Mini budget to include 'ready-to-roll' packages
Published: 2009/02/21
THE mini budget to be tabled in Parliament on March 10 will include "ready-to-roll" packages, comprising a mix of intermediate projects to stabilise growth and investment, so as to cushion the impact of global financial woes on the local economy.
The move will support businesses in overcoming the slowdown as well as in tackling retrenchment issues, said Economic Planning Unit (EPU) director-general Tan Sri Dr Sulaiman Mahbob in Kuala Lumpur yesterday.
"The mini budget will be definitely more comprehensive because we are doing a lot of consultations with the industry players," he told reporters after delivering a talk on measures needed by Malaysia to get back on track due to the current global economic crisis.
"It will cover many sectors and also address concerns (on the impact of the global financial crisis)," he said.
Sulaiman said the EPU, together with the Finance Ministry, was reviewing projects which have positive impact on the economy in terms of multiplier effects so that these could be proposed to the government.
"This will involve transferring allocations among ministries so that projects which have been delayed can be carried out quickly," he said.
Earlier, Sulaiman said that with the first RM7 billion stimulus package and continued decline of global crude oil prices, the fiscal deficit will be higher.
"With the new stimulus package, we anticipate fiscal deficit to increase further than the 4.8 per cent estimated earlier during the tabling of Budget 2009 last year," he said.
Sulaiman said the new estimated fiscal deficit as well as revised gross domestic product (GDP) figure will be announced during the tabling of the mini budget.
"We expect a small positive growth for the GDP, (but) so far, we have not finalised the number," he said.
Sulaiman said as the global economic slowdown worsened, the government would continue to take measures to strengthen economic resilience to cushion the impact. - Bernama
Saturday, February 21, 2009
Paying tithes via kiosks
NST Online » Local News
2009/02/21
Paying tithes via kiosks
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Yang di-Pertuan Agong Tuanku Mizan Zainal Abidin (left) watching his son Tengku Mohd Muaaz trying out the kiosk at the Kampung Baru Mosque yesterday.
KUALA LUMPUR: Muslims can look forward to paying their tithes electronically using the "Maju Masjid (Mosque Development) eZakat/eDerma kiosks, which will be placed in mosques across the country.
The first kiosk can be found at the Kampung Baru mosque, which was launched by Yang di-Pertuan Agong Tuanku Mizan Zainal Abidin yesterday.
Also present was Minister in the Prime Minister's Department Datuk Seri Dr Ahmad Zahid Hamidi.
Zahid said the first eZakat/eDerma kiosk was provided by Maybank and would be managed by Majumaz Aktif Sdn Bhd.
He believed that the modern method to pay tithes or even to make donations would turn mosques into a key economic generator for Muslims here.
Majumaz Aktif chief executive officer Datuk Subirin Sahan said more kiosks would be set up in mosques nationwide including the National Mosque, Federal Territory Mosque, Putra Mosque and the Putrajaya Mosque.
"In the near future, the people can also buy wakaf shares and make deposits into their Tabung Haji accounts using the kiosk," he said, adding that the technology could be introduced in other Islamic countries.
2009/02/21
Paying tithes via kiosks
Email to friend Print article
Yang di-Pertuan Agong Tuanku Mizan Zainal Abidin (left) watching his son Tengku Mohd Muaaz trying out the kiosk at the Kampung Baru Mosque yesterday.
KUALA LUMPUR: Muslims can look forward to paying their tithes electronically using the "Maju Masjid (Mosque Development) eZakat/eDerma kiosks, which will be placed in mosques across the country.
The first kiosk can be found at the Kampung Baru mosque, which was launched by Yang di-Pertuan Agong Tuanku Mizan Zainal Abidin yesterday.
Also present was Minister in the Prime Minister's Department Datuk Seri Dr Ahmad Zahid Hamidi.
Zahid said the first eZakat/eDerma kiosk was provided by Maybank and would be managed by Majumaz Aktif Sdn Bhd.
He believed that the modern method to pay tithes or even to make donations would turn mosques into a key economic generator for Muslims here.
Majumaz Aktif chief executive officer Datuk Subirin Sahan said more kiosks would be set up in mosques nationwide including the National Mosque, Federal Territory Mosque, Putra Mosque and the Putrajaya Mosque.
"In the near future, the people can also buy wakaf shares and make deposits into their Tabung Haji accounts using the kiosk," he said, adding that the technology could be introduced in other Islamic countries.
Sunday, February 15, 2009
IMF managing director shares his views on the financial crisis
Saturday February 14, 2009
IMF managing director shares his views on the financial crisis
By JAGDEV SINGH SIDHU
THE International Monetary Fund (IMF) is no stranger to financial and economic crises. Thus, when it recently admitted that this is indeed a grave time for the global economy, those hanging on to the final threads of optimism must have felt shivers down their spine.
The steep declines in consumer confidence, global trade, consumption and a number of other economic indicators, paint a bleak picture for the world. And there may be more bad news ahead.
That was bluntly conveyed by IMF managing director Dominique Strauss-Kahn when he was in town last week. He used the D-word, saying the advanced economies are already in a ‘’depression’’ and that the financial crisis may deepen unless the banking system is fixed.
Dominique Strauss-Kahn
“The worst cannot be ruled out. There’s a lot of downside risks,” he was quoted as saying.
That prognosis is scary considering the IMF has witnessed 122 banking crises. Saying most of the world was already in a depression was a surprise, but Strauss-Kahn was clearly not in the mood for mincing words when he met the press at the end on his two-day trip to Kuala Lumpur.
The reason for this dire warning can be traced back to the litany of literature on how the world today is suffering from a number of angles. But one facet that could have a telling implication, Strauss-Kahn believes, is the psychology of consumers and investors.
In his speech at the 44th South East Asian Central Banks (SEACEN) Governors’ Conference, he says investors have lost confidence in many companies, especially banks, because they fear that there are further losses to be realised.
