Mitigating Bubbles & Crises

8/13/2019 Mitigating Bubbles & Crises

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Mitigating Bubbles and Crises

A Written Report Presented to

Neil Angelo C. Halcon

College of Business, De La Salle Universit

!n Partial "ulfill#ent of t$e Re%uire#ents of t$e Course in

!ntroduction to &acroecono#ics

'C(N)W( *+

B

*istine A-elardoRoanne Cru/

)ara &argarita Del RosarioC$arissa 0ao1a-riel *ai#o

C$ristian Re-olledo&iguel Sotto

Dece#-er 2, 3453

INTRODUCTION



A -u--le can -e descri-ed as an econo#ic ccle c$aracteri/ed - rapid epansionfollo6ed - a contraction. !t is 6$en asset prices rise and is follo6ed - a collapse and6idespread default. Agenc relations$ips in t$e -an7ing sector are t$e cause of -u--les.)$is occurs 6$en investors use #one -orro6ed fro# -an7s in order to invest in ris7assets. )$ese ris7 assets are attractive -ecause - defaulting on t$e loan, investors can

avoid losses in lo6 paoff states. !nvestors -id up t$e asset prices -ecause of t$is ris7s$ifting, 6$ic$ lead to it. !n -ot$ t$e real and financial sectors, ris7 can originate. W$enpositive credit epansion is insufficient to prevent a crisis, t$e result is financial fragilit.

!n an intervie6 conducted - Pro8ect & 6it$ professor Avinas$ Persaud, professor0o$n Casti and C'( of Allian/ 1lo-al !nvestors Asia Pacific, Douglas 'u, #itigating-u--les 6as discussed. Casti stated t$at $e -elieved t$at as far as -u--les are concerned, t$e areinevita-le if ou live in an environ#ent 6$ere people freel trade -ac7 and fort$, and anenviron#ent 6$ere prices are set - suppl and de#and. Persaud added to t$is, saingt$at ccles are natural, and t$at eli#inating t$e# are difficult. W$ile t$e are difficult, t$e

can also -e destructive and cause $uge social and econo#ic conse%uences, 6$ic$ is 6$action s$ould -e ta7en to #itigate t$ese -u--les.

!n t$e intervie6, Persaud i#plies t$at 6e s$ould tr to #itigate -u--les since 6$at$appens in a crisis is t$at pu-lic de-t levels dou-le, une#plo#ent rates dou-le and t$ereis a $uge i#pact on povert and ine%ualit. He -elieves t$at our reponse to t$is s$ould not-e so #uc$ -out eli#inating -u--les, -ut 6or7ing on #oderating t$eir ecesses in orderto -enefit everone.

Historical bubbles

)$e earliest recorded -u--le in $istor 6as t$e tulip#ania t$at occurred in t$e 59t$centur in Holland. )ulips 6ere introduced to 'urope in t$e #id:5;t$ centur and soonafter t$at, tulips -eca#e a $ot co##odit and a status s#-ol in Holland. (ver ti#e, t$eDutc$ developed a li7ing for eotic tulip -ul-s 6it$ colored stripes, a#ong all classes in t$ecountr. )$e Dutc$ )ulip#ania -u--le 6as filled 6it$ tec$nological innovations andfinancial innovations. At t$e pea7 of t$is tulip#ania in Holland, fro# Nove#-er 5;+; to"e-ruar 5;+9, t$e price of tulips increased t6ent fold, and 6as follo6ed - an evengreater decline in prices in t$e net t$ree #ont$s.

)$e Sout$ Sea Bu--le occured in Britain in 5934. )$e Sout$ Sea co#pan 6as#ade in 5955 to assu#e t$e Britis$ national de-t, as a re6ard t$e 6ere granted a#onopol to trade 6it$ Spain<s Sout$ A#erican colonies. )$e co#pan too7 advantage of

its relations$ip 6it$ govern#ent officials and eploited t$e unli#ited potential of t$eopportunit. )$eir stoc7 rose reall fast and it #otivated t$e creation of #ore 8oint:stoc7co#panies -ut Sout$ Sea pus$ed for Parlia#ent to pass t$e Bu--le Act in 0une 59346$ic$ pro$i-ited unaut$ori/ed 8oint:stoc7 co#panies. )$is -oosted t$eir s$are price =>4euros in 0une and 5444 euros in August fro# 53= euros in 0anuar. Directors of t$eco#pan started to sell t$eir $oldings after reali/ing t$at t$e co#pan could not sustaint$e #ar7et price of t$eir s$ares. )$eir selling caused t$e s$are price to drop to 544 eurosat t$e end of t$e ear.

