Remember 1997: Asia's policymakers must respect the impossible trinity

The author joined Lehman Brothers in Hong Kong in April 1997 and within a few months was in the lion's den of the Asian financial crisis. The causes now seem obvious: Asian countries kept exchange rates fixed or heavily managed amid massive net capital inflows, producing grossly overvalued currencies and ballooning current account deficits, while central banks kept rates low to slow inflows, only overheating their economies further. By 1997 fundamentals had deteriorated enough that foreign investors began to withdraw, forcing policymakers to intervene; they lost that battle once FX reserves ran out, starting with the Thai baht in July 1997, after which Asian currencies devalued like dominos and central banks hiked to punitively high levels, driving economies into deep recession. The author stresses that Asia's fundamentals are far stronger today, but in some countries the main lesson is fading: respect the impossible trinity, under which only two of exchange rate stability, free capita