This Week In Finance

"Let the Markets Clean Up the Mess"

The Asian Flu. The Asian Crisis. The Asian Contagion. It seems you can't pick up a newspaper or a magazine these days without reading about the financial troubles of the erstwhile "Asian Tiger" nations. Unfortunate aspects of the situation aside, world events such as this provide excellent opportunities to bring some international perspective to the Corpfin course. For this week's discussion starter, we go to the January 26 issue of Forbes magazine, which contains an interview with Professor Randall Kroszner, a financial historian at the business school of the University of Chicago.

Professor Kroszner notes the historical similarities between the collapse of the economies of the Western nations in the 1930s and the collapse of the Eastern nations' economies in the 1990s. According to Professor Krozner: "Countries such as Great Britain had returned to the gold standard [after WWI] at unrealistic parities and found it difficult to pursue domestic policies consistent with their link to gold. After 1929 there was a dramatic loss of confidence in the ability of the central banks to peg their currencies to gold, and in the banking systems themselves."

The Asian economies are now in turmoil because they had unrealistic exchange rates-except in their case they were pegged to the dollar, not to gold. Their domestic credit policies made their external link to the dollar unsustainable."

Nigel Holloway (of Forbes magazine) then points out that both in 1930 and today "currency collapses led to a deflationary spiral." Further discussion centers on the ability of market forces to "sort things out" - central banks "do more harm than good in the long run" according to Professor Kroszner, and the lesson of the depression is to "open-not close [a country's] markets in time of crisis."

Continuing, Professor Kroszner makes a case for the least amount of regulation in the financial markets. Citing as an example the rapid development of 18th century Scotland, Professor Kroszner suggests that "a virtually unregulated financial system can be the engine of economic development."

Since all but the most oblivious students will have seen the headlines or heard the news about the Asian economic problem, most members of the the class will have at least a passing knowledge of the situation. You might want to use this interview to raise the following questions for discussions in class:

1. Why are financial problems in Asian countries relevant to American firms?
2. Does history repeat itself? Put another way, is it reasonable to extrapolate from events of two centuries ago?
3. How would you characterize the level of regulation of U.S. financial markets today? Are they "virtually unregulated?"
4. How might a financial manager hedge against currency fluctuations like the ones seen in Asia? [This could serve as a lead-in to a discussion of corporate risk management and the use of derivatives.]

In short, with an interested class, you can go a long way toward raising student awareness of the world financial situation, and provide a little historical perspective.

One other thing - What should the world's central bankers and members of the International Monetary fund do to mitigate the problem?

"Let the markets clean up the mess." -- Professor Kroszner

RWJ Discussion Starters Archives

Adopter Resource Page