Tutorial d8 MR.

WEI YI | a0099494h

Introduction
The Global Flow of Money is a modern phenomenon in worlds economic
that allows people in a country to invest their money in another country.
One example of the Global Flow of Money might be investment made by
investors from well-developed countries in less fortunate countries
through the financial markets available in the country. The advantage of
the Global Flow of Money phenomenon for less fortunate countries would
be an additional capital flow from the funds that are invested by the
investors in the countries which further lead to the countries economic
growth. While, the investors who put their money in the less fortunate
countries might profiting from the gain of the investment they made. Even
though the Global Flow of Money phenomenon seems to offer benefits for
the global economic community, it does not rule out the possibility to
cause disastrous situation such as 2008 Global Financial Crisis which
caused by the bursting of the United States housing bubble. This essay
which is written with the reference to external articles will discuss about
the reason which caused contradiction in the Global Flow of Money
phenomenon (the 2008 Global Financial Crisis) to happen, together with a
close examination of the similar situation in the South East Asia region.
Summary of 2008 Global Financial Crisis

In the article written in The Economist which discuss about 2008 Global
Financial Crisis states that the housing bubbles which happened in the
United States was the beginning of the Global Financial Crisis. The crash
was started in 2006 when the house price reach a new high by cause of
steady growth in the house price over the past few years. This situation
encouraged many people to take advantage of the market situation which
leads to a flood of irresponsible mortgage lending. Loans were doled out
to subprime borrowers with poor credit histories who struggled to repay
them.1 Then the risky mortgage were pooled together in order to turn
them into presumably low-risk securities which managed by financial
engineers. Afterwards, the securities were rated as AAA credit ratings by
the agencies who were paid by the banks that created Collateralized Debt
Obligations (CDO). They were far too generous in their assessments of
them.2 Since the securities gave an impression of being safe, many
investors around the world saw this as an opportunity to provide them a
higher returns at a time when the bank in United States set a low interest
rate. Since the original mortgages had been chopped up and resold in
pieces, the actual derivatives were impossible to price. 3 This situation
panicked the investors which leads to a decrease in the securities value.
Unfortunately, the derivatives became insolvent and the insurance
company (AIG) who sold the credit default swaps realized that it could not
compensate all swaps. When financial institutions began to realize they
would have to absorb all the losses, widespread panic gripped global
financial institutions.4

Another article written in the New York Times, in an accordance with the
federal inquiry, proclaims that the failures in government regulation,
corporate mismanagement, and unmindful risk-taking by Wall Street was
the main reason of an avoidable 2008 Global Financial Crisis. According
to the New York Times, the commission that look into the crisis accused
the Federal Reserve and other regulators for allowing disastrous act such
as careless mortgage lending, massive pooling as well as selling of loans
to investors in form of securities, and risky act of investors by betting on
securities backed by the loans. Then, bad press was also given by the
commission to Bushs administration for allowing Lehman Brother to
collapse in September 2008 which further worsen the situation. Since
many investments from many parts of the world were linked to Lehman
Brother, hence the bankruptcy of the Lehman Brother further worsen the
situation which leads to financial crisis outside the United States.
How financial globalisation may cause financial crisis

