Hong Kong, late September 1997. All the world’s financial elite are flying in to come together for the annual conference of the International Monetary Fund and the World Bank. These two institutions were established at the end of World War II to promote smooth economic growth and to resolve crises quickly as they occur. When the heads of the financial world arrive in Hong Kong, they can look back on more than 10 years of strong stable growth. The demise of many communist economies and heightened growth in East Asia have created a boom. Meanwhile, the global economy has moved toward an increasingly intertwined division of labour. Southeast Asian countries have been contributing strongly to growth in recent years. But for the past few months, the currency crisis in Thailand is slowly turning into a massive economic crisis and now threatens to spread to other countries such as Indonesia and the Philippines. So the participants at the Hong Kong conference aren’t just there to pat each other on the backs. Delegates from Asia in particular are concerned and are pushing for a joint crisis team made up of all the major countries’ finance ministers. The heads of the financial world come mainly from the West — the kingpins of the new global economy. When they meet in Hong Kong, they can’t imagine that their perfect world of steady growth might be endangered. But in fact, the crisis that began in Thailand was to develop into a wildfire that would engulf the entire region and bring misery to millions. The Asian financial crisis is to be the first modern financial crisis in the globalised world. Yet the global financial elite is unprepared for the destructive elements that would come to characterise all future financial crises from then on. Fast forward only 10 years, and the world is literally on the brink of collapse when, in 2008 and 2009, first the banks in the United States, and then the financial system of the entire Western world, threaten to disintegrate. The heads of the financial system and Western governments had failed to learn the lessons of the Asian financial crisis. Had they understood the causes of the Asian bushfire and fought them decisively, they could have been spared the near-collapse of the financial sector 10 years later. The problem was: The speed with which the financial markets acted was out of sync with the speed of politics. Until the US financial crisis in 2007, the lessons from the Asian crisis hadn’t really been taken seriously and people thought that doesn’t affect us — it won’t affect us. And today? Where do we stand today? The world is currently facing many crises. How great is the danger that the global financial economy will crash again? Are policymakers better able to keep pace with the financial markets today? It’s surprising in retrospect how little was learned from the Asian financial crisis in 2008. I mean, in effect, much of the memory of 97, 98 was buried or it was somehow declared exotic. The developing and emerging countries in Southeast and East Asia had become important engines of global economic growth since the 1980s — aptly named tiger economies. When they are hit by the crisis — one after the other, the middle classes are almost wiped out, millions lose their jobs, hunger returns to countries that had finally been seeing prosperity, riots break out. It took five years to get back to the level of 1996. So it was a pretty deep and long crisis back then. Thailand was the model of the new global division of labour. It was one of the first countries in the region to see a lot of foreign capital flowing in, starting in the 1980s. At first, it was mainly Japanese companies investing, with components or entire products manufactured in the country. Labour was cheap, as were raw materials. I remember in in the mid-eighties, Thailand’s poverty rate was at about 30%. So 30% of the population were poor. Today it’s down to 9%, right? So it took time, but there were people who actually were able to benefit from this growth. Almost all the countries in the region were booming. More and more young professionals were coming out of the universities. Asian countries were allowed entry into the antechamber of sustainable prosperity. Bangkok grew very quickly at that time as well because a lot of money was flowing into Thailand through loans from overseas, primarily taken out by Thai companies who borrowed to invest. We mustn’t forget that in 1993 the World Bank published a hugely influential book that stirred up a great deal of controversy: The East Asian Miracle. So if the World Bank, a highly influential organisation, labels an entire region like this, then investors will be keen to get into that region. And that’s exactly what they did. The World Bank and the International Monetary Fund are headquartered in Washington. Their analyses and forecasts carry considerable weight in the international financial world. Their assessment for the region in the spring of 1997 is entirely positive. Joseph Stiglitz is the World Bank’s chief economist at the time, focusing on East Asia, and he shared this assessment. They put a more egalitarian policy at the centre. They were