Going by the imagery produced by Hollywood you would not be wrong to think that the U.S. is a nation that is extremely open to new ideas. That the U.S. is extremely nimble with their minds. That Americans (with apologies to the Canadians, Central and South Americans who have equal claim to being called Americans. But, what to do. Like everyone else, I'm a victim of Pax Americana) are pragmatists.
But, in truth, you would be wrong.
Ideologists disguised as rugged pragmatists
Americans are actually very ideological. They are actually very parochial and insular. But, due to their size, both geographically and in their economy, and, due to the imagery transmitted via Hollywood, we don't realise this.
Let's zoom straight into the current market turmoil in the U.S. Just yesterday, the ex-Guru himself, Alan Greenspan, who had advocated and permitted a climate of deregulation of the financial system, admitted that he was stumped that the banks were unable to regulate themselves.
Self-regulation was the hallmark of the Greenspan-American ideology of free market capitalism. And, it has been proven to be a major failure.
But, instead of attacking the failure of self-regulation and asking hard questions about this underbelly of free market capitalism, we saw U.S. Treasury Secretary, Hank Paulson, apologising profusely to the American public for violating the free market principles by asking Congress to approve the bailout package.
Then, we saw President Bush taking great pains to emphasise that the bailout package was an exceptional exception to the free market principles that America espouses.
Yes, Americans have shown that they are pathologically ideological.
Similar ideology before the Great Depression
When the market turmoil hit Wall Street in 1929, the New York Stock Exchange was purely self-regulatory. Likewise with the banks that started suffering systemic failure co-tandem with the stock market. They, too, were largely self-regulatory.
When panic set in the U.S. government stood by and watched. Conventional wisdom dictated the ideology that the free market would correct itself. The role of the government was completely benign and passive.
Thus, the turmoil spread from Wall Street to the Main Street. Banks stopped lending. There were bank collapses. Businesses started to fail. People started to lose their jobs. the s**t had hit the fan.
There are striking parallels between that story and the present, unfolding one. But we'll have to leave that to the historians to deal with at a later date.
Keynes and the debunking of classical economics
I'm not an expert economist nor am I an economic historian. Historical evidence informs that during the U.S. economic turmoil of 1929, John Maynard Keynes had worked out his magnum opus, The General Theory of Employment, Interest and Money. This was the basis for Keynesian economics.
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Basically (and, I stand to be corrected), Keynes' theory dealt with the imbalance caused by the dynamics of free market supply and demand. During the bad economic times supply will exceed demand. So, according to Keynes, the role of the government cannot be benign. Government must play an active role to correct the over-supply imbalance by stimulating and creating demand. This is done by fiscal policies. Only then can the economy return to a state of equilibrium.
Keynes needed
During the 1960s and 1970s, the U.S. government, President Kennedy, in particular, was quite comfortable in declaring that he was a Keynesian. But I noticed that came the 1980s, President Reagan was quite happy to travel the ideological route of monetarist economists like Milton Friedman. Reagan was a staunch advocate of the ideology of the free market.
It is ironic that a non-intellectual ideologue like Reagan came to be so dominant that even by the Clinton presidency, the influence of Reaganomics still loomed large. The ideology of the free market was carried on seamlessly by the Federal Reserve, particularly during the long spell of Alan Greenspan.
Now that the pigeons have come home to roost, it is actually a great time for an economist, anywhere in the world, possibly even from Malaysia, to offer a compelling economic framework that can be adopted by the global financial and capital markets.
A new Keynes is needed.
But, in truth, you would be wrong.
Ideologists disguised as rugged pragmatists
Americans are actually very ideological. They are actually very parochial and insular. But, due to their size, both geographically and in their economy, and, due to the imagery transmitted via Hollywood, we don't realise this.
Let's zoom straight into the current market turmoil in the U.S. Just yesterday, the ex-Guru himself, Alan Greenspan, who had advocated and permitted a climate of deregulation of the financial system, admitted that he was stumped that the banks were unable to regulate themselves.
Self-regulation was the hallmark of the Greenspan-American ideology of free market capitalism. And, it has been proven to be a major failure.
But, instead of attacking the failure of self-regulation and asking hard questions about this underbelly of free market capitalism, we saw U.S. Treasury Secretary, Hank Paulson, apologising profusely to the American public for violating the free market principles by asking Congress to approve the bailout package.
Then, we saw President Bush taking great pains to emphasise that the bailout package was an exceptional exception to the free market principles that America espouses.
Yes, Americans have shown that they are pathologically ideological.
