Financial institutions started facing a sharp increase in the demand for foreign currencies. With the exhaustion of their foreign reserves, there was an imminent risk of the depreciation of local currencies. This, in addition to the reduced currency inflows, created a crisis as governments could not sustain domestic spending. The Crisis in Korea The financial crisis in Korea started with the market liberalization of the early 90’ s so as to conform to the OECD membership requirements.
The government also encouraged the borrowing of short term loans from foreign sources. These steps made the Korean market attractive to both local and foreign investors. With time, the nation’ s foreign debt increased as investors took short term loans to finance long term projects. By the time the crisis hit in 1997, the foreign debt had accumulated to over 63 billion US dollars against a foreign reserve of slightly over 9 billion US dollars(Blinder & Zandi 2010).
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