Q: In 1997, East and Southeast Asian countries were hit so bitterly. The market turmoil started with a sudden reversal of international capital flows. First, a bunch of US banks left Thailand out of blue and then a massive outflow of international investors followed the suit (in Thailand and in some other countries in the region). The end result was a financial crisis. At the eye of the storm, just to make things worse, those countries also took a bitter blow in the form of a credit crunch. Credit crunch means a sudden halt of lending in an economy. It is a form of credit crisis however, the technical difference between the broad definition of a credit crisis and credit crunch is crisis crises refer to any kind of problems in lending. Whenever banks stop issuing new loans to borrowers, it is a credit crisis. But when a credit crisis occurs merely due to the fact that banks do not lend money because they dont have Money, this situation is called a credit crunch. Otherwise a credit crisis in the more general sense does not need to occur because of liqudity squeezes all the time. Banks may stop lending because of lack of trust in the economy or because of regulatory reasons etc.

That nuance explained, it was a credit crunch that took place in late 1997 in East and Southeast Asia because when foreigners left those economies, banks simply fell into a liquidity pitfall.

The Eurozone crisis which happened in 2008 was another case. There we saw again serious problems in the international credit market. For example French and German banks stopped lending to institutions in the problematic southern countries like Greece, Spain, Italy etc. However, that was not because French or German banks did not have Money. They did. However, they were scared because of the problems in the economies of the South European countries. That was an incidence of credit crisis.

During this semester, we discussed many different types of market failures. Is credit crunch a type of market failure? Is credit crisis a market failure? If yes, why do you think so and please name the specific type of market failure that credit crunch and crisis resemble to. I mean, are they some kind of an externality issue? Is there a problem with the diffusion of information etc. Be clear and precise in identifying the exact type of market failure category you have thought.

Market failure categories as I have said above are the following. Markets may fail due to externatility issues, due to informational asymmetries, due to the fact that the product or service supplied resembles to a public good, or due to the fact that there may exist tendencies in the marketplace to form natural monopolies etc. Hence, be clear with where you are putting credit crunch and credit crisis events.

Or, if you claim that they are not a kind of market failure, why do you think that way?

Finally, is it possible that credit crunch only is (or is not) a market failure but any other kind of credit crises due to issues other than liquidity squeezes are (or are not)?

Discuss please.