)$e Roaring )6enties 6as t$e decade 6$en t$e U.S. e#erged as t$e ric$estcountr in t$e 6orld. )$is 6as t$e era 6$en ne6 tec$nologies 6ere a-le to create #ass

production of consu#er goods suc$ as cars and radios. Ho6ever, t$e Roaring )6entiesca#e to an end 6it$ t$e Stoc7 &ar7et Cras$ of 5>3> and t$e onset of t$e greatdepression. )$is 6as said to -e caused -?



5. Rapid gro6t$ of stoc7 prices in 5>3= and 5>3> t$at outpaced t$e fir#<s gro6t$ ofdividends3. @Ne6: econo# stoc7s+. Heig$tened level of trading volu#e. Large influ of ne6 investors

2. Rapid epansion of loans 6$ic$ allo6ed investors to -u stoc7s again

"or t$e t6entiet$ centur t$e -iggest -u--le 6as t$e internet -u--le. Because oft$e rapid develop#ent of t$e internet, a ne6 6ave of fir#s 6ent pu-lic. !nternet stoc7seperienced a gro6t$ of nearl 5444 fro# (cto-er 5>>= to "e-ruar 3444. At t$e pea7of "e-ruar 3444 t$e !nternet sector $ad 44 co#panies and 6as profitless. Prices ofinternet stoc7s declined after "e-ruar 3444 - over =4 t$e #ar7et value of t$e lossesis around = trillion. S$orting internet stoc7s 6as $ard. )$ere 6ere $ig$er s$ortinginterests, $ig$er -orro6ing costs and greater violation of put call parit for !nternet stoc7sin t$e #ar7et. )$e internet -u--le -urst due to t$e failure of fir#s to produce real earnings

According to Wei Eiong $istorical data $as s$o6n several co##onalities of asset -u--les?

5. )$e tend to coincide 6it$ tec$nological or financial innovation3. )$e tend to coincide trading -et6een investors, and active trading of ne6 investors+. )$e are vulnera-le to increase in asset and supplies. )$e #a suddenl @-urst 6it$out a 6arning sign

)$ese co##onalities can -e of essential guidance in anal/ing -u--les.

DISCUSSION



Characteristics of Depression

A depression is an occurrence in an econo#, 6$ic$ argua-l results in t$e #ostcatacls#ic turn of events to $appen to a nation. !t is generall defined as a prolongedperiod of recession, 6$erein a countrFs 1DP is continuousl negative. !t ta7es a specific#iture of events for one to $appen, -ut once it $as -egun it is ver $ard to stop and ver

$ard to control. )$is often creates an unprecedented a#ount of panic and fear, 6$ic$ inturn results in declining -usiness activities, falling prices, rising une#plo#ent, etc. )$ecauses of an econo#ic depression can co#pose a ver long list of co#ple concepts,6$ic$ is 6$ #an of t$ose affected do not even understand $o6 eactl t$eir financialpropert is -eing lost. 1enerall spea7ing $o6ever, it can -e said t$at ContractionaryMonetary olicy can provo7e a depression. )$is is 6$ere t$e "ederal Reserve uses toolssuc$ as t$e "ederal "unds Rate t$at slo6 do6n econo#ic gro6t$ and decrease t$e#one suppl. !nitiall, t$is is ai#ed to prevent inflation 6it$out pus$ing an econo# into arecession. !n t$e US, t$is 6as used to slo6 do6n t$e stoc7 #ar7et -u--le in t$e 5>34Fs.Ho6ever, once t$e stoc7 #ar7et cras$ed, t$e "ed 7ept raising interest rates to #aintaint$e gold standard instead of pu#ping #one into t$e econo#, allo6ing t$e #one suppl

to continuousl fall creating #assive deflation. Prices fell - 54 a ear, 6$ic$ delaedpurc$ases and ulti#atel led in t$e loss of personal real estate. La6s 6ere constitutedspecificall in reaction to t$e 1reat Depression, ai#ing s$arpl at its per#anentprevention, at least in t$e 6a or #agnitude t$at 6as eperienced. Central -an7s are no67een in #aintaining a #ore active role in !"pansionary Monetary olicy, 6$ere rates arelo6ered t$erefore increasing #one suppl and ena-ling -an7s to lend #ore #one. )$issti#ulates t$e econo#, allo6ing -usinesses to epand and consu#ers to spend #oret$erefore #eeting levels of de#and. )$ere is #ore to t$e preventive actions againstdepressions $o6ever, re%uiring t$e use of #iscal olicy. )$is 6ould #ean control over t$ede#and rat$er t$an t$e suppl - increasing govern#ent pro8ects or lo6ering taes t$atsti#ulate activit 6it$in t$e econo#.

