IMF counselor says Asian market crisis was unpredictable
A mixed crowd of about 60 professors and students gathered yesterday to hear Michael Mussa, the economic counselor for the International Monetary Fund, speak about the downfall of the Asian market.
Mussa began by stressing that the IMF could not have foreseen the Asian market crisis. He refuted other economists' criticisms that the nations prematurely asked for IMF assistance.
Instead, the nations had sufficient need and the organization was simply faced with the "circumstance where it had to help someone who has already arrived in the emergency room," Mussa argued.
He outlined some of the circumstances preceding the crisis. "The past decade has seen a persistent decline in the general world price of risk," he said.
Since 1993, there has been a general rise in stock market prices. This rise has been coupled with a downward trend in yield spreads, Mussa said. Markets have been willing to accept a lower yield, affecting not only industrialized countries, but developing countries as well.
The historically low bond levels and the tenfold increase in capital flow have contributed to rising debt in many countries, most notably Thailand, Malaysia, Korea and Indonesia, he said.
Given the events of the antecedent years, analysts predicted lower growth for these countries, but no one could have foreseen the extent of the crisis 15 months ago, Mussa said.
"In what point in the voyage would you have forecast that the Titanic was going to sink and 50,000 lives would be lost?" he asked.
He detailed the major elements of the crisis. The Thai exchange rate began to plummet in July 1997. As the pressure increased, the currency depreciated to 40 percent. Even at this rate, the Thai government was reluctant to tighten monetary policies.
This lack of action, in combination with a shift in the real trade balance position, increased the tension in other related markets, Mussa said. In Thailand, the Gross National Product declined by 15 percent. Prices fell in Thailand, Indonesia, Korea and Malaysia, and imports decreased.
Through the shift in trading position, the Asian countries interfered with each other's recovery, he said. At this point, the IMF stepped in.
The IMF lent financial support to the Asian market, but also requested the governments use interest rates to limit the degree of depreciation.
This decision has been one of contention in the financial community. Critics have postulated that raising interest rates induced depression, but Mussa noted that it was a reasonable action.
"Raising interest rates is not a pain-free process," he said. "It is like chemotherapy for cancer patients -- it does not make you feel good in the short run. However, it is necessary to protect the patient from more catastrophic effects."