“Consumers are holding back from buying cars and from other big discretionary purchases, because they fear for their jobs,’’ he points out.
The IMF has slashed its forecasts dramatically over the past few months and is expecting the world to eke out a small growth this year.
To help restore growth, Strauss-Kahn says the main objective is to revive confidence. “At a global level, this means that governments and central banks need to act decisively so that investors once again feel confident about the solvency of financial institutions,” he says.
“And they should credibly commit to measures sufficient to eliminate the risk of a repeat of the Great Depression.’’
Strauss-Kahn adds that the world needs a coordinated global response to contain the crisis. Piecemeal responses are not enough and he argues that the one-size-fits-all approach will not work either.
“But policy responses have to take into account the interconnectedness of national economies, and the fact that decisions taken in one country can have profound effects on others,’’ he says, warning that protectionism is not a way out of the economic crisis.
To get the financial sector moving again, Strauss-Kahn stresses that financial stability is essential. He notes that governments have acted to address threats to systemic stability through massive liquidity support and have supported confidence in the banking system by extending guarantees.
He urges governments to examine the balance sheets of banks and restructure those in need of help. Furthermore, if needed, capital can be provided and bad assets carved out of the bank. He also suggests that governments sell or wind up insolvent banks quickly, depending on whether any franchise value remains. He advocates the establishment of a public resolution agency to manage bad assets to maturity or sale.
“Even with these measures, it will take time to restore credit growth. They will also be expensive for governments,’’ he cautions.
Fixing the financial sector is only one step. The damage from the weaker growth has to be addressed as well. “To restore aggregate demand, we also need supporting monetary and especially fiscal policies,’’ says Strauss-Kahn.
Fiscal policies have been promoted by governments across the world as a further fillip to deep interest rate cuts to stimulate growth, but those measures are only as good as their implementation.
Piling hope on a government-funded boost has its own hazards. Countries that take on huge debts to finance the pump-priming do so at the risk of affecting their credit ratings.
Strauss-Kahn says the pile-up of government debt may also present a future problem but stresses that the risk of not acting now far outweighs the danger of higher fiscal deficits.
He adds that China offers a great way for fiscal stimulus to work where pump-priming can lead to a rebalanced demand in favour of private consumption through improvements in the social safety net.
Social insurance will give the Chinese consumers the confidence to start spending instead of maintaining high precautionary savings. “Allowing greater flexibility for its currency to appreciate over time would also help,’’ he says.
“In doing so, China could support both domestic demand and intra-regional trade, because more domestic demand from China would mean more exports for other Asian countries.’’
Strauss-Kahn shares the view of many people – that Asia will be the first to rebound from the global mess. Its banking system is healthier than those in most parts of the world, and that is a strength the Asian economies can rely on when the world finally emerges from this slump.
IMF managing director shares his views on the financial crisis
By JAGDEV SINGH SIDHU
THE International Monetary Fund (IMF) is no stranger to financial and economic crises. Thus, when it recently admitted that this is indeed a grave time for the global economy, those hanging on to the final threads of optimism must have felt shivers down their spine.
The steep declines in consumer confidence, global trade, consumption and a number of other economic indicators, paint a bleak picture for the world. And there may be more bad news ahead.
That was bluntly conveyed by IMF managing director Dominique Strauss-Kahn when he was in town last week. He used the D-word, saying the advanced economies are already in a ‘’depression’’ and that the financial crisis may deepen unless the banking system is fixed.
Dominique Strauss-Kahn
“The worst cannot be ruled out. There’s a lot of downside risks,” he was quoted as saying.
That prognosis is scary considering the IMF has witnessed 122 banking crises. Saying most of the world was already in a depression was a surprise, but Strauss-Kahn was clearly not in the mood for mincing words when he met the press at the end on his two-day trip to Kuala Lumpur.
The reason for this dire warning can be traced back to the litany of literature on how the world today is suffering from a number of angles. But one facet that could have a telling implication, Strauss-Kahn believes, is the psychology of consumers and investors.
In his speech at the 44th South East Asian Central Banks (SEACEN) Governors’ Conference, he says investors have lost confidence in many companies, especially banks, because they fear that there are further losses to be realised.
“Consumers are holding back from buying cars and from other big discretionary purchases, because they fear for their jobs,’’ he points out.
The IMF has slashed its forecasts dramatically over the past few months and is expecting the world to eke out a small growth this year.
To help restore growth, Strauss-Kahn says the main objective is to revive confidence. “At a global level, this means that governments and central banks need to act decisively so that investors once again feel confident about the solvency of financial institutions,” he says.
“And they should credibly commit to measures sufficient to eliminate the risk of a repeat of the Great Depression.’’
Strauss-Kahn adds that the world needs a coordinated global response to contain the crisis. Piecemeal responses are not enough and he argues that the one-size-fits-all approach will not work either.
“But policy responses have to take into account the interconnectedness of national economies, and the fact that decisions taken in one country can have profound effects on others,’’ he says, warning that protectionism is not a way out of the economic crisis.
To get the financial sector moving again, Strauss-Kahn stresses that financial stability is essential. He notes that governments have acted to address threats to systemic stability through massive liquidity support and have supported confidence in the banking system by extending guarantees.
He urges governments to examine the balance sheets of banks and restructure those in need of help. Furthermore, if needed, capital can be provided and bad assets carved out of the bank. He also suggests that governments sell or wind up insolvent banks quickly, depending on whether any franchise value remains. He advocates the establishment of a public resolution agency to manage bad assets to maturity or sale.
“Even with these measures, it will take time to restore credit growth. They will also be expensive for governments,’’ he cautions.
Fixing the financial sector is only one step. The damage from the weaker growth has to be addressed as well. “To restore aggregate demand, we also need supporting monetary and especially fiscal policies,’’ says Strauss-Kahn.
Fiscal policies have been promoted by governments across the world as a further fillip to deep interest rate cuts to stimulate growth, but those measures are only as good as their implementation.