Causes that occurred during $%%& ' ())* financial crisis

+sian #inancial Crisis $%%&

According to Nanto G5>>=, t$e Asian "inancial Crisis in 5>>9:5>>= revolvesaround four -asic pro-le#s or issues 6$ic$ are said to -e G5 t$ere 6as a s$ortage offoreign ec$ange t$at resulted to t$e dra#atic decrease of value of currencies ande%uities in )$ailand, !ndonesia, Sout$ *orea and ot$er Asian countries, G3 t$ere 6as aninade%uatel developed financial sectors and #ec$anis#s for allocating capital for Asian

econo#ies 6$o are eperiencing pro-le#s, G+ effects on t$e crisis on -ot$ t$e UnitedStates and t$e 6orld, and G !nternational &onetar "unds< role, operations, andreplenis$#ent of funds.

!n t$e article "inancial Crisis Asia 5>>9, it states t$e causes of Asian "inancialCrisis. !t first #entions t$e foreign de-t:to:1DP ratios of t$e four large AS'AN econo#iesin 5>>+:>; rose fro# 544 to 5;9. Secondl, t$ere 6as a large current account deficitfro# t$e countries li7e )$ailand, !ndonesia, Sout$ *orea. !t also #entions financialderegulation encouraged #ore loans t$at also $elped create asset -u--les, and t$ere 6asencourage#ent of epansive -orro6ing - fir#s -ecause of t$e -oo#ing econo# and-oo#ing propert #ar7ets. !t 6as also said t$at t$e increase of interest rates in t$e United

States in t$e late 5>>4s caused t$e #ove#ent of $ot #one flo6s fro# t$e east to 6estt$at caused currencies to fall and for t$e govern#ents to struggle to 7eep t$e ec$angerates at t$eir fied level against t$e US Dollar. Su-se%uentl, t$e )$ai B$at t$en -egan its



rapid devaluation t$at follo6ed - ot$er Asian countries and econo#ies -egan to devalueas 6ell -ecause investors 6anted to leave Asian currencies. )$e result of t$is event #adeit #ore difficult for countries to repa its de-ts -ecause of t$e devaluation of t$eircurrencies. Ho6ever, t$e !nternational &onetar "unds G!&" tried to intervene t$roug$i#ple#enting fiscal restraints suc$ as lo6er spending, $ig$er taes and privatisation to trsta-ili/e t$e crisis -ut it 6as dee#ed as a controvers t$at #ade t$is 6orse according to

t$e article.

Monetary olicy Responses

!n Asia, tig$t #onetar polic 6as surprisingl $ard to co#e -. As evidenced -"igures 5 and 3, it s$o6s t$e pattern of interest rates and onl reveals t$at t$ese rates arenot re#ar7a-l $ig$ in t$e crisis countries G!ndonesia, *orea, &alasia, )$ailand, andP$ilippines. Alt$oug$ t$e situation and t$e i#pact of t$e crisis tends to -e co#ple and#ore or less varies fro# one countr to anot$er, so t$e follo6ing generali/ations arepossi-le, $o6ever, in ter#s of $o6 #onetar polic 6as used in t$ese countries.

"igure 5. No#inal !nterest Rates and 'pected Dollar Returns

Source? !nternational &onetar "und, 5>>>

"igure 3. 'pected Dollar Returns



Source? !nternational &onetar "und, 5>>> #iscal olicy Responses

Regarding t$e 5>>9 Asian "inancial Crisis, according to Berg G5>>>, t$e initialfiscal polic response 6as to enact so#e contractionar #easures. Li7e in )$ailand, t$eneed to reduce t$eir ecessive current account deficit. Ho6ever to co#pare it to ot$er

countries, contractions 6ere #uc$ s#aller. Wit$ t$is financial crisis, fiscal ad8ust#ent 6asin need to finance large loo#ing ependitures involved in recapitali/ing t$e financialsste#. Also t$ere is a need to preserve scarce foreign invest#ent and do#estic credit forprivate sector fir#s.

&oreover, Berg G5>>> states t$at during t$e financial crisis, all of t$e affectedcountries ecept t$e P$ilippines $ad a strong reputation on fiscal discipline. As series ofpro-le#s 6ere revealed, particularl in t$e financial sector, dou-ts e#erged regarding t$esustaina-ilit of t$e polic regi#e. Also, in fiscal epansion, t$ere s$ould -e a caution.Ast$e dept$ of t$e recession -eca#e #ore o-vious, epansionar fiscal polic approac$gained #ore strengt$. )$is entails t$at fiscal polic is felt not rig$t a6a.

Berg G5>>> points out t$at t$ere is no clear general fiscal polic -ecause fiscalpolic varied across countries.

