WEBVTT - The World's First Modern Financial Crisis: 1997 Edition

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<v Speaker 1>Twenty years ago this week, a momentous event, a hundred

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<v Speaker 1>and fifty six years in the making, finally took place,

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<v Speaker 1>the handover of Hong Kong to China. The world was

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<v Speaker 1>transfixed for the first time before or since loomed the

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<v Speaker 1>peaceful handover of a capitalist economy to a communist regime.

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<v Speaker 1>Would China maintain the rule of law as Beijing promised,

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<v Speaker 1>uphold Hong Kong's freewheeling ways, an unfettered stock market among

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<v Speaker 1>the largest in Asia. Those were the kind of issues

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<v Speaker 1>that dominated headlines around the world, and the journalist Gift

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<v Speaker 1>was sure to keep giving right wrong, right region, wrong country,

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<v Speaker 1>I mean sorry, special administrative region. Welcome to benchmark. I'm

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<v Speaker 1>Malcolm Scott in Hong Kong, and you're right. Then, just

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<v Speaker 1>one day after Prince Charles sailed out of Hong Kong,

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<v Speaker 1>harbor financial calamity erupted in Bangkok and proceeded to ripple

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<v Speaker 1>through Indonesia, South Korea, and eventually Russia and Brazil. It

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<v Speaker 1>was the first truly global financial crisis of the modern era,

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<v Speaker 1>and in retrospect, a harborer of things to come in

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<v Speaker 1>the US. Today, Dan and I take stock of the

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<v Speaker 1>Asian financial crisis and the lessons we learned or the

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<v Speaker 1>ones that we ignored to our peril. Why is it

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<v Speaker 1>that these crises keep erupting our disruptions, such as the

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<v Speaker 1>two thousand and eight US mortgage implosion the inevitable consequence

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<v Speaker 1>of a capitalist market system. Joining us are Bloomberg journalists

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<v Speaker 1>who covered the Asian financial crisis as it unfolded, starting

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<v Speaker 1>with that fateful decision by Thailand to stop defending its

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<v Speaker 1>currency the BART. I watched the Bart's implosion from next

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<v Speaker 1>door in Malaysia. Let's introduce the rest of the panel.

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<v Speaker 1>Alec McCabe reported on the region extensively from Hong Kong.

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<v Speaker 1>Former Hong Kong Bureau chief reminds us was born in

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<v Speaker 1>Hong Kong. Lee Miller Bureau chief in Bangkok at the time,

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<v Speaker 1>and Malcolm you are now managing editor Frasier Economics based

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<v Speaker 1>in Hong Kong. Well, let's put this in some sort

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<v Speaker 1>of context. Remember, Asia's relationship with the West was very

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<v Speaker 1>different twenty years ago. It was the era of the

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<v Speaker 1>Tiger economies. Nations that had suffered economically since the end

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<v Speaker 1>of the Vietnam War not only regained their footing, were

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<v Speaker 1>poised to remake themselves and in some instances had as

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<v Speaker 1>low cost manufacturing powerhouses. It was around this time we

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<v Speaker 1>began to shed the phrase third world country in favor

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<v Speaker 1>of less developed nation, a subtle but powerful hint of

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<v Speaker 1>a new respect for Asia. So when Thailand surrendered its currency,

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<v Speaker 1>it was as if the first spider web of cracks

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<v Speaker 1>had appeared in the new narrative. Let's listen in as

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<v Speaker 1>ALEC interviews economist David one week after Thailand's decision. Thailand's

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<v Speaker 1>decision to flow to the currency he bought has big

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<v Speaker 1>implications for other Asian countries. Joining us in Hong Kong

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<v Speaker 1>is David Roach. He's the president of Independent Strategy. For

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<v Speaker 1>a look at what lines ahead for Thailand and post

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<v Speaker 1>hand over Hong Kong, thanks for being here today. It's

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<v Speaker 1>nice to be here again. There are implications, of course,

