presence of foreign buyers will limit the actual fall in asset prices. In the moral hazard case, land falls from 100 to 60, not 50-which means that the losses to domestic investors(and taxpayers)are less than they would have been if foreign acquisitions had been blocked. In the financial panic case, the willingness of foreign investors to buy half-completed projects means that the costs of liquidation are avoided, which is necessarily a gain that more than offsets the loss from the transfer into less efficient Finally, we should note a final point: the availability of potential foreign buyers may in itself be a stabilizing factor. Suppose that we take the pure financial panic model, but add a large number of otential foreign buyers who would be willing to pay a price high enough to pay off all investors, even if everyone decided to withdraw funds early. In that case investors, knowing that they had nothing to lose by failing to join in a run on the intermediary, would not in fact withdraw their funds unless they needed to consume in period 2-which means that the possibility of a bank run would be eliminated. Or to put it a bit differently, the presence of potential foreign buyers would provide sufficient liquidity to make a liquidity crisis impossible. This suggests an unconventional additional payoff to opening one's economy to foreign direct investment: quite aside from any transfers of technology, managerial skills and so on, the mere potential for FDI may act as a stabilizer against the risk of domestic financial panics In any case, our analysis of both models seems to indicate that whether or not foreign investors are getting bargains- whether asset prices have fallen because they were initially overpriced or because they are now underpriced - given that a crisis has occurred, the"fire sale"of domestic companies is currently in the interest of the afflicted countries It remains interesting. however. to ask which of these stories we believe to be closer to the truth 5. What kind of fire sale? As long as we view the asian crisis as a matter of collapsing financial intermediaries, it is easy to explain why that crisis should be accompanied by the sale of domestic assets to foreign firms However, we have also seen that the efficiency implications of those sales-whether assets are being sold into or out of the"right"hands- depends on whether asset values are slumping toward or away from their appropriate levels What evidence do we have on the nature of the crisis? It seems hard to deny that there was a very significant moral hazard issue on the eve of the crisis. The role of"finance companies"in Thailand fits the"minister,'s nephew"story almost perfectly; in Indonesia many dubious investments(including the ambitious plans of a taxi company, which caused the spectacular failure of Hong Kongs Peregrine)involved members of the Presdident's family. In South Korea, all accounts suggest that the chaebol were engaged in reckless, ill-conceived expansion plans-with the industrial groups moving into businesses far from their core competences, and in many cases overseas ventures that seemed foolhardy even at the time- that would surely have come to grief even without the speculative attack Indeed, a series of chaebol banruptcies took place even before the onset of speculation against the currency To some extent the"overborrowing syndrome"(as McKinnon calls it )shows up in balance of payments statistics. Figure 4 shows total capital flows into South Korea, inward direct investmentpresence of foreign buyers will limit the actual fall in asset prices. In the moral hazard case, land falls from 100 to 60, not 50 - which means that the losses to domestic investors (and taxpayers) are less than they would have been if foreign acquisitions had been blocked. In the financial panic case, the willingness of foreign investors to buy half-completed projects means that the costs of liquidation are avoided, which is necessarily a gain that more than offsets the loss from the transfer into less efficient hands. Finally, we should note a final point: the availability of potential foreign buyers may in itself be a stabilizing factor. Suppose that we take the pure financial panic model, but add a large number of potential foreign buyers who would be willing to pay a price high enough to pay off all investors, even if everyone decided to withdraw funds early. In that case investors, knowing that they had nothing to lose by failing to join in a run on the intermediary, would not in fact withdraw their funds unless they needed to consume in period 2 - which means that the possibility of a bank run would be eliminated. Or to put it a bit differently, the presence of potential foreign buyers would provide sufficient liquidity to make a liquidity crisis impossible. This suggests an unconventional additional payoff to opening one's economy to foreign direct investment: quite aside from any transfers of technology, managerial skills and so on, the mere potential for FDI may act as a stabilizer against the risk of domestic financial panics. In any case, our analysis of both models seems to indicate that whether or not foreign investors are getting bargains - whether asset prices have fallen because they were initially overpriced or because they are now underpriced - given that a crisis has occurred, the "fire sale" of domestic companies is currently in the interest of the afflicted countries. It remains interesting, however, to ask which of these stories we believe to be closer to the truth. 5. What kind of fire sale? As long as we view the Asian crisis as a matter of collapsing financial intermediaries, it is easy to explain why that crisis should be accompanied by the sale of domestic assets to foreign firms. However, we have also seen that the efficiency implications of those sales - whether assets are being sold into or out of the "right" hands - depends on whether asset values are slumping toward or away from their appropriate levels. What evidence do we have on the nature of the crisis? It seems hard to deny that there was a very significant moral hazard issue on the eve of the crisis. The role of "finance companies" in Thailand fits the "minister's nephew" story almost perfectly; in Indonesia many dubious investments (including the ambitious plans of a taxi company, which caused the spectacular failure of Hong Kong's Peregrine) involved members of the Presdident's family. In South Korea, all accounts suggest that the chaebol were engaged in reckless, ill-conceived expansion plans - with the industrial groups moving into businesses far from their core competences, and in many cases overseas ventures that seemed foolhardy even at the time - that would surely have come to grief even without the speculative attack. Indeed, a series of chaebol banruptcies took place even before the onset of speculation against the currency. To some extent the "overborrowing syndrome" (as McKinnon calls it) shows up in balance of payments statistics. Figure 4 shows total capital flows into South Korea, inward direct investment