!n earl 5>>9 up until Dece#-er, )$ailand and *orea did not actuall raise itsinterest and ec$ange rates on a sustained -asis. According to !nternational &onetar"und G!&", @t$e average real interest rates #easured during t$ose ti#es are re#ar7a-llo6 for #ost countries for #ost ti#e periods. *orea<s real rate 6as actuall -elo6 54percent during t$e 6$ole ear of 5>>9, 6$ile )$ailandIs real rate $ave #ore or less-roac$ed 54 percent during August and Septe#-er Gsee "igure +. P$ilippines, on t$e

ot$er $and, 6as so#e6$at an eception for its rates $ave reac$ed a-ove +4 percent in0ul and 52 percent in (cto-er. !n addition fro# t$ese figures, )$ailand<s no#inal interestrate s$o6ed a tendenc to return fairl rapidl to pre:crisis levels in t$e fall of 5>>9follo6ing t$e pea7s in 0ul and Septe#-er. Ho6ever, in earl 5>>=, according to !&",



interest rates in *orea and )$ailand $ave finall risen as t$e currencies sta-ili/ed 6$ile&alasia, out of all countries, $ad generall lo6er interest rates. "inall, rates $avesu-se%uentl co#e dra#aticall do6n 6it$ t$e sta-ili/ation of t$e currencies. )$us, -0une 5>>=, real rates and even #ost no#inal rates 6ere -elo6 co#pared to 6$ere t$e6ere prior to t$e crisis G!ndonesia 6as an eception.

"igure +. Real !nterest Rates


)$e -asic cause of t$is crisis 6as t$e sudden decline of investors t$at resulted tolarge capital outflo6s. "igure give a variet of crude #easures of t$e si/e of t$e s$oc7 to-e a-sor-ed - #onetar polic. )$e #ain conclusion t$at #a -e dra6n out fro# t$ista-le is t$at -ot$ large increases in interest rates and large real ec$ange ratedepreciations are generall associated 6it$ large s$oc7s. !ndonesia, for ea#ple, $as t$elargest increase in sovereign spread largest depreciation and $as t$e -iggest increase inno#inal interest rates. P$ilippines, in contrast, $ave t$e s#allest increase in sovereignspread, s#allest interest rate increases and ec$ange rate depreciations. &alasia $asalso -een a standout for it a-sor-ed t$e entire s$oc7 - its ec$ange rate. An i#portantargu#ent t$at can -e raised in t$e contet of t$is Asian econo#ic crisis is t$at reduction ofoutput, 6ea7ening of -an7s and fir#s< -alance s$eets, and tig$ter #onetar polic #a$ave a great effect of driving a6a rat$er t$an attracting foreign investors. !n t$is case,according to !&", t$e countries 6it$ -ad s$oc7s could $ave -een acco##odated if t$eirrespective interest rates 6ould -e relativel lo6 6$ile suffering a relativel s#all ec$angerate decline.

"igure . Policies and (utco#es GPercent c$anges, 0une 5>>9 to &arc$ 5>>=, unlessot$er6ise indicated




)$e -roader eperience of t$is econo#ic crisis suggests t$at as long assupportive policies are t$ere, appropriate #onetar polic does not $ave a perverse effect.

!ndeed, eperience in #an countries suggest t$at fir# #onetar policies can sta-ili/eec$ange rates and allo6 real interest rates to decline fairl rapidl as confidence returns.)$e se%uence in *orea and )$ailand $ave so#e$o6 -roug$t sta-ilit in t$eir ec$angerates in earl 5>>= and a rapid decline in t$eir interest rates 6it$ t$e i#ple#entation oftig$t #onetar polic. A #onetar polic t$at is geared to6ards ec$ange rate sta-ilit int$e P$ilippines $as resulted in s$arp -ut fairl s$ort:lived increases in rates. )$ei#ple#entation of a loose #onetar polic, $o6ever, $ave led !ndonesia to $ave relativellarge depreciations and continued $ig$ no#inal and real interest rates as to confidence forsta-ilit 6as relativel slo6 in return.

