Question

The Asian financial crisis of 1997 and the global financial crisis of 2007. Summarize these two crises and highlight any similarities and dissimilarities.

PLEASE BE THOROUGH IN SUMMARIZING AND HIGHLIGHTING

Answer 1

Asian Crisis

The Asian Crisis was basically a problem of capital outflows from countries that had little foreign exchange reserves. This type of crisis is called a Balance of Payments Crisis, because it happens when countries hold significant external debt (debt that is held by foreign investors and that usually is denominated in a different currency than the country's domestic one), a weak balance of payments (low "profits", or big "losses" on the net account of money flows with foreign entities, and low reserves.

Global Financial Crisis

The Global Financial Crisis was basically an asset bubble that burst in Developed Markets due to a fast depreciation in U.S. Housing Prices, associated with very high levels of system-wide leverage. The bubble was formed by years of very low interest rates in developed markets, which led to great debt accumulation by governments and families - leverage itself used to fund asset purchases and current spending.

DIFFERENCE

Great Financial Crisis of 2008 was a much more systemic risk that arose because of severe discrepancies in the US economy, many of which have still continued to exist and not been rectified. On the other hand the Asian financial crisis was a situation that arose because of problems in the flow of capital.

SIMILARITIES

1. A common backdrop to both crises was abundant liquidity and excessive, imprudent credit expansion
2. There was also a search for yield by lenders, and the abundance of liquidity tended to lead to lax credit standards
3. Another sign of trouble prior to both crises was the rapid increases in property asset prices
4. Another sign of trouble prior to both crises was the rapid increases in property asset prices
5. There were also classic cases of moral hazard, because lenders and borrowers faced little if any risk from their activities