If y'all have time, you might want to browse the whole thing.
My outline:
Both depth and breadth of the crisis are a big surprise. As Krugman says in the intro, "even pessimists expected something along the lines of a conventional currency crisis...[not] collapses in domestic asset markets, widespread bank failures, bankruptcies.."
He tries to explain what happened as a problem of "moral hazard", like the S&L crisis here, where FSLIC insurance gave S&L's "..every incentive to play a game of heads I win, tails the taxpayer loses." Asia was rife with de facto guarantees. "..most of those who provided..funds believed that they would be protected from risk - an impression reinforced by the strong political connections of the owners.."
He then shows that such a 'guaranteed intermediary' has an incentive to make risky investments, even if the expected return is low. This leads to high levels of investment and inflated asset prices. Ending this system ('disintermediation') deflates prices - boom, bust.
He concludes by admitting to gross oversimplification, in the quest for a workable model. "If this story is right in its essentials, those of us who have been trying to make sense of that crisis in terms of conventional currency-crisis models have been on the wrong track: the Asian crisis may have been only incidentally about currencies. Instead, it was mainly about bad banking and its consequences." |
