ASIA AND THE GLOBAL FINANCIAL CRISIS Asia Economic Policy Conference Sponsored by the Federal Reserve Bank of San Francisco ASIA AND THE GLOBAL FINANCIAL CRISIS Edited by Reuven Glick Mark M. Spiegel Asia Economic Policy Conference Sponsored by the Federal Reserve Bank of San Francisco Santa Barbara, California October 19–20, 2009 The articles in this publication can be obtained in electronic form from the Federal Reserve Bank of San Francisco’s website: http://www.frbsf.org/economics/conferences/aepc/2009/agenda.php Contents Foreword . 1 Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco Conference Summary . 3 Reuven Glick, Group Vice President, Federal Reserve Bank of San Francisco Mark M. Spiegel, Vice President, Federal Reserve Bank of San Francisco Welcome Address . 11 Asia and the Global Financial Crisis Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System General Discussion . 23 The Impact of the Financial Crisis on Emerging Asia . 27 Morris Goldstein, Dennis Weatherstone Senior Fellow, Peterson Institute for International Economics Daniel Xie, Research Assistant, Peterson Institute for International Economics commentary . 81 Michael Mussa, Senior Fellow, Peterson Institute for International Economics General Discussion . 85 Lessons from Asian Financial Experience . 93 Anne O. Krueger, Professor of International Economics, Paul H. Nitze School of Advanced International Studies, Johns Hopkins University commentary . 115 Andrew Sheng, Chief Adviser, China Banking Regulatory Commission General Discussion . 123 Global Imbalances and the Financial Crisis: Products of Common Causes . 131 Maurice Obstfeld, Class of 1958 Professor of Economics, University of California, Berkeley Kenneth Rogoff, Professor of Economics and Thomas D. Cabot Professor of Public Policy, Harvard University commentary . 173 Ricardo J. Caballero, Ford International Professor of Economics, Massachusetts Institute of Technology commentary . 179 Jacob Frenkel, Chairman and Chief Executive Officer, Group of Thirty General Discussion . 185 Keynote Address . 191 Reforming the Global Financial Architecture Andrew Crockett, President, JPMorgan Chase International General Discussion . 203 Fire, Flood, and Lifeboats: Policy Responses to the Global Crisis of 2007–09 . 207 Takatoshi Ito, Professor, Graduate School of Economics, University of Tokyo commentary . 251 Frederic Mishkin, Alfred Lerner Professor of Banking and Financial Institutions, Columbia Business School General Discussion . 259 Panel Discussion: Experiences with the Crisis . 265 The Global Financial Crisis: Impact on Asia and Policy Challenges Ahead . 267 Heng Swee Keat, Managing Director, Monetary Authority of Singapore Global Financial Crisis and the Korean Economy . 277 Kyungsoo Kim, Deputy Governor and Director General, Institute for Monetary and Economic Research, Bank of Korea Global Financial Crisis: Japan’s Experience and Policy Response . 285 Takafumi Sato, former Commissioner, Financial Services Agency, Japan General Discussion . 291 The Financial Crisis and Global Policy Reforms . 299 Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Political Science, University of California, Berkeley commentary . 335 Anil K. Kashyap, Edward Eagle Brown Professor of Economics and Finance, University of Chicago Booth School of Business General Discussion . 341 Closing Remarks . 347 Asia, the Financial Crisis, and Global Economic Governance John Lipsky, First Deputy Managing Director, International Monetary Fund General Discussion . 355 contributors . 359 conference ParticiPants . 369 1 Foreword This year’s Asia Economic Policy Conference, titled “Asia and the Global Finan- cial Crisis,” is the first in a series that the Federal Reserve Bank of San Francisco plans to hold every other year . Our objective is to bring together researchers, private market participants, and policymakers to explore Asia’s evolving role in the global economy . We hope that this conference series will provide a useful arena for interaction, with opportunities for both formal and informal discus- sion . We also hope to stimulate more top-quality research on Asian issues . We decided to begin this venture for several reasons . First and foremost, it goes without saying that Asia is an important force in the global economy . We consider knowledge of the region critical in insuring that the Federal Reserve System has the understanding of global economic trends needed to conduct monetary policy and to address issues relating to the stability of the financial system . Not sur- prisingly, given the strength of economic and financial ties between Asia and the western United States, the Federal Reserve Bank of San Francisco has a long- standing tradition of focusing on Asian