Summers: International Financial Crises: Causes, Prevention, and Cures

Summers, LH. 2005. International Financial Crises: Causes, Prevention, and Cures. Economic Globalization In Asia.

This is a lecture.

Summers begins by noting how important applied economic research is to policy decisions, and how frequently it is used to make decisions that affect the lives of millions. Today he is talking about crises. There are four points that he outlines that he will address: 1.) what is the relationship between efficiency in financial architecture and system performance? 2.) what are the sources of crises? 3.) how best should the financial architecture be structured either internationally or nationally? 4.) what should nations do when a crisis occurs? (2).

Summers analogizes the advent of jet-engine technology to that of financial capital flows: the jet improved international travel immensely, even though there were spectacular crashes that occurred, especially earlier in the adoption of the technology. In this same way, finance capital can also stream-line international capitalism, though it may also be prone to spectacular crashes.

"International financial crises can be defined in many ways and can take many forms. What I mean by an international financial crisis is a situation where the international dimension substantially worsens a crisis in ways that would not occur in a closed economy" (5).

"There have been six major international financial crises during the 1000's: Mexico in 1995; Thailand, Indonesia, and South Korea in 1997-1998; Russia in 1998; and Brazil in 1998-1999" (6).

There are three general trends that can be inferred from these crises: "First, after a period of substantial capital inflows, investors...decide to reduce the stock of their assets in the affected country in response to a change in its fundamentals...Second, after this process went on for some time in these emerging-market countries, investors shifted their focus from evaluating the situation in the country to evaluating the behavior of other investors...Third, the withdrawal of capital and the associated sharp swing in the exchange rate and reduced access to capital exacerbated fundamental weakness, in turn exacerbating the financial-market response" (6).

Contagion is also another crucial factor in determining the severity and breadth. The author lists seven different ways that contagion can take effect.

"Just as better airplanes and airports are good in ways that go beyond accident-prevention, all of these steps are valuable not simply as crisis prevention measures, but in their own right, as proven strategies for promoting economic efficiency and growth" (9).

"Crisis response, like crisis prevention, has two dimensions: national policies that can restore confidence and international efforts to finance a credible path out of crises. Of these, by the far the [sic] most important is the response of national authorities in the countries concerned" (10).

Summers outlines potentially helpful national and international responses to financial crises.