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Western financial crisis: Asian viewpoint

Jeffery Sng/Contributor
Asia News Network
Publication Date : 03-04-2011


In her modern history, Asia has lived in the shadow of the West - militarily, technologically, scientifically, economically, politically, ideologically and intellectually. Perhaps for this reason Singapore’s born-again Asianist Dean of the Lee Kuan Yew School of Public Policy Kishore Mahbubani had, tongue-in-cheek titled his first book Can Asians Think?
Witness the reaction of the Western financial establishment to the Asian economic crisis in 1997. Steeped in confident self congratulatory cultural superiority Western pundits brooked no hesitation to pin the blame on the ethical deficiency of Asian culture and its susceptibility to crony capitalism. The collapse of Asia’s corporate and banking systems in 1997 served to confirm, in their eyes, the moral superiority of Western culture and the integrity of Western management standards.
When the US sub-prime economic crisis broke an outpouring of books and articles, by Western authors, seeking to explain the festering crisis of the Western economies quickly appeared. The regional bias reflects the continued Western hegemony in the world of ideas.
It is therefore refreshing to find a book which views the global financial crisis from an Asian perspective. The book Nowhere to Hide: the great financial crisis and challenges for Asia, was co-authored by two Overseas Chinese, Lim Mah-Hui and Lim Chin. Mah-Hui lectured political science at The University of Malaya and Temple University in New York before turning banker. Lim Chin is a professor of economics at the NUS Business School, Singapore. The book was published by the Institute of Southeast Asian Studies, Singapore, in 2010.
The book sets out to tell the story of the US Sub-prime financial crisis in historical context because “nothing emerges from nowhere,” said Mah-Hui. He traces the origin of the crisis to the removal of the Glass-Steagall Act in the early eighties. The Glass-Steagall Act sought to regulate the US finance industry and prevent banks from taking excessive risks by limiting the size of banks, separating commercial banks from investment banks and prohibiting inter-state banking.
As the ideology of market fundamentalism began to take hold in the US during the eighties the Glass-Steagall Act was removed and with it the obstacle to prevent banks from becoming too big and taking on excessive risks. Deregulation led to the appearance of asset backed securities(ABS), credit default swaps and collateralized debt obligations(CDO).
Asset backed securities were repackaged into groups with different credit ratings creating a category of less than prime mortgages which became known as Sub-prime mortgages. A year before the crisis broke Sub-prime mortgages, amounting to over US$1.5 trillion were traded and distributed around the world through the global banking system.
In the wake of deregulation the finance sector expanded to become the dominant sector in the US economy outstripping and dwarfing the real economy. The conventional wisdom that banks and financial institutions may fail if they are allowed to become too big was replaced by a complacent faith in bigness embodied in the smug Wall Street catch phrase “too big to fail!”
Everything remained fine as long as the US housing market was booming and interest rates remained low. However, housing prices cannot rise forever. When borrowers defaulted in 2007, the US economic bubble burst and rapidly spread across the Atlantic to become a Western financial crisis.
How could this have been allowed to happen? Who should be held responsible for this tragedy which has led to countless bankruptcies, bank runs, job losses, European street riots and saddled future generations of Western taxpayers with crippling debt burdens? “Neo classical economists, monetarists and rational expectation theorists must share responsibility for the crisis which erupted in 2008,” said Mah-Hui.
Neo classical economic theory lent credence to the ideology of market fundamentalism which exercised a great influence on public policy as well as the attitudes of key central bankers, legislators and regulatory officials. Economic theory provided ideological justification for the liberalization and deregulation of the US financial market and lent scientific respectability to, the demands of political and finance industry, interest groups who want to get government regulators off their backs. Deregulation opened the door to unscrupulous innovation of dodgy and risky financial products like, credit default swaps, CDOs and Sub-prime mortgages which turned sour in 2008.
Intellectual capture of political leaders, universities, technocrats, industry leaders, bankers, high level bureaucrats and regulatory officials at the commanding heights of the political economic system is only the most euphemistic charge that has been raised. More scandalous are the efforts of powerful Wall Street firms to bend the regulatory, policy and legal institutions of the state for their private benefit.
Mah-Hui quoted the testimony of Robert Weissman who charged that Capitol Hill and the White House responded to legal bribes from the financial sector, rolling back common sense standards and barring honest regulators from discharging their duties. “Besides political lobbying there is a revolving door between Wall Street and Pennsylvania Avenue. Witness the number of Treasury Secretaries who were former CEOs of Wall Street firms and the many former regulators, central bankers and IMF officials who have moved to senior positions in the finance industry,” added Mah-Hui.
Isn’t this reminiscent of the charges of “Crony Capitalism” and corrupt “Asian Values” leveled at Asian countries by Western leaders and the IMF during the Asian Financial Crisis in 1997? In fact all the ingredients of “Crony Capitalism” are present in the US Sub-prime crisis to an even greater degree. If so, why are the solutions prescribed for the Asian Financial Crisis so different from those that Western governments prescribed, for themselves, during the Sub-prime Western financial crisis?
Unfortunately, Mah-Hui does not address this question although he saw many similarities between the two financial crises. It was another Malaysian Martin Khor who cried foul when Western leaders and governments began to do the very things they told Asian countries not to do during the Asian Financial Crisis in 1997.
In 2008 the first reaction of Western governments was to prop up their crumbling private financial institutions and save their economic systems from meltdown. A battery of measures including massive capital injections, purchase of toxic assets and loans, deposit guarantees and guarantees for new unsecured bank loans, market interventions to regulate speculative actions of hedge funds and ban short selling of financial stocks, lowering of interest rates and other forms of quantitative easing were swiftly announced to prevent the run-away Western financial crisis from turning into a full scale economic recession.
Yet when Thailand, Indonesia and South Korea wanted to take similar measures, during the Asian Financial Crisis in 1997, Western leaders told them in no uncertain terms that interfering in the market mechanism would only worsen the crisis. In 1998 Michel Camdessus, the head of the IMF, dismissed Malaysian Premier Mahathir’s accusation that unregulated short term capital flows, speculative short selling and the actions of hedge funds had brought on the collapse of Asian currencies and stock markets. Instead the IMF blamed Asian management standards, crony capitalism and corruption for causing the Asian Financial Crisis and urged Asean finance ministers not to roll back financial liberalisation.
The IMF also ordered Thailand and Indonesia not to bail out failing local banks and companies because it was morally reprehensible to use public funds to underwrite imprudent private excesses. Consequently, many local banks in Thailand and Indonesia collapsed because the IMF pressured Asean central banks not to rescue local private banks. Finally, to top it all Asian countries were instructed to raise their interest rates sharply, leading to consumers and companies being unable to service their debts precipitating economic recession.
Without doubt Western imposed policies converted Asia’s financial crisis into full blown economic recession in 1998. In contrast to the deflationary policies imposed on Asian countries in 1997 the US and Western central banks engaged in successive rounds of interest rate cuts in 2008 to stimulate and kick-start their economies. Thus, Western policies for handling their own financial crisis in 2008 contrast sharply with the prescriptions they dish out to Asian countries during the Asian Financial Crisis in 1997, revealing blatant double standards.
Western double standards, policy blunders and the unflattering spectacle of total regulatory capture in the US political economic system must have shocked Asia and shattered whatever illusions Asian policy makers may have in the infallibility of Western global leadership. “Before this Asian policy makers deferred towards their Western counterparts. We assumed the West knew best on finance and economics. The enormous blunders since committed by the US and Europe mean deference has been replaced by disquiet,” said Kishore Mahbubani. Such disquiet is apparently, shared by Andrew Sheng, Chief Advisor to the China Banking Regulatory Commission who remarked that “When our teachers are no better than us, we really have to think for ourselves.”
When Western policy makers can no longer be trusted to determine what is in Asia’s best interest perhaps it is time for Asians to shed their traditional politeness and speak their minds. Enough of the West telling Asia what to do, it is time for Asia to tell the West what the latter should be doing.
The important thing is not just to take the easy way out but to do whatever it takes to prevent a repeat financial crisis. What worries Asia is that Western leaders are trying to do a “quick fix” to avoid making painful readjustments to put their economic house in order. “An America that blunders onwards with quantitative easing in the hope of reviving its economy creates enormous global instability,” said Kishore Mahbubani. “Only when America gets its house in order can Asia hope for a more sustainable future,” he added.
During the Asian Financial Crisis Western leaders told Asian countries to stop living beyond their means. Like Asia’s crisis the US Sub-prime crisis was the result of an America living beyond her means. America must stop living beyond her means. “Domestically, the US must cut spending and raise taxes no matter how difficult,” said Kishore.
Besides domestic over consumption, America’s embattled economy can ill afford another expensive Middle East foreign adventure. “We have already spent trillions of dollars on wars in Iraq and Afghanistan both of which descended into unwinnable quagmires,” said Liberal Democratic Representative Dennis Kucinich. America’s latest involvement in Libya may come with another huge price tag. The Centre for Strategic and Budgetary Assessments estimated that enforcing the Libyan no-fly zone alone could cost up to $300 million per week.
The US can’t have her cake and eat it too. “The time has come for you to administer the same bitter medicine you prescribed to us,” Kishore Mahbubani added. Of course an America that tightens its belt will cause the rest of the world pain as US consumption and imports shrink. “But there is no painless solution,” said Kishore.