Comments on the study of Prof. Robert L.

Brown

Dr. Vu Sy Cuong Academy of Finance Ministry of Finance The long study of Prof. Robert L.Brown attracted me immediately since my first reading by the way he explained economic issues. He was rather telling a story than mentioning to bald econometric models, that made his different to other economic and financial studies. The study jumps to interesting conclusions on 8 economic crises since the birth of capitalism, included: (1) The Tulipmania in 1637 Eeconomic crisis in Holland (2) The Mississippi Bubble Scheme in 1720 Ccrisis in France (3) The South Sea Bubble in 1720 Ccrisis in Britain (4) The Great Recession Crash in 1920 started in the United States and led to the global recession (5) The Recession Crash in 1987 (6) The Asian Financial Crisis in 1997 started by the Thai Bath devaluation led to economic crisis in several Southeast and East Asian countries, then had impact on the whole world economy. (7) The Dot-com Bubble in 2000 the too high expectation on profit of IT enterprises (8) The Financial Crisis in 2007-2010 the collapse of financial markets triggered by housing loans Using the cases that are mentioned more or less in economic and financial textbooks or analyses, the study highlights the background, the causes and the consequences of economic crises. Therefore, the author focused on reviewing developments of crises, synthetizing postcrisis studies and scoring issues as theirs importance and relevance. Crises are different in causes but similar in nature: all related to the uncontrollable greed of human. The crowd psychology and the inappropriate policy intervention of states have created conditions for crises to consolidate and break out. The study points out that all crises related to property bubble (8 marks) created by human greed and emotion (7.5 mark) then let to speculation (7.5). However, real estate bubble was directly causes only three among all crises. Crowd psychology and human greed are eternal problems but rarely realized by governments until crises broke out. In some cases, the state intervention worsen crises, e.g., the loosen monetary policy was one causes of The Mississippi Bubble, The Great Recession in 1929 and the Financial Crisis in 2007-2010. The loosen credit polices affected by leftist capitalism was cause of crisis in several Asian countries in 1997. Wherever capital flows were misleading invested that based on politic wills but credit analyses, there exists the threat of crises and Indonesia was the most relevant case. Globalization and the FDI increase also created risks of economic crises. FDI increase, graded 2 mark, was cause of four crises included the three latest crises. While the change of exchange rates related to only two crises and got 1.5 mark. In the middle of 1990s, Thailand, Indonesia and Korea applied high interest rate and fixed exchange rate to attract foreign capital inflows, most of that were in form of USD-valued 1

short term loans, not long term holdings in local currencies. However, being attracted by short term profit, most of foreign capital was invested in real estate instead of in production. The property bubble appeared as consequence and resulted in the Financial Crisis in 1997. The inappropriate intervention of governments to remain the fixed exchange rate and reduce the value of debt in local currencies gave conditions to further consolidate the seeds of crises. Crises spilt over the world due to globalization and through the connection and dependence among economies. It means this economy has to pay the price of other country mistakes, especially the powers. Recent crises were different to crises in the pre-20th century years, which affected only one or a small group of countries. Today, countries need to coordinate to others in dealing with crises rather than separately acting. The appearance of stock markets created another channel of mobilizing capital for enterprises. Thus the decline in stock market, that graded 7.5 mark, would lead to economic recession. However, weakness of the economies are not causes of crises in all cases. With the strong development of information technology, financial flows rotated faster in speed and greater in scale. As a result, consequences of economic and financial crises becomes greater than in the past. Information technology allows faster, more convenient and larger transactions in financial markets. Moreover, the development of complex calculation techniques also gives chances to financier create more derivative financial products. As a result, there are more and more complex securities available for speculation. Then property bubbles become bigger and more difficult to control. According to the study, the new products variable existed in all crises, which means the too high expectation that people and enterprises laid on new products would bring about risk of crisis. And technological innovation related to half of cases. Lessons and policy implications While mentioning to some lesson for investors, the study is not included clear policy implication for governments. However, there are some lessons learnt through analyzing previous crises. Firstly, how to control the human greed and crowd psychology? Should governments support or prevent speculation, which is impossible mission in marketed economy. Experiences showed that the state intervention is necessary, but the method and moment to intervene will decide the result. Good examples are the intervention in capital flow off Malaysian government in financial crisis, the administrative intervention of Dutch or British government during Tulipmania or the South Sea Crisis, and the decision to inject money to market of the US in the 2007-2010 crisis. Secondly, restructure investment and debts to ensure loans and payments. The aim of this action is to maximize the effectiveness of projects, guarantee the profitability and payment capacity when domestic savings and exports do not meet demands for investment and import. Foreign loans, including enterprise loans, should be strictly monitored. Thirdly, loosen monetary policy accompanied by credit high-speed growth and low interest rate raise high threat of property bubble accumulation. Fourthly, establish flexible exchange rate and diversify foreign reserve. Fifthly, the decision to free capital flows should be based on real situation of each countries. The lack of management to capital inflows and outflows also creates risks of crises in developing countries.

Sixthly, the development of new financial products should be appropriate to management capacity of each government. It is essential to be cautious in dealing with new financial products. In the process of completing institutions of marketed economy, Vietnam has dealt with many problems faced other countries. Hot growth of real estate and stock markets that led to high inflation rate and unstable exchange rate in recent years are the clearest evidences. That is why we need deep analyses and studies on previous crises to choose appropriate policies for economic growth. In the study, the writer believed that weaknesses of state in managing financial systems would lead to property bubbles and the cost of dealing the broken bubbles would increase much. He also mentioned to conditions to actively conduct policies preventing property bubbles, including: Firstly, conclusions of situation analyses confirm the exist of bubble burst-out risks in the future, that could be threat to the financial stability. Secondly, government has identified tools that would be effectively used in preventing the worst scenarios. However, the writer did not clarify the strength and weakness of these tools. Thirdly, there are reasonable foundation for the government to believe that the cost of using these tools is lower than their benefit to the economy. Questions: 1. Are crises circular and indispensable when expectation on growth higher than capacity of improve productivity in the same circle? 2. What are specific lessons for developing countries like Vietnam? 3. Is crisis a form of creative destruction?