The Once And Future Financial Crisis

The lessons of the 1997 Asian meltdown might have prevented the one in 2008. Will they help China?

- Michael Schuman

By 1997, the South Koreans were pretty cocky, and for good reason. For 30 years, the East Asian country had been one of history’s economic marvels, transforming itself from a poor, war-torn wasteland into a rich industrial powerhouse. The economy wasn’t perfect: Korea’s big companies were prone to amassing too much debt and investing it in outlandish projects. But the Koreans had shrugged off such problems again and again. The future seemed secure. It wasn’t. On July 2, 1997—almost exactly 20 years ago— authorities in Thailand relinquished their control over the national currency, the baht. With market watchers already anxious it would plunge in value, the move tipped off the Asian financial crisis, an economic storm that crashed through Thailand, Malaysia, and Indonesia, then slammed into South Korea as it spread tremors across the globe. In Korea companies tumbled into bankruptcy, and banks were gutted. Its cupboard of foreign currency stripped nearly bare, the government was forced into an embarrassing International Monetary Fund bailout. The message was clear: No economy, no matter how brilliant its performance, is impervious to a financial crisis when policymakers fail to control risk. Twenty years later that lesson seems to have been forgotten. Even the Asian crisis feels like ancient history, over shadowed by the more traumatic Wall Street fiasco of 2008. That’s unfortunate, because the events of 1997 still offer critical insights about debt crises, how they happen, and how to prevent them. Without heeding these lessons, we leave the global economy vulnerable to more destructive financial calamities in the future. I haven’t forgotten 1997, probably because I lived through it. I was a correspondent in Seoul, surrounded by the chaos, disorientation, and heartbreak the crisis caused. Here was a society that had worked tirelessly to climb out of poverty, only to see its hard-won gains evaporate. House