Piling hope on a government-funded boost has its own hazards. Countries that take on huge debts to finance the pump-priming do so at the risk of affecting their credit ratings.
Strauss-Kahn says the pile-up of government debt may also present a future problem but stresses that the risk of not acting now far outweighs the danger of higher fiscal deficits.
He adds that China offers a great way for fiscal stimulus to work where pump-priming can lead to a rebalanced demand in favour of private consumption through improvements in the social safety net.
Social insurance will give the Chinese consumers the confidence to start spending instead of maintaining high precautionary savings. “Allowing greater flexibility for its currency to appreciate over time would also help,’’ he says.
“In doing so, China could support both domestic demand and intra-regional trade, because more domestic demand from China would mean more exports for other Asian countries.’’
Strauss-Kahn shares the view of many people – that Asia will be the first to rebound from the global mess. Its banking system is healthier than those in most parts of the world, and that is a strength the Asian economies can rely on when the world finally emerges from this slump.
Mystique of global crisis unravelled
Saturday February 14, 2009
Mystique of global crisis unravelled
What Are We To Do
By TAN SRI LIN SEE-YAN
Friends have been asking with increasing frequency why the biggest banks in the world are in such a sorry state of affairs. Was it because of a black swan? This refers to Hassim Taleb’s concept of an unlikely but not impossible catastrophe that no one ever seems to plan for, but that does not mean it does not exist.
Indeed, I have heard it quoted in a recent issue of Time that it is not just one black swan; it is a bunch of black swans that have hung out for a while and have since created this gigantic problem.
Twelve days ago, I had one of those rare opportunities to spend some quality time with Tun Mahathir Mohamad at a private brainstorming session with select experts (including some from abroad), and to participate in his Feb 4 strategy session on the global financial crisis.
Mahathir’s challenging query was simply this: Why did the US financial meltdown – not just its scale – happen so very swiftly (most were caught unawares), destroy so completely (US financial system in particular), and reduce so systemically (the efficacy of the global financial international mechanism)? How could subprime mortgages provoke such worldwide dislocation?
These are legitimate but very difficult questions to answer. I have since thought about it a lot. I shall now try to unravel, as best as I can, the mystique of this upheaval (which the Financial Times called, tongue-in-cheek, Asia’s Revenge), in so far as I have managed to string together the sometimes rather incoherent parts.
The big picture
Professor Charles P. Kindleberger’s classic book, Panics, Manias and Crashes: A History of Financial Crises, suggests that in history, financial crashes shared one trait – excessive expansion of credit which feeds on itself.
The current bubble is no different. The US Fed (Federal Reserve Board) kept interest rates too low and for too long.
George W. Bush became president following the dotcom bust in 2000. His tax cuts plus then-Fed chairman Alan Greenspan’s push on the monetary accelerator (in rapidly cutting interest rates) helped spur housing and consumer spending.
Even as the second tax cut became law in late May 2003 and with economic recovery beginning in earnest, the Fed funds rate was further cut to a mere 1% and kept there for a year. This stimulus worked well – indeed, too well.
Professor John Taylor of Stanford called this a monetary mistake. By pushing so much excess credit into the economy, the Fed created a consumption and housing mania that Wall Street took full advantage of, with many banks abandoning normal risk standards.
Taylor demonstrated this by comparing the actual Fed funds rate for this decade with what the rate would have been if the Fed stayed within the policy experience of the previous 20 years (see chart). This has now come to be known as the Taylor Rule for determining how central bank rates should be adjusted.
“This extra easy policy (the pink space) was responsible for accelerating the housing boom and thereby, ultimately leading to the housing bust,” he says. It was a party no one wanted to end, but it did nevertheless in 2008.
The system that failed
The banking business is based on trust; some may even call dealing with a bank an act of faith. Over the past decade in particular, the system that has evolved was underpinned by four articles of trust.
1. Trust in regulators (central banks, securities and exchange commissions, inspectorates), who apparently have done such a great job that it can be safely assumed the Western banking system is extraordinarily strong and much more advanced than a decade before. The track record of the crisis management skills of central banks and financial authorities is so well regarded, even the authorities are convinced that any glitches (big and small) can be readily contained. Indeed, the system always emerges stronger and more sustainable after a crisis.
2. Belief in the viability of modern capital markets, especially New York and London, which are always liquid and have become so deep and dependable that banks and investors can readily trade with confidence in debt securities. So much so that this has encouraged banks to let down their guard to arrogantly assume that risks can always be passed on. Indeed, in times of abundant liquidity, most have over-estimated the markets’ ability to assume risk.
3. Confidence in credit rating agencies (assumed wrongly by investors to be strictly regulated) as a reliable compass to guide investors through the workings of the complex jungle of derivative products which most don’t understand.
4. Trust in the intellectual capital and capital muscle of Wall Street based on the assumption that any “slicing and dicing” of debt into derivatives of all hues have made the financial system more resilient and more stable, supported by the banks’ ability to churn out so much profits in the process. This assumption that pain emanating from any potential default would be spread over millions of investors, rather than concentrated in particular banks (since these are off-balance sheet activities), is naive of course. The opacity of the derivative products left much to be desired. This shift from bank balance sheet to off-balance sheet realm of securitisation and derivatisation on Wall Street might not have been so bad if they actually worked to spread risk and encourage creative destruction, bringing the best minds to bear on resolving the underlying banking problems. Instead, they created a bubble, diverting capital to the least productive use and, worse of all, fed the pangs of greed.
A word about derivatives
They are what they sound like. Their worth is derived from a stock or a bond or a mortgage or a collection of them. The most common (and dangerous) is the credit default swap (or CDS) – a sort of insurance policy. A third party assumes the risk of the debt (say, mortgage) going into default. In exchange, the insurer receives payment (like a premium) from the issuer bank.
