US Subprime Mortgage Meltdown
1.Introduction
It is exactly ten years after the Asia Financial Crisis in 1997, US subprime mortgage crisis started in 2007. Perhaps ten year a cycle is coincident, but most peoples would agreed economy cycle is real. The financial crisis in Mexico in the 1980's, the Asia financial crisis in 1997 and the US Subprime Mortgage crisis in 2007. With the globalized financial systems, the crisis provide many opportunities for many smart hedge fund managers and short term hot capital fund. Some peoples argued that short term hedge fund speculators is not the cause of financial crisis, but most peoples would agree it can cause distability and subsequent lack of confidence in the financial systems.
2.US Economy
US economy have enjoy a boom period in the last decade, US private corporate sector are the prime mover of the economy, lead by the technology stocks and financial service sector. The movement of short-term funds into US economy immediately after the Asia financial crisis is evident by the strong US currency and stock market performance before the Subprime crisis. As a result, the US financial system are enjoying extra liquidity and money supply in the economy.
3.The Cause of the Subprime Crisis
3.1.The Lenders
With the extra liquidity in the system, the Subprime lenders have deliberate relax the lending rule and guideline and due diligence are sometime not the prime criteria for the lending institution. The unprecedent surplus supply of fund available to the mortgage providers, the lenders are prepare to lend the borrowers with poor credit record without regard to their ability to repay.
3.2. The Borrowers
The easy access of fund together with the minimum initial deposit requirement for the house purchasers have encourage the peoples to speculate in the property market beyond their mean of repayment. In addition, the lower interest rate from the lending institution have encourage the existing house owners to refinance their house. The borrowers believe that their house value could keep appreciating in value over time or at least at par with the compounding factors of rate of interest and inflation rate.
3.3.Economy Factors
With the global competition from the east asia coutries, like China and Vietnam and the emerging India as the main competitors in the technology sectors for investors, US mainland have experiencing economy down turn. This was further aggregated by the surging of crude oil price in recent years before the crisis. Some argued that financial burden in the Iraq war is also a contributing factor.
4.The Consequences
With slowing down of US economy, the borrowers start to default their loan repayment. Many of the top subprime leaders are either gone out of business or scaled down their business. The closing down of some lending institution have sent fear to the financial system with the possible lack of trust and confidence from the depositors and investors of the institution, which could in turn create a panic if without a government involment or guarantee at least in the short and medium term.
The Subprime mortgage meltdown have inevitable affecting the stock market, the price of major financial institutions got the first hit. Some economist and analyst have predict a possible short term economy recession and increase of unemployment rate in the US.
5. The Government Involvement
To restore the public confidence, particularly the depositors and investors of the financial institution is paramount important. the US government have pledged to pump US$250b into the banks through direct investment as shareholders (preference shares) of the banks. The government involvement in the private US corporations or nationalization is objectionable to many Americans, but this time in the national interest and to avoid a possible collapse of financial system, the government involvement is allow at least for a short and medium term.
Wednesday, October 15, 2008
Thursday, October 9, 2008
Malaysian Experience In Asia Financial Crisis
The Financial Crisis In Malaysia
During the Asia financial crisis in 1997, Malaysia saw its long term program to build Malaysia economy development suffer under the onslaught of currency devaluation. The currency devaluation affected the stock market so badly that Malaysia witnessed first hand the consequence of short-term money propping the stock market. There are always people to ride on a bubble. The short-term capital investors were no exception, when the ringgit denominated share asset was affected by currency devaluation everybody wanted to jump ship and dumped their ringgit assets.
The situation was exacerbated by the USD becoming stronger based on US monetary situation. The US interest rates were rising and the USD appreciated against all East Asian currencies on its own accord. The currency speculators saw an ideal situation. The ringgit depreciated by half against the USD.
The Malaysia's Specific Approach
Malaysia found the IMF proposal too difficult to absorb. The real GDP had suffered and to revive the economy there was a need to keep interest rate low. Higher taxes and lower government spending will send the economy even further down. The floating exchange rate was not helping the ringgit. However, Malaysia had good exports and enough foreign reserves. It had enjoyed good foreign direct investments which were long term capital infusion to the economy. It decided that it will be too painful to adopt IMF strategies and defending the ringgit at such a cost was though of as too high a price to pay.
