Policy Responses from Four Economies
Edited by Daigee Shaw and Bih Jane Liu
Chapter 1: The Global Financial Crisis: Lessons for Taiwan
Sheng-Cheng Hu 1.1 INTRODUCTION The US subprime mortgage problem became an apparent crisis in summer 2007 and soon escalated into the worst global financial crisis and economic downturn in 60 years. In the global financial crisis, the five largest investment banks in the US became history and would either disappear or no longer exist in their current forms.1 The government-sponsored agencies such as Fannie Mae and Freddie Mac also had to seek assistance from the US government. The US Federal Reserve System (the Fed) had to come to the rescue of non-banking financial institutions such as Bear Stearns, Merrill Lynch and AIG, while allowing to fail some others (such as Lehman Brothers) that had looked too big to fail.2 The UK experienced its first bank run (Northern Rock) of any macroeconomic significance since 1866 (Miline and Wood, 2008). The three largest banks in Iceland, accounting for about 85 per cent of its banking sector, collapsed within a span of slightly more than a week, and the country avoided bankruptcy only with emergency assistance from the IMF in November 2008. The IMF (2009a) estimated global bank write-downs for 2007–10 to be US$2.81 trillion. According to a study commissioned by the Asian Development Bank (Loser, 2009), capital losses in financial assets worldwide (including stock market valuations, private and public debt, and bank assets) in 2008 amounted to US$50 trillion, while those for developing Asia were US$9.6 trillion, or just over one year’s worth of its gross domestic product...
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