Global and Asian Financial Crisis Comparison

Introduction

The Asian economic crisis of 1997 and the global financial crisis of 2007-2008 are similar in several fronts, particularly in the failures by responsive governments to control and manage financial markets. Also, both the financial crises were blamed on the failure by various monetary institutions to manage financial risks. While the financial instruments applied and risks are unique to each case, the economic effect of the failures in the financial sector is global.

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However, the policy responses to the crises differed and depended on how deeply the crises affected the economies. The Asian economic crisis turned out to be catastrophic when the providers of capital investments finally lost self-assurance on the value of the major Asian currencies (Dooley 14). Just before July 1997, the Asian stock market was characterized by high yielding rates that attracted most of the major world investors.

However, during the same time, the US was experiencing a recession, which they had to act on before it severely affected the economy. In July 1997, America lowered its interest rates to stem the rising inflation and continuous recession. As a result, the American economy became more attractive to most of the investors that funded the Asian capital investments enabling the Asian economies to decline and looks too risky (Dooley 14).

The behavior in the financial markets resulted in the domino effect that spread through most of the East Asian economies igniting an extraordinary global financial crisis. The economic boom that was experienced before the turndown of the stock prices declined drastically within one month.

For instance, Thailand economy dipped by over 75%, Singapore dropped by approximately 60% while Hong Kong reduced by over 23%. The drop in these economies affected every economy in the world. Eventually, the Asian crisis affected every single global market (Moreno, Pasadilla, and Remolona 27).

Similarly, in 2008, the financial boom in the immediate years was downsized by a recession resulting from the collapse in the stock market. Deficiency in financial regulations, deprived public fiscal policies, and unsustainable levels of debts both from the public and private domains as well as from baseless international economy were blamed for the biggest recession that resulted in greatest unemployment rates (Conklin and Cadieux 3).

Moreover, most of the governments around the globe did not control or lacked sustainable control mechanisms of their financial sectors. Consequently, over 45% of the total world economic wealth was destroyed with a few months (Shah Par 10).

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The Asian financial crisis

The Asian financial crisis resulted from an unprecedented economic boom of the most Asian economies, including Korea and Thailand (Moreno, Pasadilla, and Remolona 12). In fact, before 1997, most of the East Asian economies were experiencing extraordinary economic growth that was fuelled by exports in industrial products as well as a combination of various factors such as limited barriers to free international trade.

Essentially, the economic growth experienced during this time in East Asian economies was majorly based on export-oriented externalities in combination with various factors such as cheap and highly skilled labor as well as limited restrictions on international trade (Moreno, Pasadilla and Remolona 17). Essentially, most of the Asian countries encouraged free exports to boost their economies.

Various factors have been attributed to the rise of the Asian financial crisis of 1997. One school of thought has attributed the crisis to poor investments projections and excess capacity in production. The enormous growth in economic prosperity resulting from exports brought a large pool of foreign investments. The foreign investments were directed to various sectors of the economy ranging from the development of residential properties to infrastructures (Dooley 14).

The large pool of foreign investments resulted in the rise of property prices in most of the major economies. However, as the volume of investments increased, the quality of the investments considerably turned down. The impact of increased prices is the failure of the invested capital to raise the expected returns (Dooley 26).

The unexpected outcomes left many specialists, including economists wondering whether the expectations of the investment were based on realistic conditions. The result was a cyclic economic condition as well as spiraling financial activities based on excess capacity (Moreno, Pasadilla, and Remolona 12).

On the other hand, economists argue that the overproduction capacity, particularly on the export-oriented good and services before the crisis was not particularly a bad indicator. However, inflows of capital investments to finance productive investments were subjected to unprecedented financial shocks. The school of thought argues that the financial shocks couple with inadequate policy responses resulted in the regional financial crisis and the global economic disruptions that followed (Moreno, Pasadilla, and Remolona 12).

The major argument is that the crisis stemmed from the weaknesses in the Asian financial system. The weaknesses were caused largely by the deficiency of effective risk management that was generated by implied or explicit governments’ assurances against failure.

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The weaknesses in financial management could not be seen due to the economic gains countries realized during the time. The exchange rates pegged on American dollars attracted huge investments into the economies. While the two analytical points of views are not far much apart, their procedural insinuation varies (Moreno, Pasadilla, and Remolona 12).

Global financial crisis 2007-2008

As indicated, the global financial crisis was blamed on various factors ranging from the deregulation of the financial sector to unsustainable levels of debt both from the public and from the private sectors. The practice of offsetting risky loans through polling the risky loans into sellable assets was the major cause of the crisis and policy failure (Conklin and Cadieux 4).

Before the crisis, most of the major financial institutions were selling off their risky loans to other institutions through polling them together into purchasable securities. The huge earnings from the purchasable assets were later turned into long-term securities that would be bought by large security firms for regular payments (Conklin and Cadieux 4).

Essentially, the firm purchasing is entitled to standard costs above the taken loans while the banker does away with the associated risks (Conklin and Cadieux 5). While the transactional procedures were understood to be the most innovative way through which risky loans could be offset, it backfired to trigger the financial crisis.

Borrowings continued within the banks to generate more securitization and lend out to the public institutions such as the governments. In other words, banks continued to borrow from other financial institutions and securitize their loans. The securities looked so lucrative such that the riskiness of the loans was not a factor. The responsibilities of the risks involved in the loans were left on the institutions that buy the securities (Conklin and Cadieux 3).

As a result, most of the investment banks went into mortgages, buying loans to securitize and sell to other financial institutions. Other banks continued to lend out and securitize the loans while other banks bought securities from other banks. The transactions continued until there was no institution to lend. As a result, such banks turned into riskier loans (sub-prime). The problem was even exacerbated by the rising housing prices.

