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The Asian Disease: Plausible Diagnoses, Possible Remedies

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  • Martin Mayer

Abstract

The Asian crisis is a textbook case of the "financial instability hypothesis" first expressed in 1966 by the late Hyman Minsky. Minsky's "hypothesis" was proposed to explain instability in a large, insulated, developed economy. Despite its intuitive appeal, it was not widely accepted among financial economists (Charles Kindleberger being a notable exception) because, they said, they could not find historical illustrations to fit the theory. The financial economist's machine runs smoothly in the best of all possible worlds. What makes trouble in the financial economist's world is the exogenous shock that affects everyone (war, oil prices) or government error (fiscal imbalance, monetary policy). "Financial distress," Barry Eichengreen and Richard Portes write in their study of sovereign debt rescheduling, "normally results from a real shock or bad policies." But Asia presents a cumulation of apparently rational decisions that are precisely those Minsky predicted.

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  • Martin Mayer, 1998. "The Asian Disease: Plausible Diagnoses, Possible Remedies," Economics Working Paper Archive wp_232, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_232
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    References listed on IDEAS

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    1. Blinder, Alan S & Stiglitz, Joseph E, 1983. "Money, Credit Constraints, and Economic Activity," American Economic Review, American Economic Association, vol. 73(2), pages 297-302, May.
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    3. Guillermo Larraín & Helmut Reisen & Julia von Maltzan, 1997. "Emerging Market Risk and Sovereign Credit Ratings," OECD Development Centre Working Papers 124, OECD Publishing.
    4. J. A. Kregel, 2001. "Derivatives and Global Capital Flows: Applications to Asia," Palgrave Macmillan Books, in: Ha-Joon Chang & Gabriel Palma & D. Hugh Whittaker (ed.), Financial Liberalization and the Asian Crisis, chapter 4, pages 40-62, Palgrave Macmillan.
    5. Robert Litan & William Isaac & William Taylor, 1994. "Financial Regulation," NBER Chapters, in: American Economic Policy in the 1980s, pages 519-572, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Kane, Edward J., 2000. "Capital movements, banking insolvency, and silent runs in the Asian financial crisis," Pacific-Basin Finance Journal, Elsevier, vol. 8(2), pages 153-175, May.
    2. Davidson, Paul, 2000. "Is a Plumber or a New Financial Architect Needed to End Global International Liquidity Problems?," World Development, Elsevier, vol. 28(6), pages 1117-1131, June.
    3. Jomo Kwame Sundaram, 2008. "Obstacles To Implementing Lessons from the 1997-1998 East Asian Crises," Working Papers 66, United Nations, Department of Economics and Social Affairs.
    4. Kane, Edward J., 2000. "The dialectical role of information and disinformation in regulation-induced banking crises," Pacific-Basin Finance Journal, Elsevier, vol. 8(3-4), pages 285-308, July.

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