According to the World Bank, Financial globalization defined as global

linkages through cross-border financial flows. It has made emerging
markets increasingly relevant as they integrate them financially with the
rest of the world.5 Mr. Peter Franklin the EBRD on the supervisory boards of
Banca Transilvania and Meritum Bank, Poland, explains the cyclical concept of
how the market goes from boom to bust summarized in five phases.
First, the market boom is started with an economic growth in a country or
region, then it is supported by globalization as well as the advancement of
technology which makes the news spread so quickly and make the market
become easily visible in the eyes of the investors around the world. In
order to obtain more capital to support the growth, the market liberalizes.
Second, Investors around the world see the liberalization of the market as
an opportunity and foreign money starts to arrive. Property and stock
markets rise above their true value and continue to do so. Third, in order
to compensate the theoretical number of market demand, the supplies
gradually increase. In comparison with the fact that the actual market
demand fall below the theoretical market demand which could be caused
by interest rate change, political change or maybe natural disaster, the
price could fall at an instant the bubble burst in economic terminology. In
this phase, the foreign money starts to exit and currency devalues. Fourth,
the devaluation of the currency causes the bank crisis. Imagine a scenario
when a local bank lends money to a foreign company and suddenly the
currency devalues. It would lessen the banks profit since the value of
the money which lent to the foreign company become relatively far
smaller than the previous value before the devaluation of the currency
occurs. The bank crisis would lead to the countrys economic crisis since
the devaluation of the currency makes the bank runs out of money so
that it could not support the economic growth by way of lending money.
Last, Political change occurs and the economy starts to grow again. Then,
the cycle goes from the first phase again.

Writers opinion
Speaking for myself, I agree with both authors, the 2008 Global Financial
Crisis was simply caused by humans greediness. The crisis was not
caused by the nature nor the error in the computer system that accepted
the people who probably could not pay the debts to take the mortgage
loan. The crisis was the result of human action and inaction. 6 For me, the
action of faking peoples data in order to encourage the financial
institution to allow these people to take the mortgage loan was an
embarrassing act that the top people in the financial world took to gain
huge easy profit. Moreover, if the regulators institutions had strongly
rejected peoples home purchasing lending, the 2008 Global Financial
Crisis would have not happened. However, I conjecture that the crisis was
deliberately planned by an institution by taking advantage of the faulty
procedure of mortgage lending in order to obtain good investments when
the prices had gone up.
1997 Thailand Financial Crisis
The similar situation had happened in Thailand. In the early 1990,
Thailand experienced healthy-looking financial condition, good industrial
policies, and high interest rates which attracted foreign investors to enter.
Massive capital inflows entering Thailand were also supported by the
external factors such as stagnant demand in Japaneses economy and low
interest rates in European countries somewhere around 1990s. As a
consequence of the huge overflow of capital, domestic investment had its prime
years and the banking sector had expanded very rapidly. 7 Entrepreneurs saw
this as an opportunity to make wealth by taking the advantages of the market
situation which created the lending boom phenomenon. However, most of the
capital which was flowing into Thailand had been invested into non-productive
sectors which only manufactured non-tradable products that were only be sold
locally. This action resulting in less national volume of exports and thus weaken
the economys balance of trade as well as the capital account. 8 Unluckily, the
prime years did not last for so long. Thailand started to experience a slowdown in
economic growth. This phenomenon was caused by a number of factors such as
the contraction in the real estate sector, the emergence of China as an
intimidating competitor in international trade, the fall of world demand of
semiconductor which was one of the Thai major exports in 1996, and an
appreciation of the dollars after spring 1995.9 The people who had lent money
from the bank did not have the capability to pay back the loans due to a
significant decrease in demand. This situation caused the 1997 Thailand
Financial Crisis.

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References

1,2

"Crash Course." The Economist. September 7, 2013. Accessed February 20, 2015.
http://www.economist.com/
3,4

Amadeo, Kimberly. "2008 Financial Crisis: Causes, Costs and Could It Reoccur?" 2008
Financial Crisis: Causes, Costs and Could It Reoccur? Accessed February 22, 2015.
http://useconomy.about.com
5

Yeyati, Eduardo Levy, and Tomas Williams. Financial Globalization in Emerging Economies 1
(2011). Accessed February 25, 2015. http://www-wds.worldbank.org/.
6

Chan, Sewell. "Financial Crisis Was Avoidable, Inquiry Finds." The New York Times. January
25, 2011. Accessed February 26, 2015. http://www.nytimes.com/.
7,8,9

Laplamwanit, Narisa. "A Good Look at the Thai Financial Crisis in 1997-98." January 1, 1999.
Accessed February 27, 2015. http://www.columbia.edu/.