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Financial crisis in East Asia: bank runs, asset bubbles and antidotes

Published online by Cambridge University Press:  26 March 2020

Marcus Miller  and
Pongsak Luangaram
Marcus Miller*
Affiliation:
Department of Economics, CSGR and CEPR, University of Warwick, Coventry, CV4 7AL
Pongsak Luangaram*
Affiliation:
Department of Economics, University of Bristol, Bristol, BS8 1TN
*
Tel: 44 1203 523 049. Fax: 44 1203 523 032. E-mail: [email protected].
Tel: 44 117 928 9006. Fax: 44 117 928 8577. E-mail: [email protected].
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Abstract

No one can deny the outstanding success of the East Asian economies in the last two decades of rapid economic growth backed by surging capital inflows. Key questions posed by the current crisis are: what went wrong, and why? how to fix it? and, how to prevent a recurrence? To answer them, the article begins with a brief overview of recent developments in the miracle economies of East Asia, focusing mainly on Korea, Indonesia and Thailand. We focus too on some of the shadows that came to darken the glittering success story—on declining competitiveness and growing financial vulnerability; and on regulatory failures in banking. Then we take a leaf from Charles Kindleberger's book (1996) on Panics, Manias and Crashes and discuss—with historical precedents—various types of financial crisis: speculative attacks on pegged exchange rates, asset bubbles, stock market crashes and bank runs. Based on the distinction between illiquidity, due to a shortage of cash, and insolvency arising from a failure of economic prospects, we go on to outline three main views of the current crisis.

First that it was simply due to reversal of capital flows, to a failure of collective action on the part of creditors which could and should have been solved by supplying extra liquidity—or by forcing creditors to roll over their loans. Second the view that the miracle had grown into a bubble that had finally had to burst: so the problem was essentially one of insolvency. Finally the view that we prefer, that the panic was not wholly groundless (and rescue efforts were bound to be difficult) mainly because weak regulation combined with implicit deposit guarantees had left local bankers free to gamble with the money that global capital markets had poured into their parlours. Panic set in when foreign depositors realised that there were not enough dollar reserves left for the guarantee to be credible. This account (championed most notably by Paul Krugman of MIT) involves both illiquidity and insolvency and helps to explain why the IMF was unwilling simply to throw money at the problem.

Why did the crisis spread like wildfire around the region? Was it because a bank run due to shaky fundamentals in one country was imitated elsewhere, as investors joined the herd heading for the exit? This and other accounts of contagion are discussed before turning to ideas for crisis prevention and management, and a brief account of future prospects for the region. The article concludes by outlining immediate steps to resolve the current financial crisis and by proposing international monetary reforms to prevent a recurrence.

Type
Articles
Information
National Institute Economic Review , Volume 165 , July 1998 , pp. 66 - 82
Copyright
Copyright © 1998 National Institute of Economic and Social Research

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Footnotes

The Review is pleased to give hospitality to CLARE Group articles, but is not necessarily in agreement with the views expressed; responsibility for these rests with the authors. Members of the CLARE Group are M.J. Artis, T. Besley, A.J.C. Britton, W.A. Brown, W.J. Carlin, J.S. Flemming, C.A.E. Goodhart, J.A. Kay, R.C.O. Matthews, D.K. Miles, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent, M.Fg. Scott, Z.A. Silberston, S. Wadwhani and M. Weale.

This article has benefited substantially from suggestions made by the Clare Group and discussions with Luisa Corrado and Lei Zhang of Warwick University. Financial support from the ESRC, under project No. L120251024 ‘A bankruptcy code for sovereign borrowers’ is gratefully acknowledged. This article draws on joint work with Hali Edison of the Federal Reserve Board and with T.J. Bond of the IMF but the views expressed here are solely the responsibility of the current authors, and should not be interpreted as reflecting those of the Board of Governors of the Federal Reserve System, nor of the IMF and its Executive Board.

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