When the great Asian crisis hit(by 5to12)

Asia'seconomies came to a standstill. Millions of people were thrown out ofwork in countries with no welfare or unemployment benefits. Skyscrapersand subways rusted half—built where they stood, McDonalds stores had tosell rice patties to remain in business, because people had so littlemoney. Asians starved or stewed their own pet cats. They burned therainforest for firewood. They begged in the streets. Hotel rates at theBangkok Oriental, probably the world's most storied and luxurioushotel, tumbled to $75 a night, a fire sale. People talked bitterlyabout the loss of their savings and jobs, even in Singapore. Thecrisis was also extremely violent, culminating in anti—Chinese riotsthat killed about a thousand people in Jakarta and overthrew an oldally of 30 years, President Suharto of Indonesia. No less than sixmajor governments were overthrown, toppled or voted out. This crisisre—ignited long—dormant civil wars in Aceh, Indonesia and in southernThailand. It brought mob violence and the reemergence of witchcraft inEast Java. Cannibalism in West Kalimantan in Borneo reappeared. Andthis crisis served as an incubator for something Southeast Asia hadhardly seen in its famously laissez faire history: the ugly rise ofIslamic fundamentalism in the hardest hit crisis areas. The correlationis very precise. What happened in Asia in 1997—1998 was the economicequivalent of total war." (American Thinker, 12/30/04) To whichI'll add that there was fire sale pricing of many companies and banks-- on one hand a massive outflow, capital flight, from the region, onthe other hand a large infux of FDI taking advantage of sharply lowerprices. "In 1997 South Korea's currency lost half its valueagainst the dollar, and its stock market lost 40 percent of its valuein domestic currency. Thus the price of South Korean corporations toforeign buyers in effect fell by 70 percent, in some cases producingwhat appeared to be spectacular bargains (Korean Air Lines, with afleet of more than 100 jets, had a market capitalization at end-1997 of$240 million, roughly the price of two Boeing 747s - although any buyerwould also have acquired its $5 billion debt). Moreover, heavilyindebted corporations, facing a credit crunch, were desperate to selloff factories and subsidiaries to raise cash." (Krugman, 1999?) Thirdhand, I'm not sure that changing the Fed funds rate has much immediateeffect. A 1994 emprical study by the Chicago Fed found: "Inearly February the Federal Open Market Committee announced a tighteningof monetary policy; as of June, this has been reflected in a125-basis-point increase in the federal funds rate from 3.0% to 4.25%.In light of this action, recent movements in the dollar against theGerman mark and Japanese yen seem perplexing. From February 4 to June30, the dollar depreciated by 9.9% against the mark and 10.2% againstthe yen. The conventional wisdom would predict that the dollarshould strengthen following a tightening of U.S. monetary policy. Yetthe dollar depreciated despite central bank interventions in theforeign exchange markets to support it. To take another example, onWednesday, May 11, the Bundesbank cut its discount and Lombard rates by50 basis points each. The Wall Street Journal characterized this as "anunexpectedly deep" cut. (1) The day before, the dollar had traded at1.6735 marks; by Wednesday's close in New York, the dollar was tradinglower--at 1.6695 marks. This Chicago Fed Letter investigates theempirical relationship between the federal funds rate and theyen/dollar and mark/dollar exchange rates in the 1980s and 1990s. Theevidence from this period shows that sustained and large increases inthe federal funds rate led to an appreciation of the dollar, but itoften took two years for these effects to take noticeable hold. ... " Nevertheless,financial globalization is now very much more advanced than the periodexamined, leaving me with large uncertainty re. consequences of achange of Fed funds rate. My suspicion is that they would not be asexpected.