Why we failed to read the signs of frailty and warn of East Asia's crisis

ON consequences that could have been foreseen

Why didn't we see it coming? Surely the greatest question raised by the East Asian financial crisis - greater even than the "how are they going to dig themselves out?" one - is why there was so little warning. Large numbers of supposedly well-informed experts completely failed to warn of the fragility of the East Asian economic region until after the event.

I find this unforgivable. Once it was clear there was a problem everyone leapt in. The credit rating agencies downgraded the debt to near-junk status, which is a fat lot of use since, by then, the debt was yielding junk returns. The investment banks warned their clients that they should expect more turbulence after those self-same clients had lost half their money. The official world you would expect to be useless, for officials are too frightened for their careers to be prepared to give what are inevitably disagreeable warnings. Local financial institutions, particular local banks, I would expect to be pretty cowed and bullied, so it is unrealistic to expect warnings to come from that quarter. But the foreign financial community ought to have seen something coming and it did not.

The only previous shock that came in such a completely unexpected manner was the first oil crisis in 1973/4. Though the Shell scenario planners had noted that a sharp rise in prices was possible they did not expect a quadrupling; nor did the Treasury VSOP committee (vast surpluses of oil producers) also formed a few months earlier to consider the financial consequences of an oil price rise.

By contrast, the third world bank lending crisis of the early 1980s might have come as a surprise to the lending banks but banking crisis always come as surprises to the banks; quite a lot of other financial organisations were profoundly concerned by the growth of very low spread loans to Latin America.

So why was this one such a shock? The answer I think comes in three parts.

First, there is a structural weakness in the sources of information. Not many people follow the economies of East Asia, aside from Japan, and most of those that do work for financial institutions whose job it is to persuade investors to put their money there. The result was, at best, a lack of independence in the analysis and, at worst, actual corruption in that analysts were leant upon by their bosses to see the sector through rose-tinted spectacles.

Second, because the underlying economic performance of the region has been so strong, and in many cases for very good reasons, there was an assumption that even if some things went wrong, the general growth of the region would ensure that mistakes could be overcome. The fact that some of the big investment projects in the region were clearly overblown (Malaysia building the tallest building in the world should have been a good "sell" signal) did not seem to matter because with 7 per cent growth the losses on a few bad investments would be more than offset by the profits of the good ones.

Third, there is a certain, shall we say, "tough-minded" attitude in the financial community towards little matters like democracy, free speech, social costs and political rights. Some people even argued that the region's success was the result of its focus on economic progress rather than political freedom, as though the two were incompatible. People with money to invest, rather like authoritarian regimes and the region, provided plenty of examples. The fact that authoritarian regimes are better at covering things up and therefore are ultimately more fragile than democratic ones was quietly ignored.

Was it, then, really possible to foresee the crisis? I think I can demonstrate that it should have been. Have a look at the graphs. On the right you see Thai car sales - an interesting little picture dug out by the economists at Tokai Bank here in London. As you can see they fell off a cliff during 1997. But if you look closely you can spot that the fall started at the beginning of the year and was well in evidence by March. The currency and interest rates showed no real movement until well into the summer, though that spike in interest rates in the spring should have been a warning. Ideally the expert analysts should have been looking at bank indebtedness and saying three years ago that there was a problem; but simply by looking at one indicator of consumer confidence anyone ought to have been able to spot that something was up. Three years' notice would have been wonderful but even three months would have been helpful, for it would have given more time for a rescue to be put together.

Having fun kicking the experts is a good sport but there are some really disturbing conclusions. Forget about the actual problems of East Asia, for they are at least now in the open and the collateral damage to the rest of the world economy has been limited. There have even been some benefits in the decline in pressure on commodity markets, especially oil. Focus instead on the weakness of our early warning mechanism.

Question one: Are there structural weaknesses in the quality of information about other economic matters? For example is there the same conspiracy of silence about the level of US equities or the possibility of a collapse of EMU? There is a bit of talk about both, though I am astounded at the way in which the dangers of EMU are not fully acknowledged on the Continent. Other people could doubtless name their favourite "no talk zones" - dangers which are not properly discussed because to do so would be bad for business.

Question two: To what extent are values elsewhere dependent on a good general economic performance? For example, to what extent do public finances in the G7 countries allow for the next recession? The D-word, deflation, has moved into common currency, but the R-word, recession, is still hardly mentioned.

Question three: Are financial markets, in their self-confident view that their ideology is now the global standard, giving sufficient weight to the costs of establishing the market system in places with little experience of running it? If we were too tough-minded about the lack of democracy in East Asia, are we being too tough-minded about the costs of applying the market throughout Europe and North America?

I'm not really worried about East Asia. There will be a difficult three years and growth will resume. I'm more worried that we won't learn the lessons of the East Asian crisis: that we need honest, independent-minded people looking at every aspect of the world economy and being prepared to speak their mind without getting sacked when what they have to say does not fit the overly rosy house-view.

voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
The Pipes and Drums of The Scottish Regiments perform during the Opening Ceremony for the Glasgow 2014 Commonwealth Games at Celtic Park on July 23, 2014 in Glasgow, Scotland.
Commonwealth GamesThe actor encouraged the one billion viewers of the event to donate to the children's charity
Karen Dunbar performs
Entertainers showcase local wit, talent and irrepressible spirit
Members of the Scotland deleagtion walk past during the opening ceremony of the 2014 Commonwealth Games at Celtic Park in Glasgow on July 23, 2014.
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
Life and Style
fashion Designs are part of feminist art project by a British student
Very tasty: Vladimir Putin dining alone, perhaps sensibly
Life and Style
Listen here: Apple EarPods offer an alternative
techAre custom, 3D printed earbuds the solution?
Arts and Entertainment
Top guns: Cole advised the makers of Second World War film Fury, starring Brad Pitt
filmLt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a uniform
The University of California study monitored the reaction of 36 dogs
sciencePets' range of emotions revealed
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
A scene from Shakespeare in Love at the Noel Coward Theatre
theatreReview: Shakespeare in Love has moments of sheer stage poetry mixed with effervescent fun
Joining forces: young British men feature in an Isis video in which they urge Islamists in the West to join them in Iraq and Syria
newsWill the young Britons fighting in Syria be allowed to return home and resume their lives?
Arts and Entertainment
The nomination of 'The Wake' by Paul Kingsnorth has caused a stir
Life and Style
food + drinkZebra meat is exotic and lean - but does it taste good?
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

PMO Analyst - London - Banking - £350 - £400

£350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...

Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

Insight Analyst – Permanent – Up to £40k – North London

£35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

Test Lead - London - Investment Banking

£475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game