Malaysia rejected the IMF offer of financial help and instead resorted to fix its currency exchange rate at RM3.8 to the USD. To stop the influence of oversea ringgit, especially that are deposited in Singapore banks it decided to make ringgit held oversea worthless after a certain date. This would stop any speculation in the ringgit outside Malaysian borders. It also decided to put some capital controls to halt any short term movement of funds, which cannot be taken out of Malaysia for a period of one year. The intention of the capital control is to immediately stabilized currency fluctuation and to revive the domestic economy. Malaysia mobilized all its internal resources to finance it recovery programmes.
This approach brought back stability to the ringgit. People knew how much they will get for their trade with Malaysian importers and exporters knew how much they will get for their exports. Short term money movements were halted. Long term foreign direct investors were protected to ensure the continued flow of FDI into the country. The government has ensure that the ringgit would continue to be readily convertible to foreign currencies for trade purposes and for direct investment by foreigners. This approach has brought success in managing the financial crisis in the short and medium term strategy.
Malaysia subsequently eased its currency controls in February 1999 when it enacted a graduated exit tax for any transfers of capital by investor before the year was up. Similarly, transfers were allowed without levy for trade purposes and for long term capital investment. Malaysia has subsequently lifted the capital control.
During the Asia financial crisis in 1997, Malaysia saw its long term program to build Malaysia economy development suffer under the onslaught of currency devaluation. The currency devaluation affected the stock market so badly that Malaysia witnessed first hand the consequence of short-term money propping the stock market. There are always people to ride on a bubble. The short-term capital investors were no exception, when the ringgit denominated share asset was affected by currency devaluation everybody wanted to jump ship and dumped their ringgit assets.
The situation was exacerbated by the USD becoming stronger based on US monetary situation. The US interest rates were rising and the USD appreciated against all East Asian currencies on its own accord. The currency speculators saw an ideal situation. The ringgit depreciated by half against the USD.
The Malaysia's Specific Approach
Malaysia found the IMF proposal too difficult to absorb. The real GDP had suffered and to revive the economy there was a need to keep interest rate low. Higher taxes and lower government spending will send the economy even further down. The floating exchange rate was not helping the ringgit. However, Malaysia had good exports and enough foreign reserves. It had enjoyed good foreign direct investments which were long term capital infusion to the economy. It decided that it will be too painful to adopt IMF strategies and defending the ringgit at such a cost was though of as too high a price to pay.
Malaysia rejected the IMF offer of financial help and instead resorted to fix its currency exchange rate at RM3.8 to the USD. To stop the influence of oversea ringgit, especially that are deposited in Singapore banks it decided to make ringgit held oversea worthless after a certain date. This would stop any speculation in the ringgit outside Malaysian borders. It also decided to put some capital controls to halt any short term movement of funds, which cannot be taken out of Malaysia for a period of one year. The intention of the capital control is to immediately stabilized currency fluctuation and to revive the domestic economy. Malaysia mobilized all its internal resources to finance it recovery programmes.
This approach brought back stability to the ringgit. People knew how much they will get for their trade with Malaysian importers and exporters knew how much they will get for their exports. Short term money movements were halted. Long term foreign direct investors were protected to ensure the continued flow of FDI into the country. The government has ensure that the ringgit would continue to be readily convertible to foreign currencies for trade purposes and for direct investment by foreigners. This approach has brought success in managing the financial crisis in the short and medium term strategy.
Malaysia subsequently eased its currency controls in February 1999 when it enacted a graduated exit tax for any transfers of capital by investor before the year was up. Similarly, transfers were allowed without levy for trade purposes and for long term capital investment. Malaysia has subsequently lifted the capital control.
Tuesday, October 7, 2008
Asian Financial Crisis
Corporate Governance in the Asian Financial Crisis
Critique on Article by Simon Johnson, Peter Boone, Alasdair Breach, Eric Friedman (2000) "Corporate Governance in the Asian Financial Crisis".
1.Introduction
The 1997-1998 Asian financial crisis have been the most traumatic financial experience in the region in recent times. It shows how vulnerable and connected of all the "emerging markets" across countries and all boundaries of today's economy. The main purpose of this article is to explain the important of the corporate governance, particularly on the minority shareholders protection, have on the extent of exchange rate depreciation and stock market decline. The purpose of the article was clearly and concisely stated and agreed with the title.
