6 ideas
The Asian crisis and the global financial crisis are not separate events with separate causes. Both come from the same structure: too much leverage, capital flows that have been freed from controls, supervisors who failed to act, and persistent global imbalances. In 1997 the failure showed up first at the emerging-market periphery. In 2008 it reached the core.
Asian borrowers took on short-term, foreign-currency debt and used it to fund long-term assets earning local currency. That created a maturity mismatch and a currency mismatch at the same time. When capital reversed, the currency fell, and the fall raised the real burden of the debt. Rising debt burdens forced more selling, which pushed the currency down further.
Supervising institutions one by one misses the real risk, which sits in the links between them: shared exposures, counterparty chains and common funding sources. Each firm can look sound on its own while the whole system is fragile. Seeing that fragility requires a macro, systemic view of the network.
Crises are caused partly by regulators, not only by reckless markets. Supervisors trusted market discipline and banks' own risk models. They allowed leverage to be moved off balance sheet. Fragmented regulatory agencies left gaps that nobody watched. Light-touch regulation in the West repeated the lax supervision in 1990s Asia that Western critics had condemned.
They shorted the Hong Kong dollar to force interest rates up, and at the same moment shorted stock index futures to profit when rising rates pushed equities down. The authorities responded by buying large amounts of equities with government reserves. Sheng was a regulator in Hong Kong at the time. The episode shows how a small, open financial centre can be targeted when its currency peg and its equity market are linked.
In 1997–98 the IMF imposed fiscal austerity, high interest rates and structural reforms on Asian countries. These were remedies for fiscal profligacy, which was not the problem. Asia faced a private-sector balance-sheet crisis, and the tightening deepened the recession. In 2008 advanced economies chose the opposite course: easy money and bailouts. That exposed a double standard in how crises are managed.