Credit crisis, Asian style: a top Hong Kong analyst sets the stage.

• Author: Lo, Chi

The 2007-08 subprime crisis has more than a few similarities with the 1997-98 Asian crisis when it comes to causes and symptoms. But do not expect the western world to stage a fast recovery as Asia did from the regional crisis ten years ago. The subprime crisis is a man-made crisis, not a black swan event. To correct their mistakes in the coming years, regulators in the developed world will try to re-regulate banks. The danger of the subprime crisis to Asia is that it may send a wrong signal to the region, especially to China, and deter financial liberalization and innovation.

As the post-subprime crisis adjustment will be about asset deflation and de-leveraging, which will last for years, medium-term global growth will experience a structural downward shift, unless the developing world raises consumption sharply. The drop in developed world consumption will put an end to the emerging markets' export-led development model, crimping growth in Asia's export-led economies in the coming years.

IT'S NOT A BLACK SWAN

Some analysts argue that the subprime crisis is a "black swan" event. The term "black swan" comes from the ancient western concept that all swans are white. In that context, a black swan was a metaphor for something that could not exist. Ever since black swans were discovered in Australia in the seventeenth century, the term "black swan" has been used to connote the actual happening of a highly unlikely event with unprecedented and devastating effects. But the subprime crisis itself is not a black swan, though the resultant credit crunch and confidence crisis may qualify. This is because all the events and factors leading up to the current crisis were known.

From a macro perspective, the Asian crisis and the subprime debacle have similarities in their causes and symptoms--namely a prolonged period of low interest rates leading to moral hazard, imprudent lending, regulatory oversight, excessive investment, and asset bubbles. But the advent of financial derivatives has made the subprime crisis more complicated.

The U.S. current account deficit ballooned to above the crisis threshold of 5 percent of GDP before the subprime crisis broke, just as in Asia before the 1997-98 financial crisis. Notably, Thailand, where the Asian crisis started, had a current account deficit of over 8 percent of GDP prior to the crisis; the United States had a current account deficit of 6 percent in the year before the subprime crisis!

Americans have gone on a debt-financed spending spree for over a decade, pushing the loan-to-deposit ratio in the banking system to over 100 percent. Everything from personal consumption to financial investment has been funded by debt. The blow-out in the U.S. loan-to-deposit...