Question

Discuss about impact and cause of finanical crisis 1997 and 2008 with political economy?

Answer 1

The financial crisis was caused by a number of factors. However, in simple terms we can say, the crisis was caused by banks being incentivized by deregulation to make risky home loans, which were then repackaged as overvalued and overrated assets, which were then speculated on by banks and investors causing “a speculative bubble”.
Fixed or semi-fixed exchange rates. This made currencies vulnerable to speculation. Also, interest rates were used to maintain the value of a currency. Causing relatively high-interest rates in S.E.Asia which caused hot money flows.

Moral Hazard. With a strong political desire for rapid economic growth, governments often gave implicit guarantees to private sector projects. This was magnified by the close relationships between large firms, banks and the government. This closeness encouraged private firms to place less emphasis on the costs of projects and an assumption expansion plans would be supported by the government.

Higher US interest rates. In the late 1990s, the US started to increase interest rates to reduce US inflationary pressures. Higher interest rates in the US made the East less attractive as a place to move hot money flows. As hot money flows into the East slowed down, Asian currencies started to fall and governments struggled to keep exchange rates at their fixed level against the US Dollar.

Cause of 2008 financial crisis

The first sign that the economy was in trouble occurred in 2006. That's when housing prices started to fall. At first, realtors applauded. They thought the overheated housing market would return to a more sustainable level.

Realtors didn't realize there were too many homeowners with questionable credit. Banks had allowed people to take out loans for 100 percent or more of the value of their new homes. Many blamed the Community Reinvestment Act. It pushed banks to make investments in subprime areas, but that wasn't the underlying cause.
The first signs of the financial crisis appeared in 2007. Banks panicked when they realized they would have to absorb the losses. They stopped lending to each other. They didn't want other banks giving them worthless mortgages as collateral. No one wanted to get stuck holding the bag. As a result, interbank borrowing costs, called Libor, rose. This mistrust within the banking community was the primary cause of the 2008 financial crisis.