much more equal societies than the United States was. They had focused on governments investing in infrastructure, investing in technology, and investing in education policies that I thought were good policies for the United States, the kind of policies I had pushed when I was in the Council of Economic Advisers of President Clinton. In the 1990s, the same phenomenon could be observed again and again in Southeast and East Asia. Within the shortest time, an urban economic culture had evolved, with great opportunities for social advancement. In just one generation, farmers became engineers. Much of the money borrowed from abroad was invested in the future of these countries. These are in themselves the ingredients to a success story. But what was it that triggered the Asian crisis in the summer of 1997, bringing an entire region to the brink of the abyss? In the 1980s, the neoliberal restructuring of the international financial system had begun: First in the United States. Deregulation of financial institutions meant that the rules for granting loans became much more lax. A bank no longer had to keep reserves of the equivalent amount in its vaults for the capital it lent. This rule had previously acted as a brake on the volume of loans. From now on, Wall Street multiplied the amount of money that entrepreneurs in particular could borrow. The growth of the world economy owes much to this neoliberal financial policy. But the downside of the neoliberal monetary policy is that the mass introduction of new players in the game changes the financial landscape forever. They would borrow money from wealthy investors and invest it with the intention of making the highest possible profit with the fastest possible turnaround. The Asian markets with their above-average growth rates were extremely attractive to them. From now on, the world of money is unstable at its very core. It is a watershed moment, in history and our culture, that is kicked off in New York and whose consequences can be felt to this day. From now on, financial institutions and the global financial sector grow at a previously unimaginable pace. Investor anticipation drives bankers forward. Short-term profits are best made from short-term fluctuations in the global economy; from currency fluctuations, as in the case of the Southeast Asian countries in crisis; From fluctuating returns on oil, ores and wheat. Once you start deregulating in the late 1970s and early 1980s, the financial sector explodes in size. Financiers begin to get paid a lot more, relative to other professionals. And inevitably you start to have more financial crises. The new players work at a breathless pace. For many, the timeframe in which they trade money is no longer than two weeks, a month, or even a day. Finance has its own rules that are independent of developments in the real economy. So to pump out as much borrowing and lending and financial activity as you possibly can, to get paid is a bit like a nuclear power station deciding to pay its employees according to how much electricity they can generate, not how much electricity consumers actually need. And a new kind of banker emerges. He defines himself as greedy, because that is what is expected of him. He competes with others, he competes for the lion’s share of investors’ capital. This gives rise to a dynamic of its own. One of the factors is scale. It's just the scale. It's huge. The Thailand crisis is already a crisis of tens of billions of dollars. This is significant money. When the heads of the financial world meet in Hong Kong in September 1997, very few of them have an inkling of what is already brewing right before their eyes. The International Monetary Fund, the host of the conference, is the very institution that was supposed to oversee the global financial markets and ensure their functioning. If a debt crisis arose in a country, the Fund could extend loans, which were usually tied to tough restructuring measures for the affected countries. Of course, as if Spielberg had planned it, the conference in Hongkong in 1997 was perfectly timed. The IMF and the World Bank hold their Annual Meeting outside of Washington every five years, and in the midst of the crisis they met in Hong Kong. Companies and private investors in Thailand had borrowed a lot of money from abroad in order to be able to further increase their exports as well as to profit from the increase in property values. Just as later in the US financial crisis, the investment rush is based on the assumption of steady growth. Therefore, companies and private individuals take on short-term debt in order to be able to redeem their loans as quickly as possible from the projected profits. When Thailand’s export boom begins to falter due to an economic slump in Japan and the first companies run into difficulties, the Japanese banks are the first to become nervous and cancel loans. In Thailand, substantial investments were made in real estate and that real estate of course yields profits, but in Thai Baht. If investors accumulate debt in US Dollars in order to finance real estate projects in Thailand and the Thai Baht to US Dollar exchange