er investors to also pull their money out of the economy at sale prices. This causes a panic and seems to have a snowball effect. So in effect the country that once was flooded with billions of dollars is left off worse and soon is facing economic troubles. This panic has a tendency to effect surrounding countries. In the Asian crisis, it all started with Japan and quickly spread the whole Eastern part of Asia. Another way to think of the financial panic is to think about it as a sudden fall in demand for a country’s products. Investors will search for other companies in other countries for the same type of product. When this happens the companies that were left behind should offer the investors incentives. They should cut their prices to attract the investors again. This will help prevent another panic in the country’s product and economy. The main part of the book talked about the other financial crises of the 1990’s. I explained the classic “panic” situation that tends to always lead up to a financial crisis. Krugman uses the analogy, cattle herd, for the large investors that tend to flood the market and leave so quickly. Now that we know what causes this panic, why can’t we prevent it from happening? Why do we allow these panics to have such a huge destructive effects on global economies? Krugman suggests that we use capital controls. But capital controls tend to make those who have money keep it to them and not spend it for economic growth. This makes way for the policy of free international flows of capital. It allows those who need money to borrow it from other countries. This is a wonderful policy that helps countries recover from economic hardships much faster. This policy no only benefits the borrower but also the lender and in turn the whole global economy. But this free flow of financial capital is also giving us one major international financial crisis every two years...
