Asia-Pacific Social Science Review 9:1 (2009), pp.

85-90

Synthesis and Distillation of Policy Issues:

What Should Governments Do?
The Global Financial Crisis as a Market and
Government Failure
Julio C. Teehankee
De La Salle University
julio.teehankee@dlsu.edu.ph

Some of the current financial issues and problems besetting the world economies may be traced
to the rise of neoliberalism in the 1980s which centered on free markets and free trade with the
consequent less government regulation. Liberalization led to global prosperity and innovation after
two decades but extreme market fundamentalism also contributed to the present financial crisis. Is
the problem one of governance, of market failure or of people? It is all of these. Markets failed to
allocate resources into an efficient manner; governments failed to curb the excesses of the markets.
Policy analyses and the presentation of the speakers in the conference reveal that the possible
solution is not limited to economics but should also include political adjustments in terms of policy
pronouncements. There is a need to look into the equity issues, especially the safety nets of people
who will be displaced by the ill effects of the financial crisis. A balance between politics, the
experts, the players, the markets and everyone else is emphasized.

Keywords: global financial crisis, neoliberalism, market failure, liberalization, market

fundamentalism, Philippine economy

© 2009 De La Salle University, Philippines

86 ASIA-PACIFIC SOCIAL SCIENCE REVIEW
RISE OF NEOLIBERALISM
Government is not the solution to our
problem…
Government is the problem.
Ronald Reagan, 1980
The preceding presentations and discussions
can be viewed from the political perspective.
Hence, the proceedings of this conference can be
framed against the governance-policy nexus. The
basic question is: After all of these, what should
governments do? What do we want them to do?
Most of the papers presented and the ensuing
discussions pointed to the government’s lack of
regulation as the primary culprit in the global
financial crisis. In dealing with policy responses
or solutions, there is a need to make assessments
from both the perspectives of governments and
markets.
Some of the contemporary issues related
to the crisis can be traced to the ascension to
power of US President Ronald Reagan. In his
historic inaugural address in 1980, he indicated
that government is not the solution to the
problem but the problem itself. This started off
the market revolution, giving rise to the age of
“neoliberalism,” in political science parlance or
in economics, “liberalization.”
Two decades later, the market revolution
initiated by neoliberalism brought about global
prosperity and innovation. What is being held
to task in the present financial crisis is the
extreme market fundamentalist philosophy that
guided most governments around the world.
The perennial concern: “Is the problem one of
governance, of market failure or of people?” It
is all of these. To reiterate what Reagan asked
two decades ago, “Is government really the
problem?” If government is the problem, is it
the only institution capable of addressing it?
What should governments do? What should
citizens do? From the perspective of policy
analysis within the purview of the global
financial crisis, which policy is wise? What
tools can guide in identifying the effects of the
policy? (Box 1)
Box 1. Policy Questions
• Based on policy analysis, which policy
would be considered as wise? Given
a proposed or an existing policy, what
tools of analysis can serve as guide in
identifying and evaluating the effects of
the policy?
• How can experts improve on what the
government does?
• What policies can experts propose that
will improve the functioning of markets?
END OF MARKET FUNDAMENTALISM?
Neoliberalism, market fundamentalism as a
doctrine is dead.
Stiglitz, 2008
Nobel Laurete Joseph Stiglitz, himself
once a champion of market fundamentalism
is now one of the harshest critics of market
fundamentalism.
It is not the market, per se. It is not the
market approach to development that is being
held to task, but rather a particular approach
to the market which is known as neoliberalism
or fundamentalism. The global financial crisis
is a function of both market and governance
failures. A market failure is an outcome of
the market that is not efficient, since markets
may fail to allocate resources in an efficient
manner. In the same light, the tension between
markets and politics is over the outcomes of
market processes resulting from the differential
distribution of power in the two arenas. In
addressing the effects of the global financial
crisis including why it happened, the political
dimension cannot be disregarded. It is still a
question of power. The possible solution to
this crisis is not limited only to an economic
approach but also to a political adjustment in
terms of policy pronouncements. (Box 2)
SYNTHESIS AND DISTILLATION OF POLICY ISSUES:
WHAT SHOULD GOVERNMENTS DO?
Box 2.
Market Failure, Government Failure
• A market failure is an outcome of the
market that is not efficient. Markets may
fail to allocate resources in an efficient
manner;
• The tension between markets and
politics is over the outcomes of market
processes and is the result of the different
distributions of power in the two arenas;
• Government failure occurs when it fails to
curb excesses of market or to effectively
manage equity policies.
A government that lacks credibility cannot
address this problem. The US is fortunate in that
at the right moment, the political mechanism
is set to replace political leaders and derive
Box 3.
Three Main Policy Conflict Actors
Politicians vs. E xperts:
I nstitutional R eform
Policies
Politics
Experts
M arkets vs. Politics: E quity Policies
TEEHANKEE, JULIO C. 87
enough political legitimacy. The administration
in Washington has enough political capital to
address the global financial crisis and take the
global lead to address the problem. It has been
noted in most of the presentations that the issue
is not simply a question of politics, a question of
markets, or a question of people, but all of these.
From the perspective of this tripod, a balance is
needed. (Box 3) In addressing the financial crisis,
the debate can be between politicians and experts
