"First, money poured into emerging
markets when it looked like they offered juicy returns. Then it poured out
after they didn't. Currencies are collapsing. Stock markets are falling. And
central banks are sacrificing the real economy to save the exchange rate.
We've seen this movie before.
It was called the East Asian financial crisis, back in 1997. But, for once, the
sequel won't be worse than the original. Emerging markets don't have enough
foreign-money debt this time around to make their falling currencies much of a
concern. What is a concern is whether their central bankers realize this. They
might overreact—they might already be—and raise rates to prop up their
currencies, when they should be lowering them to prop up their economies.
Now, emerging market currencies have been in a
world of pain since last May. That's when Ben Bernanke first hinted that the
Fed would soon draw down—or "taper"—its bond purchases. If that meant
the Fed would start raising rates sooner too, as markets assumed it did, there
wouldn't be any need to park money overseas to get a decent return. You could
do that in the U.S. So investors pulled their money out just as quickly as they
had moved it in—and emerging market currencies fell."
