Between 1997 and 1998 the currencies of Indonesia, Thailand, and South Korea lost over a third of their value, while the currencies of the rest of Asia lost over one-fifth their value. This economic downturn was fueled by many variables. Pinpointing those variables may be impossible. There are however many theories as to which entities lent hands in the collapse of the Asian economies and their currencies. The fundamental issue in Asia was a liquidity problem, not a solvency problem. The debt was concentrated in short-term liabilities while reserve assets were low. Though there is evidence of weak banking systems, this was not the primary cause of the currency crisis. This problem was deeply rooted in the financial policies that have been overlooked. This paper will examine the Asian currency crisis, the extent to which the IMF may have actually worsened the problem, the explanatory power of an Under-Consumption Theory, and the effect of the crisis on the Asian environment.
             Finance and Liquidity leading to Crisis
             During the 1990s, East Asia attracted large inflows of foreign capital, most of which were short-term (Weber, 2001). These inflows were encouraged largely by weak European and Japanese economies with relatively high growth prospects. According to Weber (2001) relaxation of foreign borrowing limits, liberalization encouraged by the IMF and pegged exchange rates caused bank and non-bank foreign liabilities to explode. Bosworth (1998) states that flows of portfolio capital by 1996 exceeded $30 billion a year. He also states that outstanding bank loans to Asia increased from $110 billion at the end of 1990 to $367 billion at the end of 1996. Two-thirds of the $390 billion loans in 1997 had a maturity of a year or less. These monies were invested mainly in property and equity. The readily available foreign capital stimulated output faster than domestic demand was growing. In the long run, with zero growth of net exports and ...