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<v Speaker 1>because in any area like this, if one country changes

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<v Speaker 1>a currency regime which is not that different to the

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<v Speaker 1>general rules of the game out here, then obviously everybody

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<v Speaker 1>is attacked. And the big theory is that you've get

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<v Speaker 1>a domino effect, this time in finance rather than the

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<v Speaker 1>military matters. So Alec, again, you were reporting for Bloomberg

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<v Speaker 1>in Hong Kong. At the time, it really did seem

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<v Speaker 1>like the biggest thing ever. Right, Oh it was, and

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<v Speaker 1>it had been so in the minds of journalists for months,

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<v Speaker 1>if not years. We've been preparing for this um the

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<v Speaker 1>most the hippest club in Hong Kong for all those

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<v Speaker 1>years club marking over. We had invested all sorts of resources,

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<v Speaker 1>we and the world's press to be there. And maybe

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<v Speaker 1>it was just because I was born in Hong Kong

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<v Speaker 1>and my kids were born in Hong Kong. But for

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<v Speaker 1>me it was a very personal handover, and in some

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<v Speaker 1>ways because China was taking over peacefully a capitalist society

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<v Speaker 1>for the very first time in the world, this was happening,

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<v Speaker 1>a peaceful transfer of power was happening. It seemed like

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<v Speaker 1>this was the moment for Asia to step up to

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<v Speaker 1>the world stage and really start leading the world economically

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<v Speaker 1>and perhaps politically as well. You know, it's one of

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<v Speaker 1>these situations where an event that has been cut and raised,

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<v Speaker 1>careographed for such a long time happens, and yet something

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<v Speaker 1>seemingly small in a very different type of place ends

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<v Speaker 1>up being the big thing, and that events that had

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<v Speaker 1>been prepared head full for more than a decade all

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<v Speaker 1>of a sudden just didn't seem that important. It didn't.

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<v Speaker 1>And Lee, you were in Bangkok a day was it

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<v Speaker 1>a day or two days after the handover? It was

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<v Speaker 1>the next day, actually it was July seven. So um,

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<v Speaker 1>you know, we were all caught a little bit unprepared.

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<v Speaker 1>We had seen things kind of melting down rather quickly

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<v Speaker 1>in Thailand, but the when when the devaluation was announced

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<v Speaker 1>and they used some tooth phrasing. But when we realized

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<v Speaker 1>what it was and we sent the first headline, you know,

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<v Speaker 1>we were just like, Wow, this is not the handover

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<v Speaker 1>of Hong Kong. This is something big, and this is

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<v Speaker 1>kind of the meltdown of a single economy. And then

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<v Speaker 1>not long after that, you know, Dan was working south

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<v Speaker 1>in Malaysia. I think that you probably felt the jolt

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<v Speaker 1>coming from Thailand. Well, you know, my parents were visiting

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<v Speaker 1>me in Kuala Lumpur at the time, and we had

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<v Speaker 1>watched the handover on TV the night before, so we

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<v Speaker 1>slept in I'm not going to call from My colleague

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<v Speaker 1>in the office called me at home and he said,

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<v Speaker 1>Thailand's just let the bot go and everything's going nuts.

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<v Speaker 1>Can you come in? And the interesting thing about that

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<v Speaker 1>at the time was you know, Thailand had been the

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<v Speaker 1>world's fastest growing economy from something like seven too, so

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<v Speaker 1>you know that was before China became the world fastest

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<v Speaker 1>growing economy. And so we saw this tremendous boom going on.

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<v Speaker 1>Alec was talking about the brand of of nightclubs and everything.

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<v Speaker 1>At one point, I think Thailand became the world's second

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<v Speaker 1>largest market for Johnny Walker Black label with and so so,

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<v Speaker 1>I mean, you know what was the first the US?

