Financial Crisis 1997-2012

Financial crisis 1997-2012

By James Hansen

We've had several serious financial crises since 1997, and I would like to explain how all of them have some or more common origins:

1997 Asian financial crisis.

1998 Russian financial crisis.

2001 Turkish crisis and the dotcom bubble.

2007 Global financial crisis.

The Asian financial crisis started in Thailand in June 1997 and quickly spread to Southeast and East Asian countries. Among those who were most severely hit were Indonesia, South Korea, Philippines and Malaysia. But the financial crisis also affected other countries around the globe (Shenkar, O. & Luo, Y. 2007). The private sector in Thailand had huge loans, accounting for 81.6 billion USD, 25% of the countries GDP. Half of these loans had a short maturity date. The countries total debt was 89 billion USD, and we can understand that nearly all of the debt was in the private sector. Thailand had a fixed currency rate towards foreign currency, and a growing deficit. What started the crisis, was an attack by currency speculators, then loan defaults by several property companies . This again lead to a downgrade of the long-term debt of Thailand, and a stock market in panic; "a contagion effect" (Shenkar, O. & Luo, Y. 2007).

The Russian financial crisis were also connected to and had things in common with what happened in Asia. Russia also had a fiscal deficit, like Thailand, and they controlled the value of Russian rubles by using foreign reserves to buy Rubles. The Asian crisis which had global effects, resulted in less consumption and lower price of oil and certain metals. These commodities were important incomes for Russia. The reduced prices, results in reduced income and lower foreign exchange reserves for Russia, which again meant they had less reserves to control their currency (Abbigail J. Chiodo and Michael T. Owyan 1998). When the investors knew about the deficit and currency situation, panic broke loose, for much of the same reason it had happened in Asia; contagion effect.

In 2001 Turkey also experienced a financial crisis, which was much because of liquidity problems in some banks and a deficit build up over time. These facts together with political problems lead to a panic by International investors, which withdrew huge amounts of money in matter of months, which again resulted in a smaller crisis for the Turkish economy (OECD Economic Surverys 2000/2001). Again, we can notice a contagion effect, where investors all run towards the exit door.

I would like to state that it was a contagion effect that also laid much of the fundamentals for the dot-com bubble the same year. People were overly optimistic of future gains of Internet companies which never had made any money in the first place. Some people made fortunes over night just on rising stock prices, and others jumped on and wanted a piece of the pie. Also in this case, there were a lot of loans involved. There were a lot of unproven business models which executed huge IPOs with very high stock prices. People even borrowed on their houses to buy these fantastic dreams. Defaults on loans followed by bankruptcies. Many people were left with huge loans, and they never really owned anything in the first place(The investor's Journal 2007). I personally know several people from Norway who became so called daytraders during this period, borrowing on their houses and trading in stocks in companies who never had made any money. Most of them lost a lot of money