,lobal financial crisis of ())*

According to t$e article - A#adeo, t$e 344= financial crisis is t$e 6orstrecession since t$e 1reat Depression of 5>3> due to t$e drastic decrease of $ousingpricing in t$e United States t$at -egan in 344; -ecause of t$e loans - t$e creditors. !nan article - 1uina G3455, t$e causes t$at led to t$e 1lo-al "inancial Crisis 344= are&ar7et !nsta-ilit, 1reed in credit, and t$e $ousing #ar7et decline. Davis G344=#entioned t$at t$e facts t$at approi#atel ; of all #ortgage loans in t$e United Statesare in default as co#pared to previous rates of .32 to 3. !n t$e article of Davis G344=,$e #entions t$at t$e Clinton ad#inistration initiall pressured t$e -an7s to $elp t$e poorpeople to -eco#e $o#eo6ners. )$is pressure is also -ecause t$e Clinton 0usticeDepart#ent t$reatened t$e -an7s of la6suits and fines G54,444 per application for

discri#ination - redlining if t$ese -an7s refuse to #a7e loans. &oreover, corporationsli7e "annie &ae Corp, eased its credit re%uire#ents and t$is resulted to ris7 loans. !norder to pa t$ese -ad loans, t$e tapaers are t$e ones 6$o are said to pa it and t$is is6$at t$e call a -ailout. )$e also #entioned t$at t$e -an7s $ad resold t$ese #ortgagesinto pac7ages and t$at t$e ot$er o6ners around t$e 6orld t$roug$ $edge funds -egan topanic -ecause of t$is.

Co G344= presented t$e #acro:econo#ic and #icro:econo#ic causes of t$e344= financial crisis in t$e United States. !n t$e #acro:econo#ic side, Co G344= na#edit as t$e Profligate Lending Led to Losses in 6$ic$ it is a-out t$e people 6$o $ave not%ualified for credit loans -efore Gsu-pri#e -orro6ers and t$e people 6$o $ave %ualifiedfor loans far larger t$an t$e could $ave secure in t$e past Gpri#e -orro6ers. W$en t$esu-pri#e and pri#e -orro6ers 6ere una-le to pa t$eir #ortgages, t$e delin%uenc andforeclosure rates could not -e a-sor-ed - t$e lenders and lead to t$e failure of fir#s li7e



Bear Sterns, Le$#an Brot$ers , "annie &ae and "reddie #ac. (n t$e ot$er $and, &icro:econo#ic side na#ed as 'cessive Land Use Regulation 'acer-ated Losses in 6$ic$ ittal7s a-out t$e increase of de#and for $ousing. )$e de#and varies as to t$e landregulation and its restrictions in t$e different #etropolitan areas in 6$ic$ t$is affects t$egro6t$ of t$e de#and.

Monetary olicy Responses

)$e glo-al financial crisis $as c$allenged t$e conventional vie6s on t$e role of#onetar polic. "ro# a #acroecono#ic perspective, t$e crisis $as -een vie6ed as -eingcaused - t$e persistence of glo-al i#-alances, ecessivel acco##odative #onetarpolic pursued in #a8or advanced econo#ies and lac7 of recognition of asset prices inpolic for#ulation. !n a nu#-er of advanced countries, polic rates re#ained ver lo6 Gi.e.,-elo6 6$at is considered as neutral rates for a sustained period 6$ic$ resulted in#ispricing of ris7s and $ence contri-uted to t$e crisis Gsee "igure 2.

"igure 2.

Source? Ban7 for !nternational Settle#ents, 3455

)$e crisis $as s$o6n t$at #onetar policies in advanced countries do $ave spillovereffect on e#erging #ar7et econo#ies G'&'s. "or instance, t$e persistence of lo6interest rates in advanced econo#ies, could pus$ ecessive capital flo6s to '&'s insearc$ of $ig$er returns, t$us eposing t$ese econo#ies to t$e ris7 of reversal unrelatedto t$eir funda#entals. 'cessive inflo6s could accentuate asset prices and put up6ard

pressure on ec$ange rate. 1iven t$e fact t$at #ost of '&'s are lin7ed 6it$ advancedecono#ies #ore t$an ever -efore, t$e could not re#ain insulated fro# t$e i#pact ofcrisis originating else6$ere. Apart fro# perpetuating glo-al i#-alances, it is argued t$at



t$e eas #onetar polic pursued in advanced econo#ies encouraged ecessiveleveraging on t$e part of investors as 6ell as -an7s and financial institutions. )$e s$arprise in t$e leverage of financial institutions in t$e first decade of t$is centur $as -eenparticularl stri7ing Gsee "igure ;. )$e lo6 interest rates coupled 6it$ ecess #ar7etli%uidit led to t$e searc$ for ields, 6$ic$ in turn pro#oted rapid financial innovations inter#s of co#ple derivatives and structured finance products. Conse%uentl, t$e financial

sste# got enlarged 6it$ t$e gro6t$ in off:-alance s$eet activities, and t$e s$ado6-an7ing re#ained -eond t$e purvie6 of regulation.

"igure ;.

