Eh.Res-The Asian Economic Crisis in Historical Perspective Summary

The "Asian Economic Crisis in Historical Perspective" forum began April 6, 1998 with short essays on the topic by Larry Neal, Charles Calomiris and Brad DeLong. Each scholar provided an explanation for the economic crisis and its historical ramifications. Larry Neal provided policy recommendations to ease Asia out of its crisis and to make certain that history will not repeat itself. Charles Calomiris contrasted the Mexican and Asian crises to typically historical financial crises, while Brad DeLong provided a historical narrative.

To begin, Larry Neal’s April 6, 1998 posting provides an overview of the collapse of Asian currencies in 1997. He notes:

"…[W]e have a much clearer case of liquidity first infused, and then refused, for the Asian financial systems that have now collapsed. So history seems to have repeated itself, much to the satisfaction of economic historians who concentrate don financial affairs and who would like to think their expertise might have some relevance to current policy issues."

The basic flaw of the Japanese financial market is "crony capitalism." Neal continues:

"This is the source of the first structural flaw in the financial system; by holding long-term equity in the firms to which banks are lending, a leveraging mechanism is built into the banking system. If the stock market evaluation of the firms’ equity rises, banks have a stronger asset position and they are enabled to lend more and at better terms….This brings us to the second structural flaw…the role of the Japanese central government as a financial intermediary."

Japan acts, in essence, as a lender-of-last-resort. Neal suggests that there needs to be a secondary market for bank debt to aid countries facing an economic crisis. The Bank for International Settlements or the World Bank, but not the International Monetary Fund, could fulfill such a task.

Charles Calomiris remarks in his April 6, 1998 message that the Asian crisis is part of a relatively new phenomenon unique to developing nations. Essentially, since 1982 there has been an "enormous banking insolvency produced by incentive problems in developing country banks." Such a problem, he illustrates, stems from the role of local oligopolies and the "privatized" banking system. This "new" phenomenon is very different from historical banking crises. Calomiris states that "the crises in developing countries are different from historical crises—they reflect different political economy, different incentives of banks, and they produce different patterns of risk taking and different magnitudes of loss."

Brad DeLong uses the 1920s financial market as an illustration of the Asian financial crisis. His conclusion is that a private sector resolution "has been tried before, and the results were not very good," (April 6, 1998). DeLong’s summary is the only one to use a historical analogy to contextualize the Asia economic crisis.

In addition to the summaries of three economists and economic historians, the forum also includes the author’s responses to each of the other summaries. They debate the usefulness of the International Monetary Fund in times of financial crisis and the role of moral hazard in this topic.