developments through the activities of our Center for Pacific Basin Studies in our Economic Research Department and our Country Analysis Unit in Banking Supervision and Regulation . This year’s conference assembled an outstanding group of experts on a topic of extreme importance . I appreciate the contributions of all those who took part in the conference, including authors, discussants, panelists, and audience mem- bers . My special thanks to John Judd, Reuven Glick, and Mark Spiegel, who helped develop the program, and to Anita Todd for her assistance with the pro- duction of this volume . Janet L. Yellen President and CEO, Federal Reserve Bank of San Francisco 2 ASIA ECONOMIC POLICY CONFERENCE ASIA AND THE GLOBAL FINANCIAL CRISIS 3 Asia and the Global Financial Crisis: Conference Summary Reuven Glick and Mark M. Spiegel The global financial crisis of 2007–09 has starkly demonstrated the extent to which the economic fortunes of the United States, Asia, and the rest of the world are intertwined . The crisis was transmitted to industrial and emerging market economies through both financial and trade channels . Investors were affected by exposure to failing assets in the United States and increased uncertainty in global financial markets . Emerging market economies experienced abrupt halts in capital inflows and downward pressure on their exchange rates . Export- ers throughout the world saw demand for their products decline . While Asian economies were initially perceived to be insulated from developments else- where, the notion of Asia “decoupling” from the problems in the United States and Europe evaporated as the crisis intensified . Policymakers around the world faced the tasks of stabilizing financial conditions and managing economic growth in the short run as well as adopting long-run reforms aimed at prevent- ing future crises . To explore these issues, the Federal Reserve Bank of San Francisco inau- gurated its Asia Economic Policy Conference series with a conference on “Asia and the Global Financial Crisis” held October 19-20, 2009, in Santa Barbara, California . The conference brought together experts from around the world to discuss the transmission of the crisis to Asia and the responses of economic pol- icymakers and regulators . The conference program consisted of five commis- sioned papers and other presentations by distinguished speakers . In opening remarks, Federal Reserve Chairman Ben Bernanke noted that, in the aftermath of the financial crisis of the late 1990s, many emerging mar- ket economies in Asia and elsewhere took advantage of improved global condi- tions to strengthen their economic and financial fundamentals . They bolstered fiscal and foreign debt positions, accumulated foreign exchange reserves, and reformed their banking sectors . When financial turmoil erupted in the sum- mer of 2007, Asian economies were well-positioned to avoid its worst effects . In particular, most financial institutions in the region were not heavily exposed to distressed markets for structured credit products and other asset-backed securities . 4 ASIA ECONOMIC POLICY CONFERENCE ASIA AND THE GLOBAL FINANCIAL CRISIS Still, Asian nations were affected in late 2007 and 2008 when economies weakened in the United States and other industrial countries . The global finan- cial crisis intensified dramatically when Lehman Brothers failed in Septem- ber 2008 . As investor appetite for risk declined, capital flows shifted away from countries that were viewed as more vulnerable . Moreover, financial institutions withdrew money from risky assets in both advanced and emerging markets . The Federal Reserve established liquidity swap lines with central banks in Asia and other regions to help alleviate dollar funding pressures . In Bernanke’s view, emerging Asia’s sound macroeconomic and financial fundamentals provided room for maneuver in carrying out countercyclical mon- etary and fiscal policy, in contrast with earlier crises or compared with options available to other emerging market countries . In particular, China implemented a sizable fiscal program, supplemented by accommodative monetary and bank lending policies . Bernanke attributed Asia’s relatively rapid recovery in large part to such domestic demand-boosting policies, which provided a substitute for exports to trading partners outside the region . First-day presentations reviewed national experiences of the crisis . Morris Goldstein and Daniel Xie of the Peterson Institute for International Econom- ics identified several characteristics that affected the depth of the downturn among Asian countries . China and India experienced relatively small growth slowdowns, but the economies of Hong Kong, Korea, Singapore, and Taiwan contracted