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Strategies & Market Trends : Asia Forum
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To: Lee who wrote (6813)9/30/1998 2:08:00 PM
From: Henry Volquardsen  Read Replies (1) of 9980
 
Lee,

I wasn't implying they were duped and I agree that they are big boys and responsible for their own decisions. My point was more that certain issues were skewing the apparent risk rewards and helped lead to the over investment. It is hard to factor that into the analysis. But at the end of the day each investor is responsible for that analysis as well.

I think if you take Greenspan and Rubin's testimony as a combined whole you get the message that yes the system is able to regulate itself but losses are part of the process. Rubin spoke of how after a long run of good returns markets tend to get lax on credit and the recent debacle is one of those example. What was unspoken was that the self regulatory aspect of free markets does not prevent painful episodes, it encourages them because that is the self regulatory mechanism. Losses focus people on why tighter standards are needed.

I agree that the bad politics was supported by a lot of willing capital flows. A lot of money is very short sighted in this regard. This is why episodes like this are needed, to teach them lessons. But it was not the bad politics that I think are a major contributer to building over capacity. Even if the political environment were corruption free this could happen. I think the biggest distortion was fixed exchange rates coupled with high domestic rates to defend the local currency. This gives foreign investors the mistaken allure of earning the high local growth rates in their own economy while encouraging domestic borrowers to borrow in foreign currencies with lower interest rates. This is an explosive mix that will generate strong growth but will eventually lead to over capacity. But at each step of the way each individual is reacting rationally. This is what I mean by governmental policy distorting the analysis.

Henry
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