in terms of how to reform the institutions, the
rules of the game, of how to continue promoting
market efficiency and innovation and at the same
time provide the prudential regulatory policies.
There is a need to look into the equity issues,
especially the safety nets of people who will be
displaced by the ill effects of the crisis. A balance
between politics, the experts, the players, the
markets and everyone else is emphasized.
M arkets vs. E xperts:
E fficiency Policies
Markets
88 ASIA-PACIFIC SOCIAL SCIENCE REVIEW
The need to popularize and simplify the issues
is also stressed. In the US, the Republicans have
taken a lot of flack for the financial crisis. But
the Democrats are equally to blame since they
pushed for the Modernization Act to provide
cheap housing for people whose incomes
were not sufficient to pay for mortgages. They
succeeded in providing housing at the expense of
financial security. Politics still matters.
WHAT HAVE WE LEARNED FROM THE
PRESENTATIONS?
Box 4.
Implications of the Global Financial Crisis
on the Philippine Economy
• Antecedents
– Global Exogenous
– Domestic
– Regulatory Factors
• Impact
– Labor and Employment
– Regional Economic Integration
– Philippine Financial Markets
The keynote speech of Bangko Sentral
ng Pilipinas (BSP) Governor Amando Tetangco,
Jr. analyzed the roots of the global financial
crisis which was attributed mainly to the lack
of regulation. He considered it as a “black
swan event”–meaning, something that is highly
improbable. In the Philippines, the response is
setting buffers. (Box 5) He concluded that, “While
there is a call for greater regulation, I would
caution against going towards that direction.
What is needed is greater accountability, not
greater regulation.”
Box 5. BSP Policy Response,
Governor Tetangco’s View
• Global financial crisis due to lack of
regulation;
• “Black Swan” – large, hard to predict
event;
• Response of other countries – policy
mix;
• Philippine response – buffers:
– Domestic demands as major growth
drivers;
– Inflation deceleration;
– Spending – timely, targeted,
transparent and temporary;
– Stabilize banking system – low
exposure and corporate governance
“Greater accountability not greater
regulation.”
Dr. Tereso Tullao, Jr. looked at the global
economic imbalances, particularly trade
imbalances, and traced the crisis to the funds
coming from emerging economies, like China,
which flowed into the US financial market.
This resulted in huge variations in the balance
of payment (BOP) of countries. There is a need
to narrow them to mitigate the occurrence and
effects of the crisis. (Box 6)
Box 6. Global Economic Imbalances
• Crisis started when funds from emerging
economies like China flowed into the US
financial market;
• Financial crises tend to be caused by a
huge imbalance in the BOP of countries;
• There is a need to narrow huge global
financial imbalances to mitigate the
occurrence of crisis.
SYNTHESIS AND DISTILLATION OF POLICY ISSUES:
WHAT SHOULD GOVERNMENTS DO?
Professor Ma. Socorro Gochoco-Bautista
provided empirical evidence to the proposition
that the worst possible source of crisis is the
collapse of asset price boom. She cited Hong
Kong, Malaysia, and Singapore as examples of
those which survived the real estate fallout prior
to the Asian financial crisis. She mentioned the
case of Japan where the burst of the property
bubble led to a decade of recession. Her
presentation, which was very rich in empirical
data, concluded with the recommendation to
build better institutional structures to withstand
large shocks as part of the continuing agenda of
monetary policymakers and bank regulators in
the Asian region. (Box 7)
Box 7.
Asset Booms and Macroeconomic Outcomes
• Provides empirical evidence for the
proposition that asset price boom matters
since it tends to bring about the worst
macroeconomic outcome;
• Cites cases of Hong Kong, Malaysia, and
Singapore as examples of those which
survived real estate fallout prior to Asian
financial crisis;
• Cites the Japan case – burst of property
bubble led to a decade of recession;
• Recommends building better institutional
structures to be able to withstand large
shocks as part of the continuing agenda
of monetary policymakers and bank
regulators in the Asian region.
BSP Deputy Governor Nestor Espenilla,
Jr. focused on the regulatory factors. He noted
that while the crisis can be traced to regulatory
weaknesses, financial regulation can also
reinforce these weaknesses. This is due to the
fact that financial regulation is not an easy
task, there is a need to strike a balance between
allowing innovation in the market to flourish and
at the same time, taking a stance of “reasonable
cynicism” in the face of financial innovations. It
TEEHANKEE, JULIO C. 89
is a tricky job, regulation issues most of the time,
are political in nature. (Box 8)
Box 8. Regulatory Factors
• Regulatory weaknesses BUT financial
regulation also reinforced weaknesses;
• Financial regulation is not an easy task;
• Regulation has to strike a balance between
allowing innovation and a stable financial
system;
• “Reasonable cynicism” in the face of
financial innovation.
Department of Labor and Employment
Assistant Secretary Ma. Teresa Soriano gave a
situationer on the effects that are currently being
felt domestically as firms are closing shop. She
noted that in the past, there had been too much
emphasis on growth which led to biases towards
trade and liberalization that accounted for this
predicament. She assured, however, that the
government is doing its job through multilateral
programs to provide safety nets domestically and
to absorb returning overseas Filipino workers
(OFWs). (Box 9)
Box 9. Labor and Employment
• Effects are being felt domestically as
firms close shop;
• Too much emphasis on growth led to
biases towards trade and liberalization;
• Government Multilateral Action Program
will provide safety nets domestically and
for returning OFWs.
Asian Development Bank senior economist
Dr. Cyn-Young Park indicated that Asian
countries have been so integrated that the regional
production network in Asia serves the external
demand, particularly the US market. Can China
save the region? China will be affected because
it has become the hub for intra-Asian trade. Asia
is still vulnerable to the crisis. (Box 10)
90 ASIA-PACIFIC SOCIAL SCIENCE REVIEW

