- Currency exchange introduction
- Supply and demand curves in foreign exchange
- Accumulating foreign currency reserves
- Using reserves to stabilize currency
- Speculative attack on a currency
- Financial crisis in Thailand caused by speculative attack
- Math mechanics of Thai banking crisis
- Lesson summary: the foreign exchange market
- The foreign exchange market
How a currency crisis in Thailand led to a banking crisis in the 1990s. Created by Sal Khan.
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- What is a "bot?" at0:43?(3 votes)
- "Baht" is a currency that we used in Thailand , "BOT" must be "Bank of Thailand" http://www.bot.or.th/english/Pages/BOTDefault.aspx
( and the chart that Saul used must be a report that provided by Bank of Thailand )
I think this clear your doubt about "BOT"
Sorry my mistake the chart provided by Oxford university(7 votes)
- Are there other ways to peg a currency or at least try to stabilize its value besides buying foreign currency directly?(4 votes)
- Yes, you can use taxes to take up your currency and then destroy it. This will reduce the amount of the currency available, thus making the remaining quantity more valuable per unit.(5 votes)
- In the graph from Oxford Economics it is shown that while the Thai Baht was devalued, interest rate plummet. Can anyone explain why? If banks went benkrupt doesn't it mean that they don't have enough money to pay their loans/costumers - which mean there is high demand for money, and not enough of it?(3 votes)
- Before devaluation, people are worried about devaluation. So interest rates have to be high because lenders may get repaid in devalued baht. After the devaluation, that concern is no longer relevant.(4 votes)
- Couldn't Thailand exchange money at the time of ' being about to let the currency float ' with other countries that have not devalued and hence exchange those for USD and then pay of the debt ? Especially with countries that are on the verge of having their currency increase in value .(2 votes)
- It could, if there were a country willing to loan it the money. However, given that Thailand was facing devaluation, the debt would have become a lot harder for Thailand to pay back.(2 votes)
- what exactly is a speculative bubble?(1 vote)
- A speculative bubble is when buyers and sellers in a market expect prices to go up indefinitely.
As a result, they purchase the goods, say tulip bulbs for example, at even very high prices. This is because they expect to resell the tulip bulbs later, at an even higher price and for a profit. Since buyers keep expecting tulip bulb prices to go up, they keep buying them and selling them for more than what they paid - which keeps increasing the price of tulip bulbs. This process continues until the bubble "pops," which is when prices are so ridiculously high that no one believes they can go up anymore. If nobody expects the price of tulip bulbs to increase, then they no longer believe that they can sell the tulip bulbs for more than what they paid. As a result, nobody wants to buy tulip bulbs anymore, and the price plummets. Suggested reading: "Manias, Panics, and Crashes: A History of Financial Crises" by Charles Kindleberger.(4 votes)
- what is a "bubble"? Not just the thought that one lives in a limited access to truths..or is it?(1 vote)
- Bubble in the investment world means that something's price has become much greater than it's value. Take the housing crisis for example: homes started to be appraised for higher and higher in the marketplace over a very short period of time, however, nothing had really changed to these homes in that period of time and the economy was relatively stable, so the value of these homes stayed roughly the same. People started to buy houses with a price tag of say $500,000 when really the home probably should have been worth $250,000. These asset prices were inflated and the term bubble is used to indicate this. When you blow a bubble, it expands/inflates to a greater size. Likewise, when a bubble pops like the housing market crash, that $500,000 price for the home these people purchased now declined back to it's "value" of $250,000. So as you see, if you bought that house, you now just lost half of what you paid for it! This is why the crisis was so terrible on many homeowners!(4 votes)
- what is the meaning of interest rate? the blue line? what does it represent i dont get ti(1 vote)
- The blue line is the Prime Rate for borrowers in Thailand. Think of it as the rate banks generally loan at for car loans, for business loans, etc.(3 votes)
- Why couldn't thailand stop lending out money ? And one more, why couldn't they just print more money to solve the exporting and importing problem ?(1 vote)
- Thailand could not stop lending money simply because the central bank doesn't control how much money is being lent out. Ordinary commercial banks do. And cutting off lending within their country would have led to much bigger problems than just a devaluation.