Similar ideology before the Great Depression
When the market turmoil hit Wall Street in 1929, the New York Stock Exchange was purely self-regulatory. Likewise with the banks that started suffering systemic failure co-tandem with the stock market. They, too, were largely self-regulatory.
When panic set in the U.S. government stood by and watched. Conventional wisdom dictated the ideology that the free market would correct itself. The role of the government was completely benign and passive.
Thus, the turmoil spread from Wall Street to the Main Street. Banks stopped lending. There were bank collapses. Businesses started to fail. People started to lose their jobs. the s**t had hit the fan.
There are striking parallels between that story and the present, unfolding one. But we'll have to leave that to the historians to deal with at a later date.
Keynes and the debunking of classical economics
I'm not an expert economist nor am I an economic historian. Historical evidence informs that during the U.S. economic turmoil of 1929, John Maynard Keynes had worked out his magnum opus, The General Theory of Employment, Interest and Money. This was the basis for Keynesian economics.
.Basically (and, I stand to be corrected), Keynes' theory dealt with the imbalance caused by the dynamics of free market supply and demand. During the bad economic times supply will exceed demand. So, according to Keynes, the role of the government cannot be benign. Government must play an active role to correct the over-supply imbalance by stimulating and creating demand. This is done by fiscal policies. Only then can the economy return to a state of equilibrium.
Keynes needed
During the 1960s and 1970s, the U.S. government, President Kennedy, in particular, was quite comfortable in declaring that he was a Keynesian. But I noticed that came the 1980s, President Reagan was quite happy to travel the ideological route of monetarist economists like Milton Friedman. Reagan was a staunch advocate of the ideology of the free market.
It is ironic that a non-intellectual ideologue like Reagan came to be so dominant that even by the Clinton presidency, the influence of Reaganomics still loomed large. The ideology of the free market was carried on seamlessly by the Federal Reserve, particularly during the long spell of Alan Greenspan.
Now that the pigeons have come home to roost, it is actually a great time for an economist, anywhere in the world, possibly even from Malaysia, to offer a compelling economic framework that can be adopted by the global financial and capital markets.
A new Keynes is needed.
10 comments:
Hi, this is probably off tangent but I don't know where as to put it. It's OK if you don't want to display it.
Just a thought I had - there has been lots of emphasise on risk management in the past 4 to 5 years here in Malaysia. The methodologies been introduced by the consultants are normally American based (from what I've seen). However, several of the major corporate failures actually came form American institutions such as ENRON who are actually quoted in books as being sterling examples of enterprise wide risk management. Additionally, with all the risk management in place very few people actually saw the current Global crises on the horizon. It seems to me that risk management as practised really considers only the known possibilities. It does not look at the unknown – what do you think?
Hi shari
Excellent point and, not off tangent. Everything inter-related. For discussion sake (I don't know everything) let's see:
1. You're right in that risk management became topical in the US in the wake of Enron and Worldcom. The Sarbanes-Oxley Act created extensive reporting requirements. But, that was for he US.
2. For most of the rest of the world, the accounting standards like IASB and its new guise as IFRS, have proven to be fairly sound.
3. But, the US is the driver of the financial and equities markets. Due to its large size, the US dictates the tempo and direction of global financial markets.
4. Some of us have observed that Americans are very good at operations and implementation but weak at understanding basic principles. They gloss over the basic principles and just zoom into the "delta" or how to value-add.
5. This is where I think the Americans get into dangerous territory. By not imbibing and understanding the basic principles, their rules and regulations are often designed to look for SYMPTOMS and they miss CAUSAL FACTORS.
6. I will hazard the example of the CDOs. The whiz kids in ratings agencies and US accounting firms looked at these products for COMPLIANCE. If you look at the mountains of stuff that are disclosed under the Sarbanes-Oxley Act, you will realise that it is impossible to go beyond ensuring that the "T"s are crossed and the "I"s are dotted. A scary thought.
7. So, the due diligence process appears to be thorough due to the volume of paper. But, how can these sentinels raise their heads above the mountain of paper to say, "Wait a minute, guys. What is this bunch of sub-prime loans doing in the basket of CDOs that include blue-chip loans".
I believe US risk management has these glaring weaknesses. And, these weaknesses may be embedded in the risk management practices for the rest of the world. Regulators need to seriously get back to the drawing block and start from first principles.
I hope I'm not off-tangent from your point.
Shari
P.S.
The other problem is the "race against the sun" mentality of global finance and equities markets. Bankers and corporate advisors are forced to work within a 24/7 paradigm. Visualise a investment bank CEO in Wall Street bellowing at the