rate plummets, then they have a problem. In order to avert the devaluation of the Baht, the Thai government then sent emissaries to Beijing and Tokyo in early June to ask both countries for bilateral loans in hard currency. Thai companies needed US dollars to repay their loans abroad. Both countries refused to provide the Thai Central Bank with enough foreign currency which they could have used to keep the exchange rate stable and counter speculation. The central bank can maintain a fixed exchange rate. At the same time, however, currency reserves slowly begin to dwindle. But slowly, we say. At some point, and it’s not so easy to predict when that point will be, all of a sudden enough people start saying maybe that’s not such a good idea. And then there’s a run on central bank reserves and suddenly they collapse and that’s when there’s an exchange rate crisis. The foreseeable downward spiral now begins to trigger activity among hedge funds and speculators in New York. Their figurehead is George Soros. The speculation process goes like this: An investor deposits a security of 1 billion US dollars with a bank somewhere in the world. Then he goes to a bank in Thailand and takes out a loan for 25 billion baht. This is the official equivalent of 1 billion dollars. He sells the baht on the open market. Immediately, other money traders follow suit, because they now fear that the price of the baht will fall. When the exchange rate of the baht to the dollar has fallen, for example, by 30 percent, the investor then buys back the 25 billion baht with only 700 million US dollars, thereby redeeming his loan. He has made a $300 million profit and then hightails it out of the country. I’ve been blamed for almost everything. I am basically there to make money. I cannot and do not look at the social consequences of what I do. You see herding. You see very large-scale private-sector activity directed against states which only very big states can actually survive. So Thailand is not big enough to resist a comprehensive leveraged run on its currency by the hedge funds of this world. The United States is. But Thailand isn't. So the Baht shot up from 25 Baht to the US Dollar to 50 Baht per US Dollar. And this put firms and companies that borrowed overseas into a lot of distress because they couldn't pay back, especially when their loans, which is now double the size it was when they borrowed it. So that actually had caused a panic among creditors overseas. So many of the creditors overseas actually asked for their money to be returned. But they can’t pay them off. On July 2nd the Thai Central Bank gives up the fight against speculation and releases the exchange rate of the Baht, leading to an immediate devaluation. This date marks the outbreak of the Asian crisis — but it is still considered to be just a local problem. On July 28, Thailand asks the IMF for loans. But the IMF is reluctant to step in and help. The problem was that the International Monetary Fund had committed itself fairly early on and had said that this crisis was mainly homegrown. The result is a massive recession for Thailand. It is a harsh psychological shock for the country that had so firmly believed in its rise into the league of prosperous countries. As foreign investors flee Thailand, there is no authority to control the panic. There would have had to have been a player who, during the speculative phase, provided dollars, ideally an unlimited amount, to the issuing banks, which can’t just simply print dollars. And no one did that. At the Hong Kong conference at the end of September, two very different realities clash. While the West is celebrating the victories of neoliberalism, a robust and growing world economy and the exponentially increased importance of the financial sector, Asia is experiencing rampant fear amongst its populations. The finance ministers of the affected countries have an inkling of the massive social upheavals they will face as a result of the withdrawal of international investors and the panic on the financial markets. But the kingpins of world finance aren’t listening as they convene in Hong Kong. The IMF came together to push even more deregulation, capital market liberalisation. They were pushing a set of policies that would have made things even worse. The IMF forced the countries to stifle investment of any kind, as well as consumption, at the height of the crisis by drastically increasing the base rates. And that was a mistake. In Tokyo, before the conference, people are worried that the economic power of the entire region could collapse. Trade with Southeast Asian countries has become steadily more important to the Japanese economy in recent years. When the Thai Crisis spread to Indonesia, we were afraid that the crisis may spread to other parts of Asia. But at that point we didn’t expect it to spread all the way to South Korea. In Tokyo’s government district, staff at the Finance Ministry are putting in long hours discussing how to avert the looming recession. The IMF’s strategy for Thailand and Indonesia is considered wrong. Both countries need new and long-term loans to reform their economies