Printing money would have devalued their currency even further.(2 votes)
- right I dont get what a bot is either(1 vote)
- bot (Baht) is the word used for the money in Thailand. In the U.S. we say dollars, in Thailand they say, bot. Does that make sense?(1 vote)
- When Thai banks borrowed, say, US dollars and lend in Thai Baht, where do those US dollars come from? From their own country's reserves or from the US?(1 vote)
What I want to do in this video is show you that some of the things that we've been talking about in the last few videos actually do happen. In particular, talk about how one of these speculative attacks on accuracy can turn into a banking crisis. So, this right over here, this is a chart from Oxford economics and it's a chart of two things of Thailand's exchange rate in short term interest rates from the early 90's until the present. And so there's a couple of interesting things that you might see over here. The first is the exchange rate. You see from the early nineties all the way to the late nineties the exchange rate was relatively fixed and, just so you understand what this chart is, this is the number of the Thai (I believe their currency is a Thai baht) relative to the US dollars. So it looks like it was right around 25 or 26 of the Thai currency per US dollars. It was pretty much pegged to it. We talked about how a central bank can peg a currency by buying and selling reserves of US dollars. But then, all of a sudden, you see right over here in 1997 there was a devaluation. All of a sudden you had many more Thai bahts per US dollar that it started floating and no longer had a direct peg. And that's because it experienced some of the dimanics that we saw in the last few videos. Now, what I want to talk about in this video is that, okay, you might think that's bad. Speculative attack on a currency, imports are going to be more expensive, it's going to raise the cost of living for people in that country... But why is it so, so bad? In this video I want to give you an example of why it can be so, so bad that a speculative attack on a currency or a massive devaluation of a currency can lead to an actual banking crisis. So let's go back to the early nineties. (So, let me write this down). And you see here that Thailand had a pretty high short term interest rate. That's this blue line right over here (let me underline). If we go to 1992 we have a short term interest rate that it looks like it's in the low teens, it's about 11, 12 % right over there. And so you can see the currency had a nice peg versus the dollar, people recognised the thailands seemed to had a pretty healthy economy and investors said "well, I can go to Thailand and get pretty high interest rates". And you could imagine a Thai bank say: "Well, look! All these people want to invest in Thailand instead of me trying to borrow money from, maybe, depositors in Thailand, why don't I borrow it from abroad and invest it in Thailand?" Let's just think about this. Think of it in terms of US investors, but it was investors from all over the world. So that's the US and this is Thailand right over here. And I have a look at the exact interest rates of the US but let's just say for the sake of arguments it was somewhat lower in the early 90's. So I'll just pick up a number. Let's just say it was 7% and in Thailand, for the sake of argument, let's say it was 11%. So you could imagine if you were an enterprising thai bank (I'll draw the bank right over here). You would say, well, why don't I go to the US, borrow dollars at 7% and then I can bring it to Thailand, I convert it to the Thai baht, I'll get 25 thai baht for every one of these dollars and then I can lend it out at 11%? So I'm pretty much going to be getting this 4% spread. And what are the risks here? What are the risks of borrowing in a foreing currency and then lending in your own? Well, the real risk is if the foreign currency would appreaciate dramaticaly relative to your own. But if you're a thai bank in the early nineties you're like "this is huge demand of other people wanting to convert their currency into the thai bank". And in order to maintain the spec the thai central bank is printing money and buying those dollars. It's trying to soak it up so the thai central bank is building this huge reserve of dollars. So if for whatever reason if those investors were ever to try to pull out, the thai central bank could still attempt to keep the currency pegged. So you tell this is a pretty stable thing and I could just make this thing. The spread is 4% spread. Easy money. But as we know it's not always that easy and risks that you're not aware of can very easily crop up and so when you go to 1997 that's exactly what happened All of a sudden, people realised that there was all this boom went on in Thailand there's all the lending going on in Thailand. but maybe that lending wasn't going on in the best possible places, and in particular it was going on in real state in the very speculative way and we all know now that real state is a good source of speculative bubbles and investors started to get scared and they started wanting to pull out. and we saw in the last videos they might naturally get scared, then you might have a speculative attack, you might have currency speculers saying "I want to start borrowing in Thailand and then I'm going to convert that to dollars and then invested in the US" hoping that this devaluation will occur and knowing that if enough people kind of jump on the bandwagon, the thai central bank would literally run out of reserves. And the reason why this is risky once they do run out of reserves what's going to happen to this person who had borrowed in dollars and then lend in Thailand? Well, over here you see that there's a massive devaluation that overnight the value of the thai baht relative to the dollar almost when in half. so all the sudden you borrowed in this currency and that currency is becoming worth twice as much as you thought it was relative to your own currency, relative to this inbound payments that you're getting right over there. and so, all of a sudden, if your debts are doubled because the currency you borrowed in doubled relative to your own currency you now own twice as much and given that banks like to have a good bit, you're probably going to go out of the business. and this was happening on a massive scale, it was happening throughout the thai financial sector the entire banking sector. And so it wasn't just a matter of imports getting expensive it was a matter of the entire financial system collapsing.