Created by whiz-kids from MIT and Cambridge for JP Morgan in 1994, they have since ballooned into a US$62 trillion market, before racheting down to US$55 trillion last September after American International Group (AIG) had defaulted on US$14bil of CDS (it held US$440bil).
Warren Buffett called them “financial weapons of mass destruction”. Since CDSs are privately negotiated between the parties, they are not regulated.
There are others such as CDOs (collateralised debt obligations), derivatives linked to corporate debt. These are essentially made for insurers, banks and others to invest in a diversified portfolio of enterprises without actually buying into their stocks and bonds. This market could be as large as US$6 trillion.
The entire derivatives market is very large. Latest estimates point to US$668 trillion (gross) or about 15 times the size of the world economy. Their underlying worth is about US$15 trillion, slightly larger than the US gross domestic product (GDP).
Relevant developments
The US banking system has evolved dramatically in the past 40 years. Consider the following changes that has since worked to significantly undermine the system:
● Forty years ago, 90% of all loans were backed by bank deposits. Today, it’s 60%.
● Regulators require lower capital on loans not backed by deposits. But the US Securities and Exchange Commission (SEC) removed in 2004 the leverage cap of 15 to one for investment banks (Bear Stearns, Lehman Brothers, Merrill Lynch, etc.) which allowed them to expand lending vigorously without raising capital.
● By then, regulatory separation between investment and ordinary banks was long removed, encouraging the likes of Bank of America and Citibank to move more and more of their lending to their investment arms. Leverage took off. By end-2007, 30:1 was not uncommon. Lehman’s leverage, when it collapsed, exceeded 40:1.
● Stock buybacks, especially those funded by borrowings (the impact: upped leverage and lowered capital) boosted profits.
● Adoption of sophisticated computer models with advanced risk management controls was intended to reduce capital requirement per loan.
● Regulatory and accounting changes (including mark-to-market rules) resulted in banks’ capital bases eroding much faster than expected.
All these meant that while US banks went on a lending spree so far this decade, their capital base had lagged behind, leaving the system vulnerable and in jeopardy of collapse (US$13.6 trillion in assets against US$820bil in tangible equity, or less than 7%, as at September last year).
Trust undermined
To be fair, the Bank for International Settlements (BIS) in Basel (the central banker’s bank) did express concern over the extraordinary bust of innovation as bankers implemented novel ways to slice and dice their loans (including the now controversial subprime mortgages), and then selling the resultant derivatives under the cover of prime names and high credit ratings to investors all over the world.
Despite many early warning signals (including by notables Professor Robert Shiller of Yale and Professor Nouriel Roubini of Columbia), the Fed appears convinced that these “deals” have changed the system in a fundamentally beneficial way.
No question that there was denial all round, even though the four articles of trust underpinning the system and supporting the credit boom had started to collapse since the summer of 2007, viz, two hedge funds linked to Bear Stearns got into heavy losses related to US subprime mortgages.
This led to a series of downgrades and raised doubts among investors. Soon, the European Central Bank injected substantial cash and the Fed embarked on emergency measures. By the year-end, banks started writing off losses and Britain had its first bank run in 140 years.
In the new year (2008), there were more writedowns and downgrades culminating in the nationalisation of Northern Rock and the collapse of Bear Sterns. And then, the big ones fell – Lehman, Fannie Mae and Freddie Mac, and then Merrill Lynch.
In the first half of last year, the financial system suffered US$476bil in credit losses and raised US$354bil in new capital. This was only the beginning.
The real problem
Basic trust has since crumbled and this has shaken faith in banking and finance. Western banks found themselves running out of capital in a way none of the regulators had imagined. The Fed initially estimated that subprime losses were unlikely to go beyond US$50bil to US$100bil – a fraction of the total capital of Western banks or assets held by global investment funds.
As it evolved, banks started hoarding cash and stopped lending to each other. Bankers lost faith in their ability to assess the health of other institutions – sometimes, even their own!
Then, a vicious deleveraging spiral got under way as banks scurried to improve their balance sheets – selling assets and cutting loans, especially to hedge funds.
All these started with eight years of cheap and plentiful money (liquidity). Sure, easy money provided the fuel. But it soon became evident the real problem in the banking system was not so much liquidity, but toxic assets and inadequate capital.
The regulators lost credibility; the US Securities and Exchange Commission’s relaxation of the leverage capital cap was a huge mistake.
It also became clear that the global capital markets, especially New York and London, were not what they seemed. They could not stay really liquid when required.
Neither did the ratings generate the confidence required of them. The agencies started downgrading even supposedly ultra-safe debt, causing prices to crumble. For example, in July, Merrill Lynch sold a portfolio of complex derivatives at 22% of its face value even though they were rated triple A. Investors lost faith in the ratings and stopped buying, thus created a funding crisis.
Worse still, banks that should have been better protected because of risk dispersion, also cracked. In the end, everything came back to haunt the banks with a vengeance.
Obiter dicta
More than a year into the credit crisis, America’s broken banks are eyesores. Banks are still struggling to respond to investor demands for larger capital cushions and an effective way out to rid themselves of toxic assets. The system did crack and banks remained fearful of their own solvency. Trust remains a rare commodity after eight years of easy money. This trust was broken when the underpinnings of 21st century finance turned out to be dangerously flawed. In a crisis born of greed and indiscipline in the face of the myth of a rational market – the markets know best, remember? – pity is in short supply.
To answer Mahathir
In an environment of easy money (Greenspan cut interest rates too far, too fast), banks, borrowers and investors lost their cool and self-discipline. In an environment where free markets ran amok, trust in the banking system (and its collaborators) was shattered as regulators let their guard down, and bankers let the pursuit of profits undermine the integrity of the system which they were charged to protect. Result: The entire system failed in the face of denial, indiscipline and greed.
● Former banker Dr Lin is a Harvard-educated economist who now spends time promoting the public interest.