Box 10. Regional Integration, the ADB View Where do we go from here? The suggested
next steps are:

1. Continue dialogue among state, experts,

• Can Asia decouple?
• Will regional ties shield Asian economies? and market players;
• Will China save Asia? 2. Agree on short- and long-term policy re-
• Regional production network serves sponse;
external demand – US market; 3. Balance prudent regulation and market
• China – hub for intra-Asian trade; innovation;
• Asia still cyclically vulnerable. 4. Communicate problems to the public in
an understandable manner; and
5. Establish safety nets for those affected
Lastly, Institute of Corporate Directors by the crisis.
Founding Fellow Dr. Cesar Saldaña’s presentation
on the impact on financial markets was very
interesting because it gave an insider’s view
of the dynamics of the crisis. The crisis was a
result of risky mortgage lending practices that
breached prudent standards of risk management.
In short, moral hazard and securitization was the
“in” thing these past five years. (Box 11)

Box 11. Impact on Financial Markets

• Lessons gained:
– Risky mortgage lending practices
breached prudent standards of risk
management:
• Predatory lending, reliance on
take outs and guarantees;
• Leveraged mortgage terms –
easy, then onerous.
– Securitization amplified the risk:
• How securitization is supposed
to work: the Virtuous Cycle;
• How securitization is not
supposed to work: the Vicious
Cycle;
• Winners and losers.