former Federal Reserve Board Chairman Alan Greenspan
the staff of the Ridgewood blog
Ridgewood NJ, reminiscent of the 1997 Asian Contagion, a Chinese property owner implodes and shares of a U.S. social media and auction company dive. While it’s pretty clear why banks are quivering in the vortex surrounding China’s Evergrande Group, the link between the lender’s troubles and stocks like Twitter or EBay is harder to see. Meanwhile, Shanghai-based developer Sinic Holdings halted trading Monday after an 87% drop in its shares. The sudden selloff in Hong Kong was accompanied by a surge in trading volume that was about 14 times its average in the past year.
Cryptocurrencies also dipped lower Monday in a broad sell-off . Many analysts attribute the drop to growing concerns over China Evergrande Group’s debt crisis and contagion fears.
The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion. However the recovery in 1998-1999 was rapid.
The Asian financial crisis, also called the “Asian Contagion,” was a sequence of currency devaluations and other events that began in the summer of 1997 and spread through many Asian markets. The currency markets first failed in Thailand as the result of the government’s decision to no longer peg the local currency to the U.S. dollar (USD). Currency declines spread rapidly throughout East Asia, in turn causing stock market declines, reduced import revenues, and government upheaval.
The Federal Reserve Board Chairman Alan Greenspan stated that the Asian contagion is a “cause for concern” but not a “serious threat.”
photo John Meriwether LTCM
In 1998 Long-Term Capital lost $4.6 billion in less than four months due to a combination of high leverage and exposure to the 1997 Asian financial crisis and 1998 Russian financial crisis. The master hedge fund, Long-Term Capital Portfolio L.P., collapsed soon thereafter, leading to an agreement on September 23, 1998, among 14 financial institutions for a $3.6 billion recapitalization under the supervision of the Federal Reserve. The fund was liquidated and dissolved in early 2000.
That same year the Federal Reserve chairman saved the day turning monetary policy into high art. At mid-year, as the Asian contagion seemed to wane, Greenspan faced a rebellion from inflation hawks on the Federal Open Markets Committee who wanted a rate hike. But Greenspan sensed that the real impact of Asia was yet to be felt, and he was right. And when Russia defaulted on its foreign debt over the summer, it was Greenspan who detected the oncoming panic. He orchestrated a worldwide shift in focus from inflation to growth that ultimately led to rate reductions from every major government.