Mystique of global crisis unravelled
What Are We To Do
By TAN SRI LIN SEE-YAN
Friends have been asking with increasing frequency why the biggest banks in the world are in such a sorry state of affairs. Was it because of a black swan? This refers to Hassim Taleb’s concept of an unlikely but not impossible catastrophe that no one ever seems to plan for, but that does not mean it does not exist.
Indeed, I have heard it quoted in a recent issue of Time that it is not just one black swan; it is a bunch of black swans that have hung out for a while and have since created this gigantic problem.
Twelve days ago, I had one of those rare opportunities to spend some quality time with Tun Mahathir Mohamad at a private brainstorming session with select experts (including some from abroad), and to participate in his Feb 4 strategy session on the global financial crisis.
Mahathir’s challenging query was simply this: Why did the US financial meltdown – not just its scale – happen so very swiftly (most were caught unawares), destroy so completely (US financial system in particular), and reduce so systemically (the efficacy of the global financial international mechanism)? How could subprime mortgages provoke such worldwide dislocation?
These are legitimate but very difficult questions to answer. I have since thought about it a lot. I shall now try to unravel, as best as I can, the mystique of this upheaval (which the Financial Times called, tongue-in-cheek, Asia’s Revenge), in so far as I have managed to string together the sometimes rather incoherent parts.
The big picture
Professor Charles P. Kindleberger’s classic book, Panics, Manias and Crashes: A History of Financial Crises, suggests that in history, financial crashes shared one trait – excessive expansion of credit which feeds on itself.
The current bubble is no different. The US Fed (Federal Reserve Board) kept interest rates too low and for too long.
George W. Bush became president following the dotcom bust in 2000. His tax cuts plus then-Fed chairman Alan Greenspan’s push on the monetary accelerator (in rapidly cutting interest rates) helped spur housing and consumer spending.
Even as the second tax cut became law in late May 2003 and with economic recovery beginning in earnest, the Fed funds rate was further cut to a mere 1% and kept there for a year. This stimulus worked well – indeed, too well.
Professor John Taylor of Stanford called this a monetary mistake. By pushing so much excess credit into the economy, the Fed created a consumption and housing mania that Wall Street took full advantage of, with many banks abandoning normal risk standards.
Taylor demonstrated this by comparing the actual Fed funds rate for this decade with what the rate would have been if the Fed stayed within the policy experience of the previous 20 years (see chart). This has now come to be known as the Taylor Rule for determining how central bank rates should be adjusted.
“This extra easy policy (the pink space) was responsible for accelerating the housing boom and thereby, ultimately leading to the housing bust,” he says. It was a party no one wanted to end, but it did nevertheless in 2008.
The system that failed
The banking business is based on trust; some may even call dealing with a bank an act of faith. Over the past decade in particular, the system that has evolved was underpinned by four articles of trust.
1. Trust in regulators (central banks, securities and exchange commissions, inspectorates), who apparently have done such a great job that it can be safely assumed the Western banking system is extraordinarily strong and much more advanced than a decade before. The track record of the crisis management skills of central banks and financial authorities is so well regarded, even the authorities are convinced that any glitches (big and small) can be readily contained. Indeed, the system always emerges stronger and more sustainable after a crisis.
2. Belief in the viability of modern capital markets, especially New York and London, which are always liquid and have become so deep and dependable that banks and investors can readily trade with confidence in debt securities. So much so that this has encouraged banks to let down their guard to arrogantly assume that risks can always be passed on. Indeed, in times of abundant liquidity, most have over-estimated the markets’ ability to assume risk.
3. Confidence in credit rating agencies (assumed wrongly by investors to be strictly regulated) as a reliable compass to guide investors through the workings of the complex jungle of derivative products which most don’t understand.
4. Trust in the intellectual capital and capital muscle of Wall Street based on the assumption that any “slicing and dicing” of debt into derivatives of all hues have made the financial system more resilient and more stable, supported by the banks’ ability to churn out so much profits in the process. This assumption that pain emanating from any potential default would be spread over millions of investors, rather than concentrated in particular banks (since these are off-balance sheet activities), is naive of course. The opacity of the derivative products left much to be desired. This shift from bank balance sheet to off-balance sheet realm of securitisation and derivatisation on Wall Street might not have been so bad if they actually worked to spread risk and encourage creative destruction, bringing the best minds to bear on resolving the underlying banking problems. Instead, they created a bubble, diverting capital to the least productive use and, worse of all, fed the pangs of greed.
A word about derivatives
They are what they sound like. Their worth is derived from a stock or a bond or a mortgage or a collection of them. The most common (and dangerous) is the credit default swap (or CDS) – a sort of insurance policy. A third party assumes the risk of the debt (say, mortgage) going into default. In exchange, the insurer receives payment (like a premium) from the issuer bank.
Created by whiz-kids from MIT and Cambridge for JP Morgan in 1994, they have since ballooned into a US$62 trillion market, before racheting down to US$55 trillion last September after American International Group (AIG) had defaulted on US$14bil of CDS (it held US$440bil).
Warren Buffett called them “financial weapons of mass destruction”. Since CDSs are privately negotiated between the parties, they are not regulated.
There are others such as CDOs (collateralised debt obligations), derivatives linked to corporate debt. These are essentially made for insurers, banks and others to invest in a diversified portfolio of enterprises without actually buying into their stocks and bonds. This market could be as large as US$6 trillion.
The entire derivatives market is very large. Latest estimates point to US$668 trillion (gross) or about 15 times the size of the world economy. Their underlying worth is about US$15 trillion, slightly larger than the US gross domestic product (GDP).
Relevant developments
The US banking system has evolved dramatically in the past 40 years. Consider the following changes that has since worked to significantly undermine the system:
● Forty years ago, 90% of all loans were backed by bank deposits. Today, it’s 60%.
● Regulators require lower capital on loans not backed by deposits. But the US Securities and Exchange Commission (SEC) removed in 2004 the leverage cap of 15 to one for investment banks (Bear Stearns, Lehman Brothers, Merrill Lynch, etc.) which allowed them to expand lending vigorously without raising capital.
