Asia Economic Crisis.ppt

Asia Economic Crisis IMF and World Bank IMF: to rescue during emergency World Bank (International Bank for Reconstruction and Development): to help plan for development Old boy rules: the US names the president of the World Bank (Paul Wolfowitz, past deputy defense secretary of US), European countries name the head of IMF IMF Articles of Agreement explicitly permitted capital controls Article VI section 3: Controls of capital transfers: Members may exercise such controls as are necessary to regulate international capital movements, but no member may exercise these controls in a manner which will restrict payment for current transactions or which will unduly delay transfers of funds in settlement of commitments, …(signed in 1944) The US, didn’t not remove its most prominent capital controls in 1974. Washington concensus A term referring to the policy held by the US Treasury, IMF, and World Bank Privatization, financial liberalization, budget balance First “successfully” applied in Chile, Argentina, etc. (in a time with rampant inflation, government deficits, etc.) Should the same be applied to other countries? Type 1 Financial Crisis: “Excessive Lending” Banks and creditors stop to roll in loans in a massive way and firms are unable to repay moral hazard, corny capitalism =seems to suggest Asia countries were rotten and corrupt But since lending is voluntary, can we say the lenders (foreign banks, the Wall Street, etc.) are equally rotten and corrupt? Type 2 Financial Crisis: Speculative Attacks Speculators short sell a country’s currency (say, HK$) in a massive way, wishing to force a devaluation/depreciation and gain from it Time 1: Soros gets US$1B now by short selling HK$7.8B. Time 2: After devaluation, one US$ is worth HK$15.6. Time 3: Soros buys HK$7.8B using US$0.5B to complete the deal, gaining US$0.5B. Self Fulfilling Prophecy Even with sound fundamentals, a country may still be susceptible to self fulfilling prophecy That is, an outcome may res