In 1994 Paul Krugman wrote an article in Foreign Affairs that questioned the idea of the “Asian Economic Miracle.” Krugman simplified that argument made by Alwyn Young and others that the economic growth in Southeast Asia was driven by capital investment and increased labor force participation and NOT by total factor productivity. What this means is that the “numbers” of economic growth really weren’t telling the whole story. Bascially, the “Asian Miracle” was not sustainable. Alas…the analysis was correct. The result: The Asian Financial Crisis.
But, when these economist sounded this warning in the mid 1990’s they were ignored by the business press and non-economists. The screams went out “how can these pencil-headed economists question what is happening in the Tiger economies? We are making money so everything is fine.”
No it wasn’t. U.S. banks poured money into Southeast Asia, feeding the asset bubble that ultimately imploded.
Fast forward 15 years to today. A recent report from John Makin at the American Enterprise Institute is questioning China’s recent economic “rebound.” For a nice quick summary see Jim Jubak’s 8/11/2009 Jubak’s Journal article on msn’s moneycentral. Basically Makin argues that the Chinese government statistics about their economic growth do not really reflect what is going on in the economy. Essentially, the Chinese government maybe destroying a great deal of resources/wealth in an attempt to make their GDP numbers look good.
If this is true (and it looks as though it is) remember what happened in Southeast Asia 15 years ago.
But…I can hear the pundits in business press and the non-economists already: “China is different! You economists don’t know what you are talking about - we are making money there, so don’t question what is going on.”
Hmmm…mispricing of risk…not understanding data…where have I heard that before???
All the best,
MBrandl
Professor Michael Brandl, an economist at the McCombs School of Business at The University of Texas at Austin, discusses current economic issues with his former students and those who might be interested in partaking in the conversation. See his 
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1 Andy Oppenheim // Aug 17, 2009 at 6:34 am
When I was in your class in 1999, I threw out the notion that the proper thing to do during the Asian crisis was …. nothing (specifically, i think the question was “why did we bail out LTCM instead of letting the free market take care of the risk by killing the firm?”). As it turns out, Larry Lindsey had the same attitude as I.
I firmly believe that this failure to let the fruits of their risk hit the firms who pumped up the assets is the main reason for today’s crisis. Banks acted rationally with the subprime crisis. They made money, and didn’t have any risk because ultimately the guv was going bail them out in the event of a bubble collapse?
Well, why not just let it fall? Everyone says that letting Lehman fail was the spark that set this current crisis off, but why not? If the “troubled assets” were still the responsibility of banks, I guarantee that bank behavior would change.
I fear from what you’re writing that the same behavior is repeating itself, namely, counting on the taxpayer in the end to bail out the risk.
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