● By then, regulatory separation between investment and ordinary banks was long removed, encouraging the likes of Bank of America and Citibank to move more and more of their lending to their investment arms. Leverage took off. By end-2007, 30:1 was not uncommon. Lehman’s leverage, when it collapsed, exceeded 40:1.
● Stock buybacks, especially those funded by borrowings (the impact: upped leverage and lowered capital) boosted profits.
● Adoption of sophisticated computer models with advanced risk management controls was intended to reduce capital requirement per loan.
● Regulatory and accounting changes (including mark-to-market rules) resulted in banks’ capital bases eroding much faster than expected.
All these meant that while US banks went on a lending spree so far this decade, their capital base had lagged behind, leaving the system vulnerable and in jeopardy of collapse (US$13.6 trillion in assets against US$820bil in tangible equity, or less than 7%, as at September last year).
Trust undermined
To be fair, the Bank for International Settlements (BIS) in Basel (the central banker’s bank) did express concern over the extraordinary bust of innovation as bankers implemented novel ways to slice and dice their loans (including the now controversial subprime mortgages), and then selling the resultant derivatives under the cover of prime names and high credit ratings to investors all over the world.
Despite many early warning signals (including by notables Professor Robert Shiller of Yale and Professor Nouriel Roubini of Columbia), the Fed appears convinced that these “deals” have changed the system in a fundamentally beneficial way.
No question that there was denial all round, even though the four articles of trust underpinning the system and supporting the credit boom had started to collapse since the summer of 2007, viz, two hedge funds linked to Bear Stearns got into heavy losses related to US subprime mortgages.
This led to a series of downgrades and raised doubts among investors. Soon, the European Central Bank injected substantial cash and the Fed embarked on emergency measures. By the year-end, banks started writing off losses and Britain had its first bank run in 140 years.
In the new year (2008), there were more writedowns and downgrades culminating in the nationalisation of Northern Rock and the collapse of Bear Sterns. And then, the big ones fell – Lehman, Fannie Mae and Freddie Mac, and then Merrill Lynch.
In the first half of last year, the financial system suffered US$476bil in credit losses and raised US$354bil in new capital. This was only the beginning.
The real problem
Basic trust has since crumbled and this has shaken faith in banking and finance. Western banks found themselves running out of capital in a way none of the regulators had imagined. The Fed initially estimated that subprime losses were unlikely to go beyond US$50bil to US$100bil – a fraction of the total capital of Western banks or assets held by global investment funds.
As it evolved, banks started hoarding cash and stopped lending to each other. Bankers lost faith in their ability to assess the health of other institutions – sometimes, even their own!
Then, a vicious deleveraging spiral got under way as banks scurried to improve their balance sheets – selling assets and cutting loans, especially to hedge funds.
All these started with eight years of cheap and plentiful money (liquidity). Sure, easy money provided the fuel. But it soon became evident the real problem in the banking system was not so much liquidity, but toxic assets and inadequate capital.
The regulators lost credibility; the US Securities and Exchange Commission’s relaxation of the leverage capital cap was a huge mistake.
It also became clear that the global capital markets, especially New York and London, were not what they seemed. They could not stay really liquid when required.
Neither did the ratings generate the confidence required of them. The agencies started downgrading even supposedly ultra-safe debt, causing prices to crumble. For example, in July, Merrill Lynch sold a portfolio of complex derivatives at 22% of its face value even though they were rated triple A. Investors lost faith in the ratings and stopped buying, thus created a funding crisis.
Worse still, banks that should have been better protected because of risk dispersion, also cracked. In the end, everything came back to haunt the banks with a vengeance.
Obiter dicta
More than a year into the credit crisis, America’s broken banks are eyesores. Banks are still struggling to respond to investor demands for larger capital cushions and an effective way out to rid themselves of toxic assets. The system did crack and banks remained fearful of their own solvency. Trust remains a rare commodity after eight years of easy money. This trust was broken when the underpinnings of 21st century finance turned out to be dangerously flawed. In a crisis born of greed and indiscipline in the face of the myth of a rational market – the markets know best, remember? – pity is in short supply.
To answer Mahathir
In an environment of easy money (Greenspan cut interest rates too far, too fast), banks, borrowers and investors lost their cool and self-discipline. In an environment where free markets ran amok, trust in the banking system (and its collaborators) was shattered as regulators let their guard down, and bankers let the pursuit of profits undermine the integrity of the system which they were charged to protect. Result: The entire system failed in the face of denial, indiscipline and greed.
● Former banker Dr Lin is a Harvard-educated economist who now spends time promoting the public interest.
Sunday, January 25, 2009
More people using ‘plastic cash’ to keep debts in check
Monday January 26, 2009
More people using ‘plastic cash’ to keep debts in check
By YUEN MEIKENG
PETALING JAYA: Debit or credit, sir? This is an increasingly frequent question being asked at local sales counters these days.
With prudence being the order of the day, more Malaysians are turning to using “plastic cash” — or debit cards — to pay for their purchases.
Banks are reporting more applications for debit cards, which are slowly but surely gaining popularity compared to credit cards.
For the Chinese New Year, more shoppers are swiping debit cards to keep their expenditures — and debts — in check.
Compared to credit and charge cards where the cardholder has to pay interest for late payments to the financial institution concerned, purchases with the use of a debit card are deducted direct from the cardholder’s savings account.
Maybank consumer banking head and senior executive vice-president Lim Hong Tat said the number of its debit card users had been growing on an average of 13% every month.
The bank currently has more than seven million debit cardholders, he revealed. Affin Bank head of cards business Phoon Kok Kam said the bank’s debit card users shot up by 70% since May 2008.
“We see a growing trend among customers who are aware of the need to manage their spending,” he added.
RHB Bank consumer product management head Angela Tan said the
More people using ‘plastic cash’ to keep debts in check
By YUEN MEIKENG
PETALING JAYA: Debit or credit, sir? This is an increasingly frequent question being asked at local sales counters these days.
