In today's excerpt - the 1997 Asian financial
crisis, which a number of economists view as
the direct antecedent to our current
financial crisis:

"In the 1990s, Asia was 'hot':
observers were smitten with the Asian
'miracle'. Exactly why was puzzling.

"The Asian economics grew rapidly in the
1990s. Much of this growth
was unsustainable. Analysts were impressed by
the high savings rates.
Political instability and the lack of a
social welfare system forced people to
squirrel away money (especially in Swiss bank
accounts). Analysts focused
sagaciously on the growth prospects and high
returns for investors. Asian
labour costs were low and there were no
employment laws. Abundant natural resources
were free to be exploited without
environmental safeguards.
Unexploited domestic markets excited foreign

"There were, of course, 'problems'. The
sudden increase in the rate of
growth and demand set off rapid price rises.
The office space in Mumbai's
Narriman Point business district was among
the most expensive in the
world, a matter of national pride.
Productivity was pitiful. The phones and
plumbing did not work. The traffic was

"Some experts even claimed to know the rules
of the game. ... [One such local 'expert'
explained] 'There are distinct phases in
investment madness in emerging markets.
Phase one is growth. You get a lot of foreign
investment. It is mainly relocation of
production facilities. Cheap [local] people
to do dirty jobs for
nothing. You dig up, cut down everything you
can. The locals deregulate
everything because the World Bank tells them
it will attract foreign investment.
Government-owned businesses are sold cheaply
to the favoured sons
and their foreign cronies. Government
controls are relaxed as the foreigners
tell the locals that it will create jobs and
wealth.' ...

" 'In phase two, living standards improve for
the fortunate. For the bulk
of people nothing changes, of course. A
middle class develops chasing
McDonald's and Wal-Mart consumer heaven.
Property prices and shares go
crazy. More and more money comes in. Local
banks lend recklessly. Foreign
banks lend recklessly to local banks. The
foreign banks think the local banks
won't fail because of government support.
Investors dive in. They talk
about 'growth' and 'portfolio
diversification'. People are excited. Prices
spiral up as the tidal wave of money pours

" 'Phase three. Costs rise to levels that
make the economies uncompetitive. They are
not cheap any more. Alas, the capitalist
caravan must move
on. Everything is over priced. Politicians
talk bravely about the 'need to
move up the value chain'. They launch
ambitious initiatives - the world's
tallest building, the world's longest
building, a new port in a country which
has no sea access, bridges over rivers
between two cities that do not exist,
entire new cities! Locals bristle at any
criticism. Everybody tries to shake off
the opprobrium of being an emerging market
nation. Talk of new paradigms becomes popular
- 'the Asian century', 'Asian values'.

" 'Prices don't make any rational sense. You
only buy because you think
you can sell it tomorrow to someone else at a
higher price. You are caught
in an endless spiral of higher and higher
prices. Fear and greed rule financial
markets. You are afraid that you might miss
out. Your greed is endless.
Foreigners develop a peculiar hubris. They
are bulletproof. Fundamentals
of value are irrelevant in this world. ...
Then, of course, kaput. It all
collapses'. This was in 1995. In 1997, Asia's
run as the hottest new 'new
thing' ended abruptly.

"Other seers dispensed more worldly
investment wisdom. 'If you arrive at
a country and discover limousines waiting to
transfer foreign investors and
their investment bankers to five star hotels,
then generally speaking it is
time to sell.' "

Satyajit Das, Traders, Guns and Money,
Financial Times/Prentice Hall, Copyright 2006
by Satyajit Das, pp. 3-4.