may allah s.w.t guide us

8/9/2019 May Allah s.w.t Guide Us.

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May Allah s.w.t guideus through this

financial crisis.

Universiti Kebangsaan MalaysiaFakulti Undang-undangSarjana Undang-undang Perniagaan

Musbri MohamedDIL; ADIL ( ITM )MBL ( UKM )


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I want to say that theviews expressed here aretotally personal and donot represent the views

of any institution.

In 1998 Tun Dr Mahathir Mohamad, who was then the PrimeMinister, called for a ban on speculation in the globalcurrency trade, which he identified as causing the Asian crisis.He was then laughed at by the Western leaders and thefinancial media, and the speculation continued and increased,until the bubble burst, leaving the world in economic crisis.


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J awaharlal Nehru in his speech on Basic Wisdom to theUniversity of Ceylon on J anuary 12, 1950, said,

One thing seems to me to be certain, namely, that we of today

have no integrated view of life; that we, however clever we maybe and however much of facts and knowledge we may haveaccumulated, are not very wise. We are narrower than the peopleof old, although every fact has gone to bring us together in thisworld. We travel swiftly, we have communications, we know moreabout one another and we have the radio and all kinds of things.

In spite of all these widening influences, we are narrower in our

minds. That is the extraordinary thing which I cannot understand.


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We are indeed seeing a change over Asia. Thanks toAsian giants like Gandhi, Nehru, Mao , Deng andMahathir , and the revival of India and China ischanging the 21st century.

If we were to take a grand macro-historian perspective,with India and China both growing at more than 8%

per year, whilst G-3, US, Europe and J apan aregrowing at less than 2% per year, the relative power

between the mature economies and the emergingmarkets will change dramatically.


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The 2008 Great Global Credit Crisis will be seenin history as a major turning point, just as the1930s Great Depression set in motion the SecondWorld War and changed the financial landscapefor nearly 80 years.

Likewise, the present crisis will induce major changes in economic theory, philosophicaloutlook and in institutional structure.


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The hallmark of the current crisis is complexity,so that we would have look at it from the

perspective of history, macro and micro details.In essence, four historical mega-trends paved theconditions for crisis.

The first was the appearance in 1989 of 3 billionlabour force into the market economies followingthe end of the Cold War that gave rise to a globalflood of cheap goods and low inflation for nearlytwo decades.


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The second was the monetary policy responses to theJ apanese bubble/deflation since 1990, which gave rise to over two decades of almost interest free yen loans globally, creatingthe famous Yen carry trade. The carry trade, essentially thearbitraging of differences in national interest rates andexchange rates, has now become global, because the Westerneconomies are also going for zero interest rate policies (Z IR P).We could trace the J apanese bubble to the Plaza Accord of 1985, when J apan allowed its exchange rate to overshoot. Thesupply of almost interest free funding to combat J apanesedomestic deflation was effectively to subsidize the rise of financial engineering, and created bubbles elsewhere, most

prominently in the East Asian crisis economies between 1990to 1996.


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The third force was the emergence of financial engineers, basically scientists and physicists, who applied their technical and statistical skills to financial markets. Theycreated the financial models and derivatives to managerisks and staffed the business schools, investment banksand hedge funds that dominated financial marketsglobally. Underlying their sophisticated models was onefatal flaw, that the world of risk was a bell shapedstatistical curve that ignored the long-tailed black swanrisk. I t was the underestimation of once in 400-year risksthat proved their undoing.


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The fourth was the phase of global deregulation, from the reduction of tariffs under WTO, the removal of capital controls under IMF and the

philosophy that minimal intervention and letting markets determine pricesand competition would create global efficiency. Such philosophy

permeated the basic textbooks and the international bureaucracy.

Essentially, these mega-trends were four arbitrages that created convergingglobalization wage arbitrage, financial arbitrage, knowledge arbitrageand regulatory arbitrage. But these four mega-trends enabled thenetworking of national markets into a global market, giving rise to afinancial inter-connected world with no global monetary authority andfinancial regulators compartmentalized mentally and operationally at theinstitutional and national levels.


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Last year on February 2009, President Barack Obamasigned a US$787bil ( R M2.88tril) fiscal stimulus package

passed on to him by the US Congress.

I t was hailed in the United States as Obamas first biglegislative victory and a bold step to get the Americaneconomy out of recession.

But outside the United States, the stimulus bill was not so popular because it contains a protectionist section whichstipulates that only US-made steel and manufactured

products can be used in government projects funded bythe stimulus package.


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At the same time a speech by Britain premier G ordon Browns closest economics advisor EdBalls that the world is facing its worst recession

in a hundred years, thus implying it will be worsethan the Great Depression of the 1930s.

I t was the bleakest scenario yet painted by asenior member of the Western establishment. Andin this scenario, the effects of the recession willlast 15 years.


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Subsequently thereafter the finance ministersand Central Bank governors of the Group of

Seven leading industrial countries met in R ometo discuss the crisis.

Their statement at the end of the meeting didnot contain anything new on measures tomanage the crisis.


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But while the G7 Ministers pledgedto avoid protectionism, a few of their countries were in fact taking

protectionist measures.


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France announced bailout loans to its

motorcar companies, and tied these to their maintaining production and jobs in France,thereby rousing anger from the CzechR epublic which now fears that the Frenchcar companies factories in the country mayretrench workers or even close.


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Chinas state-owned Xinhua news agencyattacked the buy American clause in anarticle entitled: Protec-tionism a poison tofinancial crisis solutions. I t said history andeconomics have told us, facing a globalfinancial crisis, trade protectionism is not asolution, but a poison to the solution.


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THE effects of the global economic crisisreached Malaysian shores at the end of

2008, according to data released by Bank Negara and the Statistics Department.

The countrys GDP, exports and balanceof payments have all been deeplyaffected.


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Although recessionary conditions have affectedthe Western countries, which are the origin of the

financial crisis, they have in fact affected Asiancountries even more badly.

The GNP fell by 3% to 4% in the US in the lastquarter of 2008. But the fall was sharper in manyAsian countries such as J apan, South Korea,Taiwan and Singapore.


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The credit crunch led to job losses and a fallin consumer spending.

By March 2009 reports show another 651,000 jobs lost in the United States in February, bringing its unemployment rate to 8.1%, theworst in 25 years.


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In China, exports in J anuary 2009 fell by 17.5%which has caused thousands of factories to close,with 20 million losing their jobs, according toofficial estimates. But Chinas imports fell by 43%and this has hit many Asian countries which export

manufactured parts used in making the productsmeant for exports to the West.


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Countries like India that have benefited fromoutsourcing by US multinationals (for servicesranging from accountancy to being call centres)are expected to be affected as the business of the

Western firms shrink.

Now that there is an upbeat feeling aboutrecovery in the global economy, will Malaysiaand the rest of Asia and the world see the returnof good times soon?


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The reduced flows or outflows in finance and the fall in exports of goods and services have led to a deterioration in the balance of

payments and the stock of foreign reserves in many developingcountries.

Some have also seen their currencies devalued, making it more difficult

to service their external loans.Thus the transmission through the financeand trade routes is working its way through to the real economy of output, trade and jobs. And this is only the beginning, as the recession inthe US and Europe is now expected to last at least another two tothirteen years.

M ay Allah s.w.t guide us through this global financial crisis. Amin.

M usbri M ohamed June 2010

may allah s.w.t guide us

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