the Great Depression of the 1930s can be blamed on the massive
macroeconomic policy failure of the US government, then the origin of
the 2008 global financial crisis can be traced to the market failures
buried in the microstructure of the current financial system.
Deregulation in the financial
institutions that began in the 1980s unleashed forces of competition
and innovation that succeeded in bringing great profits and joy to Wall
Street, but this has come at the expense of expanding systemic risk.
Financial derivatives such as mortgage-backed-securities (MBS) and
credit-debt-swaps may have transferred credit default risk from one
party to another, but the total risk in the system expanded because the
ability to transfer risk encourages market participants to make more
risky loans. The result was a financial time bomb waiting to be
detonated by the housing bubble of 2007.The credit default shock from
the bust of the sub-prime housing market created at least three
financial shock waves, damaging several major financial institutions in
the US and Europe, freezing up their credit markets, melting down
global stock markets, and now plunging the industrialised world into a
Impact on Asia
first shock wave toppled major financial institutions that were
directly exposed to credit-default risk embedded in the MBS debt that
they held. Emerging Asia was mostly spared in this round because of
limited direct exposure to the MBS market.The second shock wave
followed soon after when fear and uncertainty of counterparty risks led
to panic. Cash redemption and the flight to the safety of the US bond
markets caused a freeze in the credit market and a meltdown in global
stock markets. In this round, Asia's financial and stock markets were
not spared, as they were hit by the risk of illiquidity that results
from deleveraging and the reverse flow of funds back to the US. The
third shock wave that began soon after was the transmission of real
economic shocks. Falling asset prices depress consumption, and the
credit squeeze constrained investment. Together, these effects cause
economic slowdown, depress output and raise unemployment. Both the US
and the major economies in Europe are already in recession, and this
has dampened the growth of Asia's export-oriented economies.
chances of the world spinning into a deep deflation-recession spiral
just like the Great Depression are remote for a number of reasons.
First, much has been learned from the mistakes of flawed macroeconomic
management during the 1930s, when monetary contraction and bank
failures were allowed to happen. Economists and central bankers now
have a much better understanding of business cycles and how to manage
After several rounds of
monetary responses to slash interest rates, inject liquidity, insure
interbank loans, and to bail out major banks and financial
institutions, the Fed still has in its arsenal some unspent monetary
policy bullets such as pushing interest rate to zero and to print money
to finance government expenditure as a last resort.
Second, the recession of the
1930s was made deeper and more prolonged by shrinking world trade,
caused by another misguided policy. On June 17, 1930, Congress passed
the Smoot-Hawley Tariff Act that eventually led to retaliatory tariffs
around the world. This time around, a repeat of this mistake is
unlikely. When the 20 world leaders - representing nearly 90% of global
GDP - met in Washington for the G-20 summit on Nov 15 to discuss how to
repair the financial system and combat recession, suppressing trade
protection tendencies was high on their agenda. They agreed that the
final round of the protracted Doha trade negotiations should come to a
close by the end of the year.
That said, the likelihood of a
prolonged recession in the US and Europe cannot be ruled out. However,
the chances of a deep recession would be reduced if every country does
its best to maintain demand in its economy.
being dragged down from its recent fast growth path by declining
exports, is in a far better shape to cope compared with others because
of healthier official foreign reserve positions, low debt-to-GDP
ratios, well capitalised banks - a result of prudent economic house
keeping after having suffered through the Asian financial crisis. They
are now in an enviable position of being able to help the world climb
out of recession while helping themselves.
Internal, external imbalances
the last decade, emerging Asia, especially China and India, have grown
at an extraordinary pace. Fast growth, however, was achieved at the
expense of two kinds of imbalances - one internal and the other
external. First, public development investment in infrastructure and in
social services such as health, education, and others was concentrated
at cities and growth centres.Second, as the aggregate level of such
investment expenditures was inadequate, private saving rose to
compensate and this, in turn, resulted in a high aggregate
savings-investment gap, and a large current account surplus.
Both imbalances are unhealthy.
First, internal imbalance creates tension between the haves and
have-nots, and is politically unstable. China, for instance, could
postpone attending to this problem as long as it could grow at an
accelerated pace. With growth slowing down and with insufficient demand
to absorb the rising pool of labour from the rural population, it can
ill afford to wait any longer to fix the internal imbalance.
Second, global macroeconomic
imbalances cannot persist without causing a crisis. In the 1980s,
current account deficits in the US averaged 3.5% of GDP, while large
current account surpluses were observed for its large trading partners
such as Germany and Japan. That eventually led to a serious exchange
rate crisis and the signing of the Louvre Accord in 1987 by the G-7
economies. In the accord, Japan and Germany agreed to spend more to
reduce their current account surpluses while the US would do the
reverse to reduce its current account deficit; the purpose was to
prevent a drastic depreciation of the dollar.
The annualised US account
deficit is now higher at more than 5% of its GDP, and it is obvious
that this cannot go on forever without precipitating another crisis.
One argument is that the 2008 global financial crisis was triggered by
the bust of the US housing bubble that was driven by low interest rate
and excess liquidity supplied from excess savings in emerging Asia.Now
rather than later Looking ahead, each economy in emerging Asia could
make a difference for both domestic and global recovery. For instance,
China's recent announcement to spend a massive US$586 billion (15% of
its GDP) over two years in infrastructure and social development
throughout the economy has multiple benefits, both for the short and
the long run. It will stimulate its own economic growth, and China's
higher level of imports going forward will soften world recession.
Moreover, its development expenditure in the hinterland will redress
the internal imbalance and enhance political stability, and it will
also narrow the global current account imbalance.
Economies in Asia are in
different stages of economic and social development and each has its
own variant of internal and external imbalances. One may need more
ports, roads and railways. Another may need more public housing and
power plants. And others may need more education, health care and
social security. Governments that are able should seize the opportunity
during the current economic slowdown to build for the future. And
acting now rather than later has the added advantage of helping the
pace of economic recovery, both for itself and for the global economy.
The writer is an economist and
professor with the NUS Business School, National University of
Singapore. These are his personal views. Published in Business Times
(Singapore) on Nov 26.
Its wake up time America.
These bailouts are not helping the American people just Companies who
have reaped millions in rewards and done nothing to change their
strategies over the years. None of them deserve bailouts and the US
government cannot run these joints??? so the underlying question is how
much of thise bail out money will be spent on themselves---- most of it
Obama is saying as we say the Recession was caused by the finance and
banking execs who paid themselves large amounts of bonuses &
salaries. These & their board of directors are the ones to blame to
the financial collapse.
Check out Pattaya/Bangkok Shipping & Transport services
BANKRUPTCY UNDER CHAPTERS 7 & 11
of the Bankruptcy Code means to "reorganize" the company and try to
become profitable. Management continues to run the day-to-day business
operations but business decisions must be approved by a bankruptcy
Under Chapter 7, the company
stops all operations and goes completely out of business. A trustee is
appointed to "liquidate" (sell) the company's assets and the money is
used to pay off the debt, which may include debts to creditors and
The investors who take the least risk are paid
first. eg secured creditors take less risk because the credit that they
extend is usually backed by collateral, like a mortgage or other
company assets. They know they will get paid first if the company
Bondholders have a greater potential for
recovering their losses than stockholders, because bonds represent the
debt of the company and the company has agreed to pay bondholders
interest and to return their principal. Stockholders own the company,
and take greater risk. They could make more money if the company does
well, but they could lose money if the company does poorly. The owners
are last in line to be repaid if the company fails. Bankruptcy laws
determine the order of payment.