May Allah s.w.

t guide
us through this
financial crisis.

Universiti Kebangsaan Malaysia

Fakulti Undang-undang
Sarjana Undang-undang Perniagaan
Musbri Mohamed
DIL; ADIL ( ITM )
MBL ( UKM )

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I want to say that the
views expressed here are
totally personal and do
not represent the views of
any institution.

In 1998 Tun Dr Mahathir Mohamad, who was then the Prime

Minister, called for a ban on speculation in the global
currency trade, which he identified as causing the Asian crisis.
He was then laughed at by the Western leaders and the
financial media, and the speculation continued and increased,
until the bubble burst, leaving the world in economic crisis.

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Jawaharlal Nehru in his speech on Basic Wisdom to the
University of Ceylon on January 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 may
be and however much of facts and knowledge we may have
accumulated, are not very wise. We are narrower than the people
of old, although every fact has gone to bring us together in this
world. We travel swiftly, we have communications, we know more
about 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 to
Asian giants like Gandhi, Nehru, Mao , Deng and
Mahathir , and the revival of India and China is
changing 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 Japan are
growing at less than 2% per year, the relative power
between the mature economies and the emerging
markets will change dramatically.

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The 2008 Great Global Credit Crisis will be seen
in history as a major turning point, just as the
1930s Great Depression set in motion the Second
World War and changed the financial landscape
for nearly 80 years.

Likewise, the present crisis will induce major

changes in economic theory, philosophical
outlook 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 the
conditions for crisis.

The first was the appearance in 1989 of 3 billion

labour force into the market economies following
the end of the Cold War that gave rise to a global
flood of cheap goods and low inflation for nearly
two decades.

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The second was the monetary policy responses to the Japanese
bubble/deflation since 1990, which gave rise to over two
decades of almost interest free yen loans globally, creating the
famous Yen carry trade. The carry trade, essentially the
arbitraging of differences in national interest rates and
exchange rates, has now become global, because the Western
economies are also going for zero interest rate policies (ZIRP).
We could trace the Japanese bubble to the Plaza Accord of
1985, when Japan allowed its exchange rate to overshoot. The
supply of almost interest free funding to combat Japanese
domestic deflation was effectively to subsidize the rise of
financial engineering, and created bubbles elsewhere, most
prominently in the East Asian crisis economies between 1990
to 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. They
created the financial models and derivatives to manage
risks and staffed the business schools, investment banks
and hedge funds that dominated financial markets
globally. Underlying their sophisticated models was one
fatal flaw, that the world of risk was a bell shaped
statistical curve that ignored the long-tailed black swan
risk. It was the underestimation of once in 400-year risks
that 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 prices
and competition would create global efficiency. Such philosophy
permeated the basic textbooks and the international bureaucracy.

Essentially, these mega-trends were four arbitrages that created converging

globalization – wage arbitrage, financial arbitrage, knowledge arbitrage
and regulatory arbitrage. But these four mega-trends enabled the
networking of national markets into a global market, giving rise to a
financial inter-connected world with no global monetary authority and
financial regulators compartmentalized mentally and operationally at the
institutional and national levels.

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Last year on February 2009, President Barack Obama
signed a US$787bil (RM2.88tril) fiscal stimulus package
passed on to him by the US Congress.

It was hailed in the United States as Obama’s first big

legislative victory and a bold step to get the American
economy out of recession.

But outside the United States, the stimulus bill was not so
popular because it contains a protectionist section which
stipulates that only US-made steel and manufactured
products can be used in government projects funded by
the stimulus package.

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At the same time a speech by Britain premier
Gordon Brown’s closest economics advisor Ed
Balls that the world is facing its worst recession
in a hundred years, thus implying it will be worse
than the Great Depression of the 1930s.

It was the bleakest scenario yet painted by a

senior member of the Western establishment. And
in this scenario, the effects of the recession will
last 15 years.

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Subsequently thereafter the finance ministers
and Central Bank governors of the Group of
Seven leading industrial countries met in Rome
to discuss the crisis.

Their statement at the end of the meeting did

not contain anything new on measures to
manage the crisis.

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But while the G7 Ministers pledged
to 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 Czech
Republic which now fears that the French car
companies’ factories in the country may
retrench workers or even close.

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China’s state-owned Xinhua news agency
attacked the “buy American” clause in an
article entitled: “Protec­tionism a poison to
financial crisis solutions.” It said “history and
economics have told us, facing a global
financial crisis, trade protectionism is not a
solution, but a poison to the solution.”

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THE effects of the global economic crisis
reached Malaysian shores at the end of
2008, according to data released by Bank
Negara and the Statistics Department.

The country’s GDP, exports and balance

of payments have all been deeply
affected.

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Although recessionary conditions have affected
the Western countries, which are the origin of the
financial crisis, they have in fact affected Asian
countries even more badly.

The GNP fell by 3% to 4% in the US in the last

quarter of 2008. But the fall was sharper in many
Asian countries such as Japan, South Korea,
Taiwan and Singapore.

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The credit crunch led to job losses and a fall
in 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%, the
worst in 25 years.

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In China, exports in January 2009 fell by 17.5%
which has caused thousands of factories to close,
with 20 million losing their jobs, according to
official estimates. But China’s imports fell by 43%
and this has hit many Asian countries which export
manufactured parts used in making the products
meant for exports to the West.

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Countries like India that have benefited from
outsourcing by US multinationals (for services
ranging 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 about

recovery in the global economy, will Malaysia
and the rest of Asia and the world see the return
of 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 developing
countries.

Some have also seen their currencies devalued, making it more difficult
to service their external loans.Thus the transmission through the finance
and 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 in
the US and Europe is now expected to last at least another two to
thirteen years.

May Allah s.w.t guide us through this global financial crisis.

Amin.

Musbri Mohamed
June 2010

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