Do we learn from economic crises? The 2008-10 crises in America and Europe and the Asian crisis a decade earlier present a rich source of contrasting experience to examine.
What a divergence there is between the 2008-10 policy responses and 1997-8! In 1997 IMF funding, even supplemented by additional bilateral rescue funds, was too small to offset the capital outflow that was driving down exchange rates. The Asian crisis countries received support equal to less than 10% of GDP, while in 2010 the European crisis countries received support equal to 50% of their GDP. The Fund component was 800% of IMF quota for the Asians, and 2230% of quota for the Europeans.
The adamant advice on monetary policy in 1997 was to tighten strongly, pushing up interest rates. In 2008, central banks not only pushed interest rates down to zero, but have also spectacularly expanded their balance sheets with innovative support for financial markets.
Swift closure of troubled financial institutions was mandatory practice in Asia. This was supposedly necessary to avoid ‘moral hazard’ from guaranteeing bank depositors or bailing out banks. This concern was forgotten in 2008. It wasn’t just banks that were saved by taxpayers’ support: insurance companies (AIG), the money market and the car industry were all rescued. In Europe, even clearly insolvent countries such as Greece were bailed out.
Fiscal policy was tightened in both episodes, but in 2008 it was because countries were starting with large deficits and unsustainable debt levels, while in 1997 the crisis countries had budget surpluses and low debt. The 1997 tightening was a macro blunder, crunching countries whose output was already in freefall.
How could the prescription be so different?
Article prepared by Leon Dubois