without bankrupting many of the country’s companies and banks. You don’t increase the capacity to grow, to repay debt, by causing a depression, which is what the IMF did. There were very clear alternatives. And I laid out very clearly why the high interest rates, tight monetary policy and austerity, predictably, would make things worse. And they did. The Japanese government develops a plan to set up an Asian Monetary Fund. This is to be endowed with 100 billion US dollars. This large sum would, on the one hand, calm the international financial markets and, at the same time, make large loans available to the affected countries. Japan is soliciting the support and participation of the governments of Singapore, China and Korea in particular. Up until November 1997, you know, international institutions didn't play any effective role in preventing that kind of crisis, even managing the crisis. That was a real problem. During the Hong Kong conference in late September, stock market news and exchange rates signal that the crisis is spreading unchecked. The Japanese government did propose the establishment of Asian Monetary Fund in Hong Kong. However, at that time, I know US government, particularly Larry Summers, who was representing the US Treasury, opposed the establishment of an Asian Monetary Fund. Behind the scenes in Hong Kong, both Sakakibara and Summers are seeking support from other key delegations. In the run-up to the conference, the US Treasury Department had informed all governments in East Asia that it was strictly against an Asian Monetary Fund. The approach prevails. No one dares oppose the United States. The Hong Kong conference would have been the ideal opportunity to avert the crisis. But the loans made available to the hard-pressed countries were too small. There is small-scale manoeuvring and waiting — meanwhile the crisis rapidly worsens. The Global Financial Crisis of 2008 and 2009 is ultimately defeated by the US government’s willingness to deploy the maximum amount of money, thus stopping panic and speculation. This political will was lacking ten years earlier in Hong Kong. Until 2007, there was this sense of arrogance that people said, well that’s the Asians and we can do it better. That’s a common pattern in the financial markets. Hong Kong is the most important banking and stock exchange centre in Asia. When, a month after the conference there, stock prices collapse, it is clear to everyone that the crisis is not over: it is only just beginning. Late November 1997 in Tokyo’s government district: The Japanese government knows that large amounts of money are needed to quickly save Korea from default and massive economic collapse. It urges the US Treasury Department in particular to act quickly and decisively. Korea was the 10th largest economy in the world at that time, as it is today. It had only $8.9 billion in its reserves. That amount of reserves would have lasted the government only a few days. President Clinton personally made a phone call to President Kim Young-sam about South Korea’s financial crisis. The US president intervenes, making it clear that Korea is of a different calibre than Thailand or Indonesia. Economically and, above all, geopolitically. It is the bastion of the West against North Korea and China. Korea successfully competes on the world market in important key industries such as electronics, car production, and shipyards. Its major companies, like Thailand’s, had borrowed heavily abroad in dollars. When the exchange rate for Thailand’s currency, the Won, plummets, they are unable to repay their loans. Only now, at the end of November, do the heads of the US administration realise that they must act. The factor changing their minds is the geopolitical dimension: If Korea had to declare insolvency, the reputation of the US as a guarantor power for South Korea would suffer massively in the eyes of the world. In Tokyo, the government urges the US Treasury to hurry. A large rescue package is to be put together, in which many participate. Korea has already agreed to many of the IMF’s conditions, everything seems ready for the deal. When finally the IMF director also flies to Seoul, everyone expects the Korean rescue package to be ratified. But Camdessus surprisingly demands further concessions. He demands that the interest rate on loans be raised to 25 percent in order to attract foreign capital. The Korean finance minister replies that many companies would go bankrupt as a result and the economy would collapse, and that is why no foreign financiers would invest. But Camdessus insists on pushing through his demand. Now, in 1997, Korea's stock market fell 49%, half of its value. But that's not the worst. The exchange rate between the Korean Won and the US Dollar dropped 65.9%. So if you combine the depreciation of the currency and the drop in the stock market index, you know that much of the wealth accumulated in the past 20 years were wiped out. The mood was gloomy. Of course, you know, many people were losing jobs. Companies were going bankrupt. So it was a depressing time. The loan package for Korea comprises 55 billion US dollars, the highest