With no appropriate control and management, investors, banks and other financial institutions started to use derivatives to take more risk and continued to make more money instead of reducing the risks (Conklin and Cadieux 3).

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Financial instruments such as derivatives offer buyers with increased capabilities for prospects based on the current price conditions. However, major financial institutions continued to be exposed, and the risks spread, became complicated and volatile, particularly on the financial institutions that bought the bad debts (Conklin and Cadieux 5).

Similarities and differences in terms of the causes

As can be observed, both the financial crises were caused and exacerbated by a lack of financial and risk management. Also, the poor financial sector control by various governments and policy failures contributed to the rise of the financial crises that affected the global economy at a greater scale.

The 2008 global financial crisis was majorly due to a deficiency in the regulations of risk management and securitization of debts owned as loans by banks (Conklin and Cadieux 9). Similarly, the Asian crisis of 1997 was caused by weaknesses in the Asian financial system. The weaknesses were largely due to deficiencies in the effectiveness of risk management that was generated by implied or unequivocal governments’ assurances against any risks that might arise.

While the Asian economic crisis was caused by a lack of policy measures such as deregulating the currencies and trading in the local currencies rather than in dollars, the 2008 financial crisis emerged from a new revolution in the financial markets with no economic data and information to stem how financial institutions were managing risks (Moreno, Pasadilla and Remolona 128).

The activities in the financial market were perceived as a new way through risks can be managed effectively. However, the form of risk management has a long-term negative effect.

Actions the governments took to stop the crisis

Besides, the financial crises differed in terms of policy interventions from governments. While the 2008 financial crises had a greater effect globally than the Asian crises, governments responded almost at the same time using similar policy interventions. Various governments stabilized and stimulated their economies through the application of stimulus packages. Most of the affected institutions were bailed out while interest rates were drastically reduced.

The economic sense behind the stimulus and reduced interest rates is to stimulate economic growth through increased government spending while maintaining the employment rates (Conklin and Cadieux 9). The policy intervention was applied by most of the major economies that were affected particularly in the European Union. Besides, the crisis affected most of the major world financial institutions and stock markets.

On the other hand, structural reforms, particularly on the financial sectors, were primarily utilized by various governments to stem further loose. Most of the Asian governments closed most of the non-performing financial institutions and recapitalized economic entities that were better performing and viable for future growth (Moreno, Pasadilla, and Remolona 128).

Moreover, tighter controls and appropriate risk management measures were put in place by various governments. Essentially, the Asian economies responded to the crises by strengthening their financial control measures and management as well as regulations to curtail the fragilities that led to the crises.

The level of damage to the economies

The effects of the 2008 financial crisis were devastating and affected every sector in most of the major economies. Immediately after the start of the processes that led to the crisis, most firms realized that they had lost a significant amount of their net worth. The collapse of mortgages and the reversal of the housing boom quickly spread to most of the major global financial institutions and banks that were in custody of instruments related to housing loans (Conklin and Cadieux 9).

As a result, the liquidity disappeared from the system leading to the collapse of these institutions and related banks that depended on additional equity to capitalize their projects or meet daily financial requirements. The major world stock markets were also caught in the web and consequently collapsed.

Further, the collapse of major financial institutions, banks, firms, and stock markets led to drastic losses in employments and increased rates of job cuts. The social unrest ensued due to increased rates of joblessness. Essentially, the 2007-2008 financial crises did away, with over 33% of the total global economic wealth.

On the other hand, the spread of the Asian financial crisis did not widely spread. However, it affected much of the global economy less compared with the 2008 financial crises. Even though most of the world major financial institutions were affected, the effects were short-term and ended through the application of policy interventions and economic reforms (Moreno, Pasadilla, and Remolona 128).

How the crises ended and most of the countries recovered from the crisis

Even though the 2008 financial crisis is still affecting some economies, its devastating effects were brought to an end through policy interventions and governments bailouts (Conklin and Cadieux 9). The monetary and fiscal policies interventions are effective, particularly on increased government spending and reduced interest rates (Conklin and Cadieux 9).

Most of the collapsed institutions were funded, resulting in at the end of the crisis. Conversely, the Asian financial crisis was stopped through financial restructuring and putting in place the control measures.

However, the help from the IMF and World Bank played a critical role in stemming the crisis and the recovery of most of the Asian countries’ economies. The recovery after the Asian crisis was quick since the economic reforms and other measures ensured stability in the financial markets and recapitalization of essential sectors of the economy.

Measures put in place by various governments to prevent more financial crises

Even though various policy interventions have been put in place to help in the recovery of the economies, measures to regulate the financial sector has been a major concern to most of the world economies. In fact, following the crisis of 2008, the regulations of financial sectors have been stepped up.

Currently, the actions of the capital markets and financial institutions are regulated through various institutional and state measures (Moreno, Pasadilla, and Remolona 128). The Asian financial crisis enabled major world financiers such as the IMF to come up with regulatory measures that restricted the activities of the financial institutions.

Works Cited

Conklin, David and Danielle Cadieux. “The 2007-2008 Financial Crisis: Causes, Impacts and the Need for New Regulations.” Harvard Business Review, 4.1 (2008): 1-13. Print.

Dooley, Michael. Are Recent Capital Inflows to Developing Countries a Vote for or against Economic Policy Reforms? Boston: Kluwer Academic Publishers, 1997. Print.

Moreno, Ramon, Gloria Pasadilla and Eli Remolona. Asia’s Financial Crisis: Lessons and Policy Responses. Tokyo: Asian Development Bank Institute, 1998. Print.

Shah, Anup. Global financial crisis, Global Issues 2009. Web.

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