With prudence being the order of the day, more Malaysians are turning to using “plastic cash” — or debit cards — to pay for their purchases.
Banks are reporting more applications for debit cards, which are slowly but surely gaining popularity compared to credit cards.
For the Chinese New Year, more shoppers are swiping debit cards to keep their expenditures — and debts — in check.
Compared to credit and charge cards where the cardholder has to pay interest for late payments to the financial institution concerned, purchases with the use of a debit card are deducted direct from the cardholder’s savings account.
Maybank consumer banking head and senior executive vice-president Lim Hong Tat said the number of its debit card users had been growing on an average of 13% every month.
The bank currently has more than seven million debit cardholders, he revealed. Affin Bank head of cards business Phoon Kok Kam said the bank’s debit card users shot up by 70% since May 2008.
“We see a growing trend among customers who are aware of the need to manage their spending,” he added.
RHB Bank consumer product management head Angela Tan said the
Saturday, January 10, 2009
business jihad can win the war
2009/01/11
Only a 'business jihad can win the war'
JOHOR BARU: Rather than giving a knee-jerk reaction by boycotting American goods, Muslims will be in a better position to fight oppression by strengthening their economic position.
Johor Corporation Berhad (JCorp) chief executive officer Tan Sri Muhammad Ali Hashim said this when asked about the drive to boycott American products in protest against Israel's atrocities against the Palestinians.
"The boycott will only hurt our own people as the businesses provide thousands of jobs here."
He was speaking at the Intelligent Chess Challenge 2008/2009 at Persada Johor Convention Centre here yesterday. He had earlier presented prizes to the winners of the challenge.
Ali said Arab countries were unable to fight Israel because of their economic dependence on the United States.
"If we go to war with Israel, we will be wiped out because of its superior technology and weaponry. We can only afford the same level of technology and weaponry if our economy is on par with it."
He said the business jihad advocated by JCorp could be the foundation to improve the economic position of Muslim countries although it might take a long time.
On the possibility of KFC Holdings (KFCH) Berhad being boycotted, Ali said the bulk of Malaysia's trade with the United States consisted of non-food products such as aircraft and computer software.
He said it was unlikely that Malaysia or other Muslim countries could do without these products.
"Are we going to drive Malaysia Airlines and AirAsia to the ground just because they use Boeing aircraft? Can we afford to dump our computers because they use Microsoft software?"
Ali said although the Kentucky Fried Chicken franchise originated in the United States, the owners in Malaysia were locals.
He said there was no drop in KFCH sales following the call to boycott American brands.
Only a 'business jihad can win the war'
JOHOR BARU: Rather than giving a knee-jerk reaction by boycotting American goods, Muslims will be in a better position to fight oppression by strengthening their economic position.
Johor Corporation Berhad (JCorp) chief executive officer Tan Sri Muhammad Ali Hashim said this when asked about the drive to boycott American products in protest against Israel's atrocities against the Palestinians.
"The boycott will only hurt our own people as the businesses provide thousands of jobs here."
He was speaking at the Intelligent Chess Challenge 2008/2009 at Persada Johor Convention Centre here yesterday. He had earlier presented prizes to the winners of the challenge.
Ali said Arab countries were unable to fight Israel because of their economic dependence on the United States.
"If we go to war with Israel, we will be wiped out because of its superior technology and weaponry. We can only afford the same level of technology and weaponry if our economy is on par with it."
He said the business jihad advocated by JCorp could be the foundation to improve the economic position of Muslim countries although it might take a long time.
On the possibility of KFC Holdings (KFCH) Berhad being boycotted, Ali said the bulk of Malaysia's trade with the United States consisted of non-food products such as aircraft and computer software.
He said it was unlikely that Malaysia or other Muslim countries could do without these products.
"Are we going to drive Malaysia Airlines and AirAsia to the ground just because they use Boeing aircraft? Can we afford to dump our computers because they use Microsoft software?"
Ali said although the Kentucky Fried Chicken franchise originated in the United States, the owners in Malaysia were locals.
He said there was no drop in KFCH sales following the call to boycott American brands.
Sunday, December 7, 2008
Malaysia usul semula penggunaan dinar emas
Malaysia usul semula penggunaan dinar emas
Oleh Zainab Mohd Yatim
Bhbiz@bharian.com.my
Kaedah perkukuh, pertingkat dagangan sesama anggota OIC
MALAYSIA akan mengusulkan semula cadangan penggunaan dinar emas dengan menjadikan pertemuan pemimpin dan pembuat keputusan dari kalangan negara Islam seperti mesyuarat Pertubuhan Persidangan Islam (OIC) sebagai platform.
Menteri Kewangan Kedua, Tan Sri Nor Mohamed Yakcop, berkata penggunaan kaedah pertukaran wang itu wajar dipertimbangkan semula memandangkan hubungan dagangan antara negara Islam yang semakin meningkat, selain mencari kaedah terbaik untuk menggantikan sistem Anglo Saxon yang semakin lemah dan tidak stabil akhir-akhir ini.
Memberikan contoh, beliau berkata nilai dagangan antara Malaysia dengan negara OIC yang membabitkan 57 negara, adalah 12 kali lebih banyak berbanding antara negara bukan anggota pertubuhan berkenaan.
"Dalam keadaan ekonomi global yang tidak menentu yang mana pasaran wang dalam keadaan begitu getir, sengit dan mencabar, mungkin elok negara Islam seperti OIC melihat kembali peranan dinar emas sebagai kaedah memperkukuhkan dan mempertingkatkan dagangan sesama negara anggota.
"Sebelum ini saranan kita tidak begitu diterima negara OIC, tapi mungkin dalam keadaan yang berubah dan mencabar yang menyaksikan sistem kapitalisme Anglo-Saxon tidak tahan dan nampak kelemahan yang begitu banyak, kita boleh lihat kembali penggunaan dinar emas," katanya.
