Tuesday, 11 June 2013

Economic Timeline 1997-2007

I'm currently doing an assignment on the major economic events between early 1990s to 2007, and thought maybe I can share it here. I believe that by having a better understanding of past events, it would help us recognized and react appropriately when similar situation arise. Do note that this outline is aimed provide a brief summary of the events. Some explanations might be simplified to avoid going too in depth.

1997 Asian Economic Crisis 
The 1997 Asian Economic Crisis started in Thailand and later spread to other countries in the region. Prior to 1997, Thailand had adopted a fixed exchange rate policy which pegged its currency with the US dollars. Following the monetary tightening policies of the Federal Reserve in 1994 which sent the US dollar surging, Thailand rapidly depletes its foreign reserve in order to maintain its currency pegs.  Anticipating a devaluation of the baht as the foreign reserve dries up, Thailand came under speculative attack of the speculators and traders which drove down the Baht even further.  Many banks in Thailand which had previously borrowed heavily in dollars and yens to lend funds in baht now find themselves unable to meet their debt payments obligations. Thailand’s banks were in trouble.
The crisis quickly spread to nearby countries in the region as investors were afraid that these countries were similarly vulnerable. This led to a massive dumping of the currencies of many Southeast Asian countries. At the height of the crisis, IMF intervened to prevent further deterioration of the situation.
The fall in value of currencies in the region including yen and yuan had substantially reduced the export competitiveness of Singapore. The financial panic also reduced international capital flow. The combining effects led to the fall of STI by about 60% from its previous peak.  However, the crisis was short-lived for Singapore. Singapore's strong macroeconomic fundamentals and healthy financial system had limited the impact of the crisis. In addition, MAS was quick to response with exchange rate and wage policies to regain export competitiveness. As a result, the STI quickly regain its loss. 

1997-2001 Dot-Com Bubble  

The speculative bubble began in the early 1990s as the world enters the Internet age. Seeing huge profitability, the market poured capital into this rising sector without any serious consideration of the business model. Many tech companies with no earning capabilities is able to raise millions of dollars through public listing. From 1995 to 2000 the tech heavy NASDAQ index soared by more than 800%. However, reality started to sink in as many tech companies reported huge loses and many of them folded within months from their public listing. In addition, the then Federal Reserve Chairman, Alan Greenspan, noted the irrationality of the market behavior had hiked interest rate to dampen the economy. Finally, the Dot-com bubble popped, NASDAQ plummeted rapidly and the US economy sank into a mild recession. 

2002 – 2007

As the US economy head towards a recession, Alan Greenspan reverses its monetary policy by lowering interest rate. By 2003, the economy began to recover. 
Following the cut in interest rate between 2001 and 2004, the US economy steadily improved. The monetary policies had apparently succeeded in driving the economy out of recession. The combination of low interest rate and a healthy economy led to an unprecedented boom in the housing market, pushing up housing prices rapidly. It also encourages investors to source for higher yielding instruments with greater risk, leading to the exploding market for securitized mortgages.
Securitization of nonconforming high risk subprime loans became popular. As the risk of the loan is borne by the investors, mortgage brokers had little incentives to perform due diligence.  Loans were easily granted to individuals with low credit score. Such high risk mortgage backed loans are then restructured and credit enhanced through the use of Collateralized Debt Obligations (CDOs) which essentially carve out AAA-rated securities from the initial junk loans.   
By the summer of 2007, the adverse effects of excessive risk taking due to subprime lending began to surface. Default rate increased as housing prices falls, pushing many financial institutions to the brink of bankruptcy. As a result, stock market plummeted.

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