To recap, the crisis probably originated in Thailand with the collapse of its currency under the weight of real-estate driven foreign debt. Indonesia, South Korea, Hong Kong, Malaysia and Philippines were also affected considerably. The Asian economic miracle and rise of Asian tigers suddenly seemed like flashes in the pan. Some have attributed the crisis to unregulated capital flows, which were not supported with real growth in productivity or the conditions required for sustainable prosperity. Other analysts attributed many causes structural, episodic, institutional and cultural, such as underdeveloped capital markets; crony capitalism; unregulated foreign hot money; speculative growth in real estate and artificial exchange rates. Some likened it to the classic run on bank deposits led by a herd mentality. Many faulted the pyramid structure of ownership of companies and banks; interconnectedness between borrowers and lending institutions; lack of norms and guidelines to prevent conflicts of interest; inadequate diversity in the financial system to absorb such shocks, and the like. It is another matter that some of the victim nations felt that it was a crisis caused by greedy and manipulative global investorsas voiced by the policymakers in Malaysia at that time. Some even called it a Western crisis with Asian victims!
The IMF played an important role in offering bailout packages and insisting on controversial structural adjustment programmes. A slew of principles, guidelines, codes emerged to ensure financial stability in the world through a robust global financial architecture. Transparency, disclosures and market principles were advanced well, including through key global standards such as the IMFs Code of Good Practices in Fiscal Transparency; the Code on Monetary and Financial Policies and the OECDs Principles for Corporate Governance apart from other creditable initiatives of agencies such as the BIS and assessment programmes.
The current subprime mortgage-lending crisis in the West is not comparable to the Asian one in terms of the speed, extent and impact. But it may have potential lessons to offer. The crisis has come after euphoric conditions that were given an unexpected blow, throwing up many chinks in the financial supply chain and the regulatory system. Both were led by structural changes in financial markets and related innovations. Both have exposed what greed can do well reputed organisations.
It could indeed be a Western financial crisis in the making, the full effects of which are still not evident. The crisis has crossed borders and caused huge losses to financial majors. Reputations are in shreds. There are accusations against a major firm in the US for injecting dangerous financial products into the worlds commercial blood stream. The US administration is being accused of inaction while the bubble was bloating, even as it makes plans to bail out the crisis-stricken industry amidst apprehensions of a credit squeeze and an impending recession. In many ways, the crisis has the hallmarks of the Asian one in terms of lack of transparency, greed and cronyism, not to mention the glorification of market innovation.
No wonder that Laurence Summers has warned that the subprime credit crisis could threaten the overall pattern of economic growth, which would in turn trigger a global slowdown. A weakening dollar, high energy costs, geopolitical uncertainties and lower global growth could indeed portend a crisis not merely for the US but for the rest of the world as well.
India and China were mostly insulated from the previous financial crisis and could remain insulated from the impending problems in the West. Yet, as developed markets are precursors for emerging ones, there could be important lessons relating to the changing structures of financial chains; intermediaries; products; transparency; risk management and regulatory gaps.