Beliau berkata demikian pada sidang media selepas merasmikan Wisma Yayasan Ekonomi Sejagat (YES), di Bukit Persekutuan, kelmarin.
Malaysia sebelum ini pernah mencadangkan supaya dinar emas digunakan sebagai perantara perdagangan antarabangsa bagi mengelakkan tekanan tukaran asing dengan dolar Amerika Syarikat sebagai tanda aras tukaran asing utama.
Nor Mohamed juga menjelaskan, bilangan umat Islam seramai 1.8 bilion di seluruh dunia juga sewajarnya dimanfaatkan menerusi dagangan antara sesama Islam dengan menjadikan dinar emas sebagai tukaran.
Tambahan lagi, katanya sebahagian besar daripada produk yang diedarkan di pasaran negara Islam yang dibeli dari Barat sebenarnya datang dari negara Islam.
Mengenai krisis ekonomi global, beliau berkata Malaysia tidak akan menerima kesan yang teruk hingga menyebabkan kemelesetan tahun depan, memandangkan kerajaan sudah mengambil langkah rangsangan yang mampu mengurangkan tekanan berkenaan.
Namun beliau tidak menolak, kemungkinan negara akan berdepan tempoh agak mencabar sekurang-kurangnya antara 18 bulan hingga dua tahun akan datang akibat daripada perkembangan berkenaan.
"Mengikut perkiraan, tiada kemungkinan negara akan terjerumus ke dalam kemelesetan pada 2009. Perkiraan kita berasaskan senario ekonomi sebenar dan juga berasaskan apa yang akan kita laksanakan.
"Kita mahu memastikan kebanyakan langkah berkenaan dilaksanakan menjelang suku tahun pertama," katanya.
Beliau yakin, seperti beberapa krisis yang dialami sebelum ini, negara bukan saja dapat meneruskan kelangsungan hidup, malah mampu bangkit menjadi sebuah negara yang lebih maju.
Mengenai inisiatif pembiayaan swasta (PFI), beliau menjelaskan, selagi sesuatu projek itu berdaya maju, kerajaan akan pastikan ia dilaksanakan dengan segera.
Oleh Zainab Mohd Yatim
Bhbiz@bharian.com.my
Kaedah perkukuh, pertingkat dagangan sesama anggota OIC
MALAYSIA akan mengusulkan semula cadangan penggunaan dinar emas dengan menjadikan pertemuan pemimpin dan pembuat keputusan dari kalangan negara Islam seperti mesyuarat Pertubuhan Persidangan Islam (OIC) sebagai platform.
Menteri Kewangan Kedua, Tan Sri Nor Mohamed Yakcop, berkata penggunaan kaedah pertukaran wang itu wajar dipertimbangkan semula memandangkan hubungan dagangan antara negara Islam yang semakin meningkat, selain mencari kaedah terbaik untuk menggantikan sistem Anglo Saxon yang semakin lemah dan tidak stabil akhir-akhir ini.
Memberikan contoh, beliau berkata nilai dagangan antara Malaysia dengan negara OIC yang membabitkan 57 negara, adalah 12 kali lebih banyak berbanding antara negara bukan anggota pertubuhan berkenaan.
"Dalam keadaan ekonomi global yang tidak menentu yang mana pasaran wang dalam keadaan begitu getir, sengit dan mencabar, mungkin elok negara Islam seperti OIC melihat kembali peranan dinar emas sebagai kaedah memperkukuhkan dan mempertingkatkan dagangan sesama negara anggota.
"Sebelum ini saranan kita tidak begitu diterima negara OIC, tapi mungkin dalam keadaan yang berubah dan mencabar yang menyaksikan sistem kapitalisme Anglo-Saxon tidak tahan dan nampak kelemahan yang begitu banyak, kita boleh lihat kembali penggunaan dinar emas," katanya.
Beliau berkata demikian pada sidang media selepas merasmikan Wisma Yayasan Ekonomi Sejagat (YES), di Bukit Persekutuan, kelmarin.
Malaysia sebelum ini pernah mencadangkan supaya dinar emas digunakan sebagai perantara perdagangan antarabangsa bagi mengelakkan tekanan tukaran asing dengan dolar Amerika Syarikat sebagai tanda aras tukaran asing utama.
Nor Mohamed juga menjelaskan, bilangan umat Islam seramai 1.8 bilion di seluruh dunia juga sewajarnya dimanfaatkan menerusi dagangan antara sesama Islam dengan menjadikan dinar emas sebagai tukaran.
Tambahan lagi, katanya sebahagian besar daripada produk yang diedarkan di pasaran negara Islam yang dibeli dari Barat sebenarnya datang dari negara Islam.
Mengenai krisis ekonomi global, beliau berkata Malaysia tidak akan menerima kesan yang teruk hingga menyebabkan kemelesetan tahun depan, memandangkan kerajaan sudah mengambil langkah rangsangan yang mampu mengurangkan tekanan berkenaan.
Namun beliau tidak menolak, kemungkinan negara akan berdepan tempoh agak mencabar sekurang-kurangnya antara 18 bulan hingga dua tahun akan datang akibat daripada perkembangan berkenaan.
"Mengikut perkiraan, tiada kemungkinan negara akan terjerumus ke dalam kemelesetan pada 2009. Perkiraan kita berasaskan senario ekonomi sebenar dan juga berasaskan apa yang akan kita laksanakan.
"Kita mahu memastikan kebanyakan langkah berkenaan dilaksanakan menjelang suku tahun pertama," katanya.
Beliau yakin, seperti beberapa krisis yang dialami sebelum ini, negara bukan saja dapat meneruskan kelangsungan hidup, malah mampu bangkit menjadi sebuah negara yang lebih maju.
Mengenai inisiatif pembiayaan swasta (PFI), beliau menjelaskan, selagi sesuatu projek itu berdaya maju, kerajaan akan pastikan ia dilaksanakan dengan segera.
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