)$e crisis #anifested itself first in t$e for# of tig$tening of li%uidit in inter:-an7#ar7ets in advanced econo#ies as -an7s -eca#e reluctant to lend to eac$ ot$er -ecauseof t$e fear of counter part ris7s. )$is led to a-nor#al level of spreads, s$ortening of#aturities, and contraction of so#e #ar7et seg#ents. As a result, -an7s and ot$erfinancial institutions eperienced erosion in t$eir access to funding and capital. )$etig$tening of credit conditions coupled 6it$ etre#e ris7 aversion and deleveraging -

-an7s and financial institutions led to a s$arp slo6do6n in private sector credit gro6t$.

&onetar aut$orities in t$e advanced econo#ies 6ere t$e first to resort toaggressive #onetar easing first - reducing polic rates and t$en - using t$eir -alances$eets in unconventional 6as to aug#ent li%uidit. Wit$ t$e financial crisis spreading tot$e real sector and raising concerns of econo#ic recession, credit and %uantitative easingac%uired polic priorit in #ost central -an7s. )$e do#inant vie6 during t$e pre:crisisperiod t$at one o-8ective and one instru#ent as t$e -est #onetar polic fra#e6or7 $asco#e under %uestion during t$e crisis. Despite t$e success of t$is fra#e6or7 in ac$ievingprice sta-ilit, t$e crisis falsified t$e do#inant vie6 t$at price sta-ilit could si#ultaneouslensure financial sta-ilit. !t can -e o-served fro# t$e se%uencing of #onetar polic

responses in advanced countries t$at as polic rates graduall approac$ed record lo6s oreven near /ero, central -an7s $ad to resort to unconventional #easures suc$ as creditand %uantitative easing, 6$ic$ posed significant c$allenges to polic co##unication.



During t$e pre:crisis period, central -an7s< #onetar polic gained #ore credi-ilit forac$ieving great #oderation c$aracteri/ed - $ig$ gro6t$ and lo6 inflation. Wit$ t$eadoption of inflation targeting increasing nu#-er of central -an7s $ad focused pri#aril on#aintaining price sta-ilit. Ho6ever, it needs to -e recogni/ed t$at glo-ali/ation 6asanot$er #a8or factor contri-uting to t$e great #oderation. Countries suc$ as C$ina and!ndia 6it$ t$eir a-undant la-our provided lo6 cost su-stitutes and t$ere- $elped contain

-ot$ inflation and 6age pressures in t$e advanced econo#ies. Conse%uentl, 6it$ eplicitfocus on price sta-ilit, central -an7s 6ere a-le to anc$or inflationar epectations andgain credi-ilit.

&an '&'s $ad financial sta-ilit as an additional o-8ective of t$eir #onetar policfra#e6or7 and t$erefore used #ultiple instru#ents, including %uantitative tools suc$ ast$e cas$ reserve ratio to #oderate t$e pace of do#estic credit gro6t$ as 6ell as #onetari#pact of large capital flo6s Ge.g., C$ina, !ndia and Russia. &acro:prudential #easures int$e for# of loan loss provisioning re%uire#ents 6ere used to target certain sectors in anu#-er of '&'s G&oreno, 3455. Apart fro# raising provisioning re%uire#ents Gon -an7s<eposure to sste#icall i#portant non-an7 financial institutions, ris7 6eig$ts Gfor $ousing

loans, consu#er credit and co##ercial real estate 6ere also used to c$ec7 un-ridledcredit gro6t$ in specific sectors. Several countries used credit ceilings Gsuc$ as !ndonesiaand 6indo6 guidance Ginvolving consultations -et6een t$e aut$orities and t$e -an7s inC$ina to curtail lending, 6$ile *orea used aggregate credit ceiling to target credit to s#alland #ediu# enterprises.

)$e recent eperience s$o6ed t$at conventional polic fra#e6or7 #a not al6as-e sufficient to deal 6it$ crisis. )$erefore, central -an7s $ave to -e flei-le enoug$ andinnovative in t$eir polic approac$ to respond pro#ptl to t$e -uild:up of sectorali#-alances. )$e do#inant vie6 during t$e pre:crisis period t$at one o-8ective and oneinstru#ent as t$e -est #onetar polic fra#e6or7 $as co#e under %uestion during t$ecrisis. W$ile interest rate can continue as t$e do#inant instru#ent for i#ple#enting#onetar polic, supple#enting it 6it$ ot$er %uantit or #acro:prudential instru#ents evenin nor#al ti#es 6ill not onl en$ance t$e flei-ilit of #onetar polic -ut it #a actuallattain #ultiple o-8ectives in a #ore effective 6a.

