Question

Discuss THREE (3) equations and THREE (3) differences that exist Southeast Asia's Financial Crisis (1997) and the Global Financial Crisis (2008).

Answer 1

ASIAN FINANCIAL CRISIS.

The Asian financial crisis, like many other financial crisis began with a series of asset bubbles. Growth in the region's export economies led to high levels of foreign direct investment, which in turn led to increasing real estate values, bolder corporate spending, and even large public infrastructure projects. Heavy borrowing from banks provided for most of the funding.

Ready investors and easy lending often lead to reduced investment quality, and excess capacity soon began to show in these economies. The U.S. Federal Reserve also began to raise its interest rates around this time to counteract inflation, which led to less attractive exports and less foreign investment.

The tipping point was the realization by Thailand's investors that the rate of appreciation in that country's property market values had stalled, and its price levels were unsustainable. This was confirmed by property developer Somprasong Land's default and the 1997 bankruptcy of Finance One, Thailand's largest finance company. After that, currency traders began attacking the Thai baht's peg to the U.S. dollar. This proved successful and the currency was eventually floated and devalued.

Following this devaluation, other Asian currencies including the Malaysian ringgit, Indonesian rupiah, and Singapore dollar all moved sharply lower.These devaluations led to high inflation and a host of problems that spread as wide as South Korea and Japan.

GLOBAL FINANCIAL CRISIS.

In 2006, housing prices started to fall for the first time in decades. At first, realtors applauded. They thought the overheated real estate market would return to a more sustainable level. They didn't realize there were too many homeowners with questionable credit. In addition, banks had approved loans for 100% or more of the home's value.

Many blamed the Community Reinvestment Act, which pushed banks to make investments in subprime areas. Several studies by the Federal Reserve found it did not increase risky lending.Others blamed Fannie Mae and Freddie Mac for the entire crisis. To them, the solution is to close or privatize the two agencies. If they were shut down, the housing market would collapse because they guarantee the majority of mortgages.

Two laws deregulated the financial system. They allowed banks to invest in housing-related derivatives. These complicated financial products were so profitable they encouraged banks to lend to ever-riskier borrowers. This instability led to the crisis.The Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley Act) allowed banks to use deposits to invest in derivatives. Bank lobbyists said they needed this change to compete with foreign firms. They promised to only invest in low-risk securities to protect their customers.As banks chased the profitable derivative market, they didn't keep this promise.

The Commodity Futures Modernization Act exempted derivatives from regulatory oversight. It also overruled any state regulations. Among these products, mortgage-backed securities (MBS) had the most impact on the housing market. The profitability of MBS created more demand for the mortgages they were based upon.