Finance 111: Essay Question
a) The so-called Asian financial crisis provided some valuable lessons about nation-state and global financial systems. What are some of those lessons?
The Asian Financial Crisis was happened start from Thailand in 1997. It is caused by the outflow of foreign capital. Before 1997, one of the initiatives that Thailand try to deregulate the financial system to approachable to foreign capital is Bangkok International Banking Facility (BIBF) and foreign banks were permitted to engage in offshore borrowing in foreign currencies, to convert those funds to Thai Bath and re-lend them to local borrowers (Craig C. Julian 2000). The initiatives attract investors invest in Thai financial market at first but it switch to China because China devalued its lower currency to promote labor-intensive exports. There were no buyers for expensive housing and land in Bangkok. This incident force Bank of Thailand began to prop up local banks by taking equity in a prominent local bank and then Thailand faced the verge of collapse (Craig C. Julian 2000). The speculators to sell off the stocks and The Bank of Thailand tried to buy up the currency by using official foreign reserves. When the bank could no longer count on the reserves, the loan was requested had turned down and the last alternative is to get help from International Monetary Fund (IMF). The Asian Financial Crisis provided some valuable lessons. A country should have a good financial planning and decision making. If the economists of the country are impatient and desire to attract foreign capital in a short term, it will have an opposite effect. However, if the plan were patiently monitored with proper policies, it might reduce the risk of collapse. The government should always alert whether over of debts lent from foreign are necessary or not. Besides, the governments should always alert the ability of the country to return in consider of currency fluctuation. Next, the government should promote more on labor-intensive, because those big corporation investors will more aware and interested in cheap labor in the world. If labor-intensive promoted, it will attract a lot of big corporation invest in the country and let other smaller corporation which is looking for cheap labor to the another countries because it is intended to make the Asian economy become more stable. Thirdly, the bank must have a good decision-making and a well prepared financial. The bank should have enough of reserve to support any economy disaster, because everything in future is an unknown and unpredictable. The bank should have the reserve to implement the monetary policies to maintain and achieve the stability in the general level of price.
Fourthly, The Thai bank consist too much of deficits in current accounts in the global financial system. The funds that from surplus units were essentially on lent by banks to business purposes, but the bank did not used it in a right way which is the funds are lent to those who do not have ability to pay back in the future. Hence, the bank should have a sharp supervision with a clear and prudential standards on lending money policies are necessary.
b) The so-called global sub-prime credit crisis has had a significant impact on the International financial markets. Discuss the evolution of the sub-prime component of the crisis and the credit component of the crisis.
The September 11, 2001 attacks had affected the Federal Open Market Committee to make decision to reduce the federal funds rate to 3.0% (Mark Jickling 2008). After the accounting scandals of 2002, Alan Greenspan decided to drop the federal funds rate from 1.25% to 1.00% to keep economy strong. The 1.00% rate is a very low return in investment, hence the investors declined to invest in this funds (Mark Jickling 2008). On the other hand, the 1.00% rate is a very low interest rate. This makes the banks in US start to borrow more money from Federal Reserve and start the Sub prime...
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