#iscal olicy Responses

According to "reed#an G344>, t$e !nternational &onetar "und $as called for fiscalsti#ulus in as #an countries as possi-le -ecause it 6or7s to sti#ulate spending andecono#ic activit directl, effectivel -passing t$e financial sector in its effects.

&oreover, '$ler G344> states t$at eac$ tpe of fiscal polic 6ill $ave its o6n 7indof i#pact on econo#ic activit and fiscal -alances 6$et$er t$is 6ould -e in t$e for# of tacuts, industr specific support, direct invest#ent, cas$ $andouts or credit guaranteeing.

Countries around t$e 6orld $ave cut taes so to strengt$en $ouse$old inco#e, topro#ote invest#ent and increase aggregate de#and. Li7e in t$e United States,-usinesses 6ere given incentive in 6$ic$ t$e 6ere given an additional 24 ta deductionon invest#ent costs in 344= G1odfre, 344=. &oreover, t$ere 6ere financial support forauto#o-ile industries. )$is entails t$at industries suc$ as auto#o-ile $as a great effect inUS econo#. )$erefore, to restrain t$e effect of t$e crisis t$e $ave to support t$is 7ind of

industr. And so as to preserve +22, 444 8o-s in t$e industr and up to .2 #illion in relatedindustries GAuto !ndustr "inancing and Restructuring Act, 344=.



(n t$e ot$er$and, in Australia, t$e govern#ent $as i#ple#ented several sti#ulussuc$ as t$e 3 -illion Nation Building Plan focused pri#aril on direct invest#ent ininfrastructure. )$is is -ecause t$e -elieve t$at infrastructure provide a larger -oost inoutput and i#prove t$e productive capacit of t$e econo# in t$e longer ter# GAustralian1overn#ent, 344>.

&oreover, according to S$err G344>, t$is supports $ousing construction and cas$-onuses to individuals. Ho6ever, t$is sti#ulus $as a ver li#ited i#pact on t$e econo# ifit is not spent.

Co-pare.Contrast the reports -ade after the $%%& ' ())* financial crisis

A financial crisis is 6$en t$e value of financial institutions drops in suc$ a rapidfas$ion t$at, it develops a sense of panic causing investors to 6it$dra6 or sell off t$eirassets in a loss of confidence. Nu#erous crises occur over ti#e, -ut t6o of so#e of t$e#ost nota-le 6ould -e t$e 5>>9 Asian financial crisis and t$e 344= glo-al financial crisis.Pro-a-l t$e defining si#ilarit -et6een t$e t6o is t$at t$e -ot$ eperienced a c$ain or

ripple effect fro# t$e -urden of one countr, t$erefore -eco#ing an international crisis. !tcan -e argued t$at )$ailand actuall -egan t$e 5>>9 financial crisis, and t$e US triggeredt$e 344=. )$e root cause of t$e Asian financial crisis ste##ed fro# de-t in foreigncurrenc, 6$ic$ led to large eternal deficits and eventuall led to investors pulling out ofpracticall t$e 6$ole 'ast Asia. !n 344= $o6ever, t$e US eperienced a pro-le# 6it$ t$e#ortgages, 6$erein it 6as actuall t$e loans t$at caused t$e recession :: t$e -an7s too7too #an ris7s in ter#s of t$e loans t$e 6ere agreeing to.

Ne6s fro# t$e World Ban7 in 3449, gives an update on t$e current situation of 'ast Asia in ter#s of t$e 5>>9 financial crisis 54 ears earlier. )$e report not onl states 'ast Asia<s #ore recentl acco#plis$#ents since t$e said crisis, -ut even points out variousc$allenges t$e region still needs to face, as 6ell as $o6 to overco#e t$ese. )$ec$allenges 'ast Asia faces $ave ver #uc$ to do 6it$ t$e after#at$ of t$e crisis. C$ina<secono#ic rise -egan 6$en t$e countr<s perseverance prevailed after t$e crisis, and arestill going strong until no6. )$is gro6t$ t$en pressured t$e ot$er 'ast Asian countries to-eco#e #ore co#petitive to -eco#e successful, s$o6ing $o6 t$e article $as #ore of apositive outloo7 on t$e crisis. )$e report on t$e glo-al financial crisis $o6ever, fro# BBCNe6s 3455 :: + ears after t$e crisis :: -rutall and directl -la#es "or#er "ederalReserve c$air#an, Alan 1reenspan, as t$e person 6$o $as contri-uted #ost negativel tot$e crisis. )$is ne6s article 6as also not t$e onl one t$e 6ord @avoida-le included in t$etitle. 'sta-lis$ing t$e -la#e for t$e glo-al crisis in 3449 6as said to -e essential to preventfuture crises :: over 944 6itnesses 6ere intervie6ed and 5> das of $earings $elp :: -ut

for t$e Asian financial crisis in 5>>9, it 6as s$o6n to $ave #ore of a positive outco#e fort$e region, if not a #ore inspiring eperience.

Ho/ the hilippines can be better prepared for future financial crisis using early /arningsyste-

!f t$e P$ilippines adopted an earl 6arning sste# so t$at it could #onitor certain

econo#ic indicators t$at #a indicate t$e possi-le develop#ent of conditions t$at canlead to a future financial crisis, t$e can -e -etter prepared for future financial crisis. (nesuggestion for t$e P$ilippines to -e -etter prepared is t$at t$e govern#ent s$ould consider



designing si#ple #easures t$at #ig$t indicate 6$et$er t$e are vulnera-le to a crisistriggered - investor eit or a currenc collapse. W$en a countr faces $ig$ levels of ris7of currenc depreciation and investorJlender flig$t, t$ese indicators #a serve as @circuit-rea7ers. !f t$e govern#ent i#ple#ented #easures to cur- i#ports, slo6 t$e pace offoreign -orro6ing, slo6 t$e entr and eit of portfolio invest#ent or li#it t$e fluctuation oft$e peso as t$e countr approac$es t$e danger range, t$ese circuit -rea7ers 6ould -e

essential in signaling 6$en t$e danger range is -eing approac$ed. So#e ea#ples of indicators are t$e ratio of official reserves to total s$ort ter#eternal o-ligations, and t$e ratio of official reserves to t$e current account deficit. )$eseare indicators of currenc ris7. An indicator of lender 6it$dra6al vulnera-ilit is t$e ratio ofofficial reserves to private and pu-lic foreign currenc deno#inated de-t, 6$ile t$evulnera-ilit to portfolio investor eit can -e #easured - t$e ratio of t$e total accu#ulatedforeign portfolio invest#ent to gross do#estic capital for#ation.

Conclusion

)o conclude, a -u--le in t$e econo#ic sense is an event 6$ic$ an econo#eperiences sudden contraction in t$e value of assets, 6$ic$ #ore often t$an not,develops into a #uc$ larger crisis. )$e 5>>9 Asian financial crisis and t$e 344= glo-alfinancial crisis are ea#ples of t$ese econo#ic -u--les -ecause -ot$ t$ese occurrenceseperienced rapid contraction leading to econo#ic recession. )$e causes of t$e 5>>9crisis in 'ast Asia 6ere devaluation of currencies due to t$e transfer of $ot #one to t$eUnited States -ecause of $ig$ interest rates, $ig$ de-t to 1DP ratio of Asian econo#iesand large current account deficits. Also, t$ere 6ere ineffective !&" policies i#ple#ented in'ast Asia, t$at furt$er #ai#i/ed t$e da#aging affects. !n t$e 344= crisis, it first -egan6it$ Clinton<s Ad#inistration -ecause $e 6anted poor people to -e $o#eo6ners as 6ell,t$at led to granting loans even if so#e could not afford to pa :: t$e ta paers 6ere t$eones 6$o ended up 6it$ t$e lia-ilit. )$e -an7s $ad to sell t$e #ortgages, and t$ere 6erea lot of ris7 loans t$at couldn<t $ave -een paid. )$e severit of t$ese situations can not -estressed enoug$, as prolonged recession can lead to an econo#ic depression, 6$ic$ isargua-l t$e #ost catacls#ic situation a nation or region can -e in. (nce it -egins, itsver $ard to stop or control, and t$e onl 6a to re#ed it is t$roug$ appropriate#anage#ent of #onetar and fiscal polic. )$roug$ ne6s reports on t$e after#at$ of -ot$crises, 6e can conclude t$at t$e Asian financial crises of 5>>9 could $ave actuall -een$elpful. Alt$oug$ t$e crisis 6as devastating to t$e 'ast Asia region, it drove C$ina into a#ore $ard6or7ing state of #ind. )$eir success pressure t$e rest of t$e countries in 'ast Asia to -eco#e #ore co#petitive, as C$ina 6as slo6l -eing t$e leading nation in t$e

area. )oda, 'ast Asia continues to fig$t against povert and is #uc$ 6ealt$ier t$an t$eir6a of life -efore and during t$e 5>>9 crisis. )$e after#at$ for t$e 344= criss $o6ever 6as#uc$ #ore -itter. Ne6s articles across t$e glo-e are calling t$e crisis @avoida-le anddirecting t$e -la#e in a ver straig$tfor6ard fas$ion. )$e -rutal -la#e directed at Alan1reenspan #ore i#portantl, 6as done in order to prevent future crises fro# $appening.

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Mitigating Bubbles & Crises

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