sum ever approved under the leadership of the IMF. The IMF itself wants to provide 21 billion, the World Bank 10, the Asian Development Bank 4. The remaining 20 billion is to come from the rich industrialised nations, especially the US and Japan, which had urged Washington to put together a large sum. Treasury Secretary Robert Rubin in particular, had long been reluctant to contribute any US budget funds. I think in the final stage, Summers succeeded in sort of persuading Bob Rubin in infusing money to Korea so that together with the US government, we were able to sort of infuse a fairly large amount of money to Korea to solve the crisis. Bob Rubin was a very difficult man at that time. IMF negotiators in Korea urge speedy financial help, predicting the country’s bankruptcy as the only alternative. When it becomes known that the US government did not want to pay out its participation in cash at all, but only to deposit it as collateral, they are disappointed. In the week running up to Christmas, a Plan B is feverishly discussed in New York, which is supposed to involve the banks of Wall Street in the rescue of Korea. The last resort: The banks must defer any loans due at the end of the year and accept longer maturities. But who should act as broker? That’s when the director of the New York Federal Reserve steps in. He heads the most powerful branch after the US Federal Reserve. He gathers the heads of the most important American commercial banks. The bankers are led into a room in the FED, where Bill McDonough begs them to give Korea more time to repay the loans that are due for repayment. Instead of adding fuel to the flames, he asks them to aid the return of confidence and stability to help the Korean economy recover. It’s Christmas 1997, and Times Square is full of shoppers. At this point, the major commercial banks on Wall Street agree with McDonough’s argument. Between the lines, he has threatened them that they have to cooperate or else risk writing off all their loans. There is now a good chance that European and Japanese banks will follow suit. At this point, if Korea had had to declare bankruptcy, the Asian crisis would already have turned into a global economic crisis. McDonough saved Korea. A sigh of relief is breathed in Washington, New York, Tokyo and other metropolises. The IMF staff also catch their breath. Many of them have worked through the nights over recent weeks, they are simply exhausted. Everyone hopes that the worst is over, but they are wrong. For with the beginning of 1998, the effects of the combined impact of the currency crisis, the banking crisis and the economic crisis are now becoming reality. In mid-January, Indonesian President Suharto signs a treaty with the IMF that instigates massive cuts in the economic system. Many interpret this as the subjugation of Southeast Asia. But by the time the agreements are signed, it is too late to avert Indonesia’s economic crisis. Riots break out, more than 1000 people die, and poverty returns to the country in full force. The International Monetary Fund has insisted that the government cancel many of its infrastructure projects as well as food and gasoline subsidies. It will take a decade for Indonesia to recover. South Korea recovers much sooner, as early as the end of 1998. Until then, however, society as a whole is going through a nightmare. So many people becoming homeless. You know, South Korea has a tradition of not having homeless other than in the immediate aftermath of the Korean War. But we begin having homeless in the parks and streets. And more than that great number of small and medium firms went bankrupt and there was increasing suicide. And kids could not go to schools. There was a total social trauma throughout Korean society. It was one of the most tragic moments in South Korean contemporary history. It’s intensely hierarchical. The costs and the benefits of the programmes which were imposed were hugely asymmetric. Absolutely. Some people are bailed out and other people have to pay the adjustment costs. It’s not for nothing. Some players in the US used the crash, in South Korea for instance, to buy up companies really cheaply after the country had slipped into crisis. But some of the structural reforms demanded by the IMF will actually benefit the Korean economy. The close ties between the state and the private sector are loosened, and the private sector becomes the motor of change for the better, once it can borrow money again and slowly regains the confidence of the international financial market. There was a collusive tie between the government and big business corporations. They were simply symbiotic. And then in the past when the corporation had financial problems, the government would always intervene and bail them out. The 1997 financial crisis was a curse to us. But at the same time, it was a blessing. One significant aspect of Korea’s renaissance is that the Korean government refuses to meet other IMF demands that would have required export-oriented companies to cut back significantly on their capacity. As world market demand once again looks to Korea, they manage to repay their loans faster than expected. From then on, the banking sector is efficiently supervised, and the formerly largest bank is sold to an investment group that includes Weijian Shan. He leads the negotiations at the time. They not only learn lessons from how they got into the crisis, but they fundamentally restructure the banking system. Broadly in the credit culture, they sold weak banks off to foreign investors like ourselves, recapitalised those banks, and then, more importantly, adopted a risk management system. So they prevented themselves from being exposed to a lot of loans, risky loans. And that is why, when 2008 came, the Asian banks were in very good shape. In late 1998, Hong Kong is attacked by hedge funds, led again by George Soros. They bet on falling stock prices and the devaluation of the Hong Kong dollar as a result of the severe recession in Southeast Asia. But Hong Kong is able to fight back, with the city government and Central Bank together erecting a firewall of hard currency with over $400 billion. Speculation collapses. It is exactly the same strategy that is used to restore confidence in the global financial system in the Western world in 2008, ten years later. In the aftermath of the crisis, the countries of Southeast Asia will take measures to protect themselves against instability in the financial markets. They are monitoring their banks more closely than in the West and are building up very large foreign exchange holdings to defend against new speculation. This is interpreted as East Asia decoupling from the West. But when the Global Financial Crisis in 2008 and 2009 causes large parts of the Western financial system to temporarily collapse, these countries have enough reserves to be able to keep their own banks stable. The 2008 financial crisis changes the International Monetary Fund’s perspective. Since then, the first priority has no longer been harsh austerity measures, which usually led to recession and poverty for many. Instead, the focus is on proposals as to how countries in difficulty could become prosperous economies again in the mid-term with the help of loans from the IMF. I think institutions like the IMF, international institutions, have a very critical role to play in this current environment of fragmentation, polarisation, because the challenges that we face, be it climate, be it digitalisation, be it inequality, the responses or the solutions have to be global, have to be multilateral. An independent institution that also has the relevant expertise would be a sensible consequence in view of the complexity of our global economy. However, the IMF can only take action if it is asked for advice and assistance by the governments of individual countries. If you ask me if it would be nice if we had a supranational institution capable of exerting far greater influence, then the answer is yes. The way the current international currency and financing system is organised is far from optimal because it’s too powerful and there is not enough cooperation and too few options. The consequences of one party’s actions affect all of the others. We know that the danger of global crises has not been averted for good. Nor has the danger of major financial crises. This is because the volume of the global financial system has more than doubled since the Asian financial crisis. In 2020, it comprised 463 trillion US dollars a sum moved by the global financial industry, annually. Markets are shortsighted. They don't price the cost of carbon, of climate change, but they also don't price risk. The result of that is that we have a society, economies that are not as resilient as they should be. I try to capture that in some of my writing with a metaphor. We build cars without spare tyres. The Asian crisis was the zero hour of all crises in the era of a globalised world economy. Only after the financial crisis of 2008 and 2009 do people begin to think about possible precautions and regulations. This has not changed the basic paradox of global finance. The financial sector has a determining influence on the functioning of the global economy. And it still often thinks in terms of weeks or months. But I think the financial sector is really important. You can't function a modern, complex society without a good financial sector. So we not only have to restrain the financial sector from not imposing harm on the rest of us, so we have to take an active role in shaping our economy and then shaping our financial sector. So they do what they are supposed to do. The challenges facing the world we live in today are no longer regional, but affect all countries: Climate change, overpopulation, war. Alongside an escalating geopolitical battle between the US and China. The consequences of any modern crisis impact millions of people. In the Asian Financial Crisis, this was also a bitter lesson for the countries of Southeast Asia. Poverty and misery returned for many years. The Asian Financial Crisis contained all the lessons we needed to avert the crisis of 2008 and 2009. We now know that in our highly complex world, the bushfire — no matter how far away — will inevitably have an impact on us too.