2. Summary of the Article
Specifically, the study sought to explain the measure in corporate governance have on the extent of exchange rate depreciation and stock market decline. The author argued that,the corporate governance variable provide a better explanations of the variation in exchange rates and stock market performance during the Asian financial crisis than that of macroeconomic variable, such as the budget deficit, monetary policy, the current account, foreign exchange reserves, and foreign debt.
The author's objectives were attainable, by provide enough data from 25 emerging markets. the key dependent variables were clearly stated, that is the change in the nominal exchange rate depreciation and the change in the stock market decline. these dependent variables were tested against the standard macroeconomic variables; the institutions variables; and the corporate governance variables.
The findings were well organized, sectioned and classified into testable hypothesis. The authors used tables and graphs to present the facts and findings. The main finding by the author showed that the corporate governance variable provide a better explanations of the variation in exchange rates and stock market performance during the Asian crisis than that of macroeconomic variable. Their evidence suggest the corporate governance have the significant effect on the extent of exchange rate depreciation and stock market decline in 1997-1998. The evidence thus provides an alternative explanation to the standard macroeconomic policies on the Asian financial crisis.
3. Limitations of the Article
The article came short of providing effect of inadequate supervision of the banking and financial sectors have on the financial crisis. The weaknesses of the Asia financial market system and the over lending in the real estate sector have not been tested.
4. Conclusion
The authors presented that corporate governance variables are better explanations for the Asian financial crisis than any other macroeconomic variable. Their conclusions were based on a well research and reliable data and their findings are logically stated. The strength of the article, it provides an insight of an extended and alternate theory to the standard macroeconomic theory in explaining the Asian financial crisis. However, it does not cover the effect on inadequate supervision of the banking and financial sectors have on the financial crisis. Overall, it was a very important and significant contribution to the field of research in the study of financial crisis.
Critique on Article by Simon Johnson, Peter Boone, Alasdair Breach, Eric Friedman (2000) "Corporate Governance in the Asian Financial Crisis".
1.Introduction
The 1997-1998 Asian financial crisis have been the most traumatic financial experience in the region in recent times. It shows how vulnerable and connected of all the "emerging markets" across countries and all boundaries of today's economy. The main purpose of this article is to explain the important of the corporate governance, particularly on the minority shareholders protection, have on the extent of exchange rate depreciation and stock market decline. The purpose of the article was clearly and concisely stated and agreed with the title.
2. Summary of the Article
Specifically, the study sought to explain the measure in corporate governance have on the extent of exchange rate depreciation and stock market decline. The author argued that,the corporate governance variable provide a better explanations of the variation in exchange rates and stock market performance during the Asian financial crisis than that of macroeconomic variable, such as the budget deficit, monetary policy, the current account, foreign exchange reserves, and foreign debt.
The author's objectives were attainable, by provide enough data from 25 emerging markets. the key dependent variables were clearly stated, that is the change in the nominal exchange rate depreciation and the change in the stock market decline. these dependent variables were tested against the standard macroeconomic variables; the institutions variables; and the corporate governance variables.
The findings were well organized, sectioned and classified into testable hypothesis. The authors used tables and graphs to present the facts and findings. The main finding by the author showed that the corporate governance variable provide a better explanations of the variation in exchange rates and stock market performance during the Asian crisis than that of macroeconomic variable. Their evidence suggest the corporate governance have the significant effect on the extent of exchange rate depreciation and stock market decline in 1997-1998. The evidence thus provides an alternative explanation to the standard macroeconomic policies on the Asian financial crisis.
3. Limitations of the Article
The article came short of providing effect of inadequate supervision of the banking and financial sectors have on the financial crisis. The weaknesses of the Asia financial market system and the over lending in the real estate sector have not been tested.
4. Conclusion
The authors presented that corporate governance variables are better explanations for the Asian financial crisis than any other macroeconomic variable. Their conclusions were based on a well research and reliable data and their findings are logically stated. The strength of the article, it provides an insight of an extended and alternate theory to the standard macroeconomic theory in explaining the Asian financial crisis. However, it does not cover the effect on inadequate supervision of the banking and financial sectors have on the financial crisis. Overall, it was a very important and significant contribution to the field of research in the study of financial crisis.
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