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<v Speaker 1>I think you don't expect things to melt down so

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<v Speaker 1>quickly because you know, even even to the point where

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<v Speaker 1>Herod's department store in London actually started putting signs up

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<v Speaker 1>in time because so many ties had money and we're

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<v Speaker 1>flying to London to go shopping. That's amazing. So what

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<v Speaker 1>happened next? I mean, Thailand, the Malaysia Mark Can you

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<v Speaker 1>have a timeline, right, w don't you just run through

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<v Speaker 1>that timeline? Let me rattle through it. Actually, let me

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<v Speaker 1>go back one step, because we've missed what what this

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<v Speaker 1>is all about, and this is this rapid reversal of

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<v Speaker 1>capital flows. Money had been flowing into these tiger economies,

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<v Speaker 1>all of a sudden it went the other way. And

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<v Speaker 1>it hurt the economy's big time. So July two is

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<v Speaker 1>where it started. That was where the spark lit in

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<v Speaker 1>the powder kick blew up. That was the devaluation that

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<v Speaker 1>Leisa spoke of. Uh. Some days later, the Philippine Pesso

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<v Speaker 1>was devalued. We didn't see huge while we saw implications,

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<v Speaker 1>but not to the extent that some of the other

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<v Speaker 1>economies that followed. Indonesia it widened its trading band soon

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<v Speaker 1>after then we had it eventually abandoning its trading band,

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<v Speaker 1>allowing the currency to float freely in August mid August,

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<v Speaker 1>and predictably it collapsed. Hong Kong stock market was hid.

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<v Speaker 1>In October, there was speculative attacks on the Hong Kong

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<v Speaker 1>dollar peg. It endured and lasts still to today. But

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<v Speaker 1>into October, then South Korea's one began to weaken. We

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<v Speaker 1>had the I m F loan packages start to unfold

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<v Speaker 1>from Thailand and Indonesia, but it got very nasty for

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<v Speaker 1>South Korea. Towards the end of nineteen South Korea having

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<v Speaker 1>to request I MF aid. The one weakening throughout the

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<v Speaker 1>IMF in December early December approved the fifty seven billion

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<v Speaker 1>dollar bailout package. For South Korea, and then into January

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<v Speaker 1>it really swung back to Indonesia the roup. He was

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<v Speaker 1>in free fall, then really nose diving. It lost as

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<v Speaker 1>much as more than of its value. The shelves were bare,

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<v Speaker 1>and people were stacking up protests through the streets amongst students.

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<v Speaker 1>And of course, then less than a year after the

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<v Speaker 1>first onset of that crisis, we had the departure of

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<v Speaker 1>Sahato after thirty two years in power in May. That's

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<v Speaker 1>a very good point, and as compelling as some of

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<v Speaker 1>these economic and financial superlatives are, let's not forget in

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<v Speaker 1>some instances what resulted from this economic crisis was nothing

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<v Speaker 1>short of a revolution. Yes, it did force Sahato to

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<v Speaker 1>stand down. We thought that would inconceivable at one point

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<v Speaker 1>in Korea, it ultimately meant the election of the first

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<v Speaker 1>opposition president. Now in Korea, presidency changes hands between parties

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<v Speaker 1>pretty regularly and no one cares big thing. Back then,

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<v Speaker 1>an Indonesian out Still after a tumultuous, ranching period, it's

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<v Speaker 1>regained its place as Southeast Asia's leading economy, the leading

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<v Speaker 1>economy of action, and it is a vibrant, rambunctious democracy.

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<v Speaker 1>Who would have thought we thought the Asian white quote

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<v Speaker 1>unquote was the way they had it right. The West

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<v Speaker 1>was in decline. And there's some images that spring to

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<v Speaker 1>mind during that whole period of bailouts lee. You remember

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<v Speaker 1>the I m F delegation staying in Bangkok. Where were

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<v Speaker 1>they staying, Oh, they were staying well it was it

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<v Speaker 1>was actually called the Oriental Hotel at that time, but

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<v Speaker 1>it was part of the Mandarin Oriental chain and every

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<v Speaker 1>year the Oriental would win either the best hotel in

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<v Speaker 1>the world or the second best hotel in the world.

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<v Speaker 1>And I if I'll give me a moment to tell

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<v Speaker 1>a story, because the I m F came in and

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<v Speaker 1>they browbeat governments to slap they're spending, which you know,

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<v Speaker 1>maybe in retrospect was what they the opposite of what

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<v Speaker 1>they should have been doing. And I remember going to

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<v Speaker 1>the the hotel for a press conference and the I

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<v Speaker 1>m F chief, Michelle camde Sux, who was this powering

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<v Speaker 1>Sorbone educated economist, and he made it clear that he was,

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<v Speaker 1>you know, sort of the financial overlord in Asia to

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<v Speaker 1>help get all these governments together and put their financing

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<v Speaker 1>back together. And um, you know, the I m F

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<v Speaker 1>brought in dozens and dozens of senior bankers to to

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<v Speaker 1>Uh sort of look over the shoulders of the different countries,

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<v Speaker 1>and they were staying at the Mandarin Oriental in Bangkoks

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<v Speaker 1>those calm da su came in and Uh I couldn't resist.

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<v Speaker 1>I had to ask him, I said, why is your

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<v Speaker 1>entire team of bankers staying at the most expensive hotel

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<v Speaker 1>in Bangkok? And he kind of got all upset, and

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<v Speaker 1>you responded that the professional bankers need certain standards of

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<v Speaker 1>living to complete that. Then you remember a moment too,

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<v Speaker 1>write it's fair to say the I M F s

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<v Speaker 1>PR operation in those days was not as sophisticated as

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<v Speaker 1>it is now. For me, the great moment was watching

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<v Speaker 1>the same Michelle come to Sue standing over Sahato on

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<v Speaker 1>national and international television with his arms folded while Sahato

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<v Speaker 1>sat hunched at a table signing the agreement. Several commentators

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<v Speaker 1>said at the time, he looks like a Dutch colonial

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<v Speaker 1>plantation owner. Now it's inconceivable that Christine Legarde would say

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<v Speaker 1>what was said to Lee and have the body language

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<v Speaker 1>that transpired in Jakarta inconceivable. So you know, the lenders

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<v Speaker 1>have changed significantly as well. It's an interesting point, because

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<v Speaker 1>the whole austerity versus bailout debate, of course, that we

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<v Speaker 1>saw through the European crisis most recently started back then,

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<v Speaker 1>back in January, before the worst of the crisis was

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<v Speaker 1>even upon Indonesia, already Joseph Stiglets, then Chief Economist of

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<v Speaker 1>the World Bank, was already questioning the sort of Washington

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<v Speaker 1>consensus view and some of the prescriptions that were being

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<v Speaker 1>put in place during that time. That's right, and the

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<v Speaker 1>Bank didn't thank him for it either. Well, it begs

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<v Speaker 1>the question have we learned anything? Did we learn anything

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<v Speaker 1>from Asia through the latest crisis in Europe that we've

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<v Speaker 1>got the world banking community still employing the same prescriptions

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<v Speaker 1>that didn't really work that well twenty years ago, Well,

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<v Speaker 1>you know, alec during any global financial crisis that followed.

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<v Speaker 1>A decade later, there was a very interesting moment at

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<v Speaker 1>a press conference in Washington where Dominique strauss Can, one

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<v Speaker 1>of Canvasser's successes at the MF, talked about fiscal expansion

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<v Speaker 1>being the way to go. The economies in crisis needed

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<v Speaker 1>to spend much much more, and that really was seen

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<v Speaker 1>as a Nixon goes to China moment. Dan the I

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<v Speaker 1>M f I think it was last year published a

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<v Speaker 1>bit of a mere culper paper which acknowledged some of

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<v Speaker 1>the mistakes of that period and the certainly you could

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<v Speaker 1>say the austerity first response has changed, although some people

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<v Speaker 1>in Greece may argue differently. It's going to say, right,

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<v Speaker 1>you know something else in retrospect, there were many predictions

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<v Speaker 1>that China would actually allow its currency to loosen. Instead,

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<v Speaker 1>it kept the peg that's the yuan's formal tie to

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<v Speaker 1>the dollar intact throughout this period. And you know, China's

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<v Speaker 1>economy was much much smaller than than it is now.

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<v Speaker 1>But looking back, was that the first real sign of

0:15:00.280 --> 0:15:05.080
<v Speaker 1>China leading, if not the region, then at least the world.

0:15:05.720 --> 0:15:08.480
<v Speaker 1>It certainly was a move that did help stem the

0:15:08.520 --> 0:15:12.600
<v Speaker 1>contagion that at certain times there must have felt like

0:15:12.640 --> 0:15:16.360
<v Speaker 1>it was never ending, the fact that they didn't devalue

0:15:16.440 --> 0:15:20.520
<v Speaker 1>to maintain their export competitiveness. But remember then China was

0:15:20.600 --> 0:15:24.120
<v Speaker 1>only just becoming the export powerhouse in it that it

0:15:24.240 --> 0:15:27.440
<v Speaker 1>is today. But that as we look back twenty years

0:15:27.480 --> 0:15:30.720
<v Speaker 1>on from the crisis, is the moment where China took

0:15:31.120 --> 0:15:35.800
<v Speaker 1>a notable global step that contributed to the stability of

0:15:35.840 --> 0:15:39.040
<v Speaker 1>the world. And to see how just how important that

0:15:39.080 --> 0:15:41.920
<v Speaker 1>you aren't anchor is to developing markets. You only have

0:15:42.000 --> 0:15:46.120
<v Speaker 1>to look back now two years to mid where there

0:15:46.160 --> 0:15:49.200
<v Speaker 1>was that decision to slightly free up. You are not

0:15:49.240 --> 0:15:51.720
<v Speaker 1>a free flow, just a slight change to the to

0:15:51.800 --> 0:15:54.880
<v Speaker 1>the mechanism. It only moved one point seven percent on

0:15:54.920 --> 0:15:59.960
<v Speaker 1>the day. Remember in mid and global markets went haywire.

0:16:00.560 --> 0:16:03.760
<v Speaker 1>So that in itself shows just how important that you

0:16:03.760 --> 0:16:07.600
<v Speaker 1>aren't anchor is today. And it all started twenty years earlier.

0:16:07.600 --> 0:16:09.440
<v Speaker 1>If you want an indication of where China is today,

0:16:09.480 --> 0:16:13.160
<v Speaker 1>it was just this month that MSCI put the domestic

0:16:13.280 --> 0:16:17.200
<v Speaker 1>Chinese stock market in the indexes. The share market was

0:16:17.240 --> 0:16:20.400
<v Speaker 1>now considered to be one of the world's biggest stock markets. Lee,

0:16:20.440 --> 0:16:24.600
<v Speaker 1>I'm wondering if this episode that we're discussing here is

0:16:24.680 --> 0:16:28.760
<v Speaker 1>also a lesson and a lesson we all needed in

0:16:28.840 --> 0:16:34.800
<v Speaker 1>retrospect about the impermanence of perceptions and of grand modeling.

0:16:35.320 --> 0:16:37.040
<v Speaker 1>You know, we said at the start of this program,

0:16:37.080 --> 0:16:39.800
<v Speaker 1>this is very much the era of the Asian Tiger,

0:16:39.880 --> 0:16:41.960
<v Speaker 1>the Asian way. They had it all figured out. The

0:16:42.000 --> 0:16:46.680
<v Speaker 1>West was in decline. By the end of the tables

0:16:46.720 --> 0:16:50.160
<v Speaker 1>were turned and the West was again in the ascendancy.

0:16:50.440 --> 0:16:54.960
<v Speaker 1>And that's highly arguable again today, is that what's really

0:16:54.960 --> 0:16:58.120
<v Speaker 1>happening here? This was about the death of perception. Well,

0:16:58.320 --> 0:17:02.280
<v Speaker 1>I don't think that, Uh, it's really about the perception.

0:17:02.440 --> 0:17:06.880
<v Speaker 1>I think that it's more about history repeating itself. I mean, uh,

0:17:08.640 --> 0:17:10.919
<v Speaker 1>was a crisis two thousand and eight was it was

0:17:10.960 --> 0:17:13.680
<v Speaker 1>a crisis we if you want to look at Greece

0:17:13.760 --> 0:17:17.120
<v Speaker 1>and sort of an ongoing crisis, I don't I think

0:17:17.160 --> 0:17:21.160
<v Speaker 1>that economically, no matter what we have in place, Uh,

0:17:21.200 --> 0:17:23.959
<v Speaker 1>we're we're going to see some of these crises happen,

0:17:24.040 --> 0:17:28.600
<v Speaker 1>and once they happen, there's a contagion to it. Should

0:17:28.600 --> 0:17:32.320
<v Speaker 1>we also be careful about constructing grand paradigms about the

0:17:32.359 --> 0:17:35.360
<v Speaker 1>era in which we live. I certainly think that that's

0:17:35.400 --> 0:17:39.080
<v Speaker 1>a that's a case. I mean, that's especially when you're

0:17:39.119 --> 0:17:41.960
<v Speaker 1>living through it. It's hard to have a grand perception

0:17:42.040 --> 0:17:45.760
<v Speaker 1>of it. Maybe that's what you know, for historians can

0:17:45.800 --> 0:17:49.480
<v Speaker 1>do fifty years from now or fifty years or a

0:17:49.520 --> 0:17:53.480
<v Speaker 1>hundred years from now. But it's awfully, awfully hard. And

0:17:54.000 --> 0:17:56.160
<v Speaker 1>and you know, we we were all on the firing

0:17:56.200 --> 0:17:59.720
<v Speaker 1>line as journalists when things were happening so fast, and

0:17:59.760 --> 0:18:03.440
<v Speaker 1>now things happen even faster because back then there really

0:18:03.640 --> 0:18:08.680
<v Speaker 1>was very little Internet. There was very little email traffic

0:18:09.200 --> 0:18:13.440
<v Speaker 1>that went on. There was no Twitter or anything. So um,

0:18:13.520 --> 0:18:17.440
<v Speaker 1>you know, when you're at ground zero of an event happening,

0:18:17.720 --> 0:18:24.320
<v Speaker 1>it's very hard to have a wide perspective. Benchmark will

0:18:24.320 --> 0:18:26.760
<v Speaker 1>be back next week. Until then, you can find us

0:18:26.760 --> 0:18:30.399
<v Speaker 1>on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app,

0:18:30.560 --> 0:18:34.040
<v Speaker 1>as well as Apple Podcasts, pocket Cast and stitch. Why

0:18:34.119 --> 0:18:36.520
<v Speaker 1>are there Take a minute to rate and review the show?

0:18:36.720 --> 0:18:39.239
<v Speaker 1>Some more listeners can find us and let us know

0:18:39.280 --> 0:18:41.800
<v Speaker 1>what you thought at the show. You can follow me

0:18:41.960 --> 0:18:46.320
<v Speaker 1>on Twitter at Moss Underscore, Echo, Alec a d b

0:18:46.520 --> 0:18:52.240
<v Speaker 1>mcse and Mal Malcolm Scott eight Lee. Oh I'm a

0:18:52.280 --> 0:18:56.439
<v Speaker 1>old world Adam, I don't use Twitter. Talk about the

0:18:56.480 --> 0:19:00.440
<v Speaker 1>absence of a new paradigm. Benchmark is produced by Sarah Addison.

0:19:00.680 --> 0:19:03.920
<v Speaker 1>The head of Bloomberg Podcasts is the same Alec McCabe.

0:19:04.080 --> 0:19:10.840
<v Speaker 1>Thanks for listening. Next time, h