The Asian Relevance to the Subprime Crisis

Abstract

The 1997/98 Asian crisis and the 2007/08 subprime crisis have many similarities. But do not expect the western world to stage a fast recovery from the subprime crisis as Asia did from the Asian crisis. The post-subprime crisis adjustment will be about asset deflation and de-leveraging, which will last for years. Some economists even see the possibility of a return of depression-like economic problems, which dominated the world economy in the 1930s, after the financial tsunami (for example, see Krugman, 2009). Re-regulation of the developed world banking sector means that a plain vanilla banking model will return and sophisticated financial engineering practice will be gone for a long time. Medium-term global growth will experience a structural downward shift, unless the developing world raises consumption sharply. But this is unlikely to happen, as the saving habits of the developing nations, especially Asia, will not change so easily. The fall in consumption in the developed world will put an end to the emerging markets’ export-led development model, crimping profit growth in Asia’s export-led economies and sectors in the coming years.