Asia: The Collapse and the Cure

Michel Camdessus
Michel Camdessus; drawing by David Levine


Economic collapses are an intrinsic part of capitalism. The names of the really big crashes ring down through history: Tulip Mania in Holland in the 1600s, the South Sea Bubble in Britain in the 1700s, the Great Crash of 1929 in America. More recently, in the 1990s, the Japanese bubble ended with stock prices down two thirds and property prices down 70 percent. Seven years later the stock market has yet to recover and property prices are still falling.

Past infections do not provide future immunity. America in the 1970s and 1980s saw the effective bankruptcy of its largest city, a government bailout of Chrysler, one of its largest corporations, the collapse of its Savings and Loan banking industry, a stock market crash in 1987, and a sharp fall in property prices. The latter rolled around much of the rest of the industrial world. Canary Wharf in London, which cost twelve billion dollars to build, was at one time worth half a billion dollars.

Today it is the turn of large parts of Asia. In Korea on December 27, stock market values were down 42 percent for the year and the won had lost half its value against the dollar. Combining these declines, stock prices had, in dollar terms, fallen by two thirds for the year. And Samsung Electronics Company, the world’s largest producer of computer memory chips, according to a report in The New York Times, now has a market capitalization—the value of all its outstanding shares—of about what it would cost to build one of its factories. At the same time the company is carrying $7.9 billion in debt.1


The sequence of events in a crash are well known. Some asset rises in value to levels far above those that can be sustained. At the peak of Tulip Mania one black tulip bulb bought one of the row houses along the canals in Amsterdam. That price was crazy, and everyone knew it, but prices were just as crazy when six tulip bulbs bought one house and those who got out of the tulip market when it was 6 to 1 missed a chance to multiply their wealth by a factor of six. Short-run opportunities to make a lot of money overwhelm well-known long-run economic realities. Every investor (no one thinks of himself as a speculator) imagines that he will be able to see the end coming and get out in time—but few do.

As asset prices fall, what had been good loans become bad loans. Adequate collateral becomes inadequate collateral and loans with inadequate collateral get called for payment. Fearful of defaults or short of liquidity themselves, banks don’t renew short-term loans that normally would be automatically rolled over. Working capital dries up. Suppliers who are fearful of not being paid demand cash before delivery instead of being willing to wait the normal ninety days for payment. Within…

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