The causes of crises

The Agony of Reform was caused by moving away from government
control to open markets. While the consequences were beneficial on the
whole, they were also wrenching in their short-term effects. One of the
reforms was the globalization of financial markets. Two results were (i) the
Asian financial crisis and “contagion” and (ii) the sub-prime crisis. What
were the causes of contagion? What were the causes of the sub-prime
crisis? Could either have been prevented, mitigated, or stopped? If so, by
whom at what cost? Do you see parallels or dangers in the current financial
system?

See the stretch activity below for an added input to this essay.

(NOTE: this is a tough assignment and should only be undertaken by
students with a deep interest in finance and financial markets. If you have
this interest, then this will be a fascinating and important topic.)

STRETCH ACTIVITY

This would be a good week to read either Too Big to Fail by Aaron Sorkin
or Stress Test by Timothy Geithner. Both of these cover the sub-prime crisis
of 2008-9. This provides a useful update on the contagion of the Asian
financial crisis. These books show that a global financial crisis can start in
the United States as well as in the Far East. Reading (one of) these will help
you to answer the essay question for this week.

For a another view of the sub-prime crisis, and a wonderfully entertaining
read (or movie), take a look at The Big Short by Michael Lewis or the film
of the same name.

Trailer to Big Short: https://youtu.be/1GfqispPMes

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