John Irons's Blog


Economic News, Data and Analysis

The Asian Currency Crisis

It seems like every day a new story breaks on the financial and economic
crises in Asia. Aside from being a good source for news on the Asian currency
crisis, the Internet can also be a good place for finding quality analysis
of the problems.

Below I present some useful sources of information and anaylsis on the
causes and consequences of the crisis as well as analysis of the International
Monetary Fund’s policy response.


The consensus that seems to be emerging is that short term loans from
foreign banks coupled with poor investment strategies created a fundamental
instability in the region’s currencies. The poor investments are seen to
be largely a consequence of financial intermediaries which had an (implicit)
government guarantee on their liabilities and the resulting moral
hazard problem

non technical

Blame Short-Term Loans for Asian Crisis
in the New York Times.
Paul Krugman
on the causes of the crisis
in Slate from August. Jeffrey
Sachs on the causes of the crisis
from early on in the melee, July
30, from the Financial Times.

research oriented

Nouriel Roubini, Giancarlo Corsetti and Paolo Pesenti have a longer
research paper
on the causes of the Asian Crisis.

Krugman also has a more recent and detailed research
on the topic. For background into the theory and past crisis I
would also recommend his background
from a NBER conference in October.


Will the crisis spread to other economies? The so called contagion
effects are getting more attention this time around.

the financial crisis could affect you
is a series of BBC reports on
how the crisis will effect the world’s economies. Greenspan’s
Testimony to the House on 11/13/97
also has some thoughts on the possible
effect on the US economy. For more the contagion effects of the past latin
american crisis see the listings
in Roubini’s page.

IMF Response

There has been quite a bit of debate over the role of the International
Monetary Fund (IMF) and its handling of the crisis. A recent discussion,
NewsHour: The IMF and Asia
, asks Lawrence Kudlow, Robert Hormats, Jeffrey
Sachs, and Mary Bush about their views. The background
is also a good place to start in assessing the IMF’s actions.

Another good place to look for information is to directly to the IMF
for their analysis of the situation in the IMF
World Economic Outlook Dec. 1997–Crisis in Asia: Regional and Global Implications

other critiques

Jeffrey Sachs on the IMF and the Asian crisis from the New
York Times
and the Financial
or Cure
is The Economist‘s take on the IMF plans.


Bail Outs: Truth and Fiction
contains a defense against the charge
that the bailout targeted preferred groups.

Crisis hotline – where to stay in touch

The crisis is not over yet, there are sure to be new developments just
around the corner. Here are some places to keep in touch.

Asia Crisis Homepage
by Professor Roubini at the Stern School of Management
contains many more links on the Asian crisis as well as issues related
to currency crashes in general. This is a great source for deep analysis
into the issues.

York Times
Homepage on the Financial Crisis in Asia
is a good starting
point for reviewing both past news events and keeping up with new developments.
The Washington Post also maintains a similar site with news and
analysis at
Asian Financial News

NewsHour Online:
presents news and commentary on the crisis as well as links to
other NewsHour coverage of the topic. See also Online
NewsHour Forum: Asian Turmoil

For a more detailed view of the crisis see OTN
explores Asia’s economic crisis: country by country guide

See Also:


Moral Hazard Problem 

If you spend much time around economists you will start to hear the
phrase “moral hazard” or “moral hazard problem” with great frequency. Below
is an example of the problem for investment decisions 

Say that an investor has the choice between two projects. The first
project is “safe” in that it will with certainty earn a small amount of
profits. The second project is risky and will either get the investor large
returns or larger losses. 

If the size of the losses are large enough for the risky project, the
investor will choose the safe project to maximize her expected profits. 

The moral hazard problem arises when some outside authority (such as
the government, parent company, or some other organization) provides a
guarantee against losses, but is unable to specify or monitor the type
of investments. The investor – now facing a choice that includes a risky
project with a limit on the losses – may choose to invest in the riskier

In general the term moral hazard is used when some incentives are introduced
that distort the optimal behavior of some economic agent in an environment
where the actions of the agent are unknown to the person or organization
providing the incentives. Because the actions are know to only the agent,
she can alter her behavior in such a way as to best take advantage of the
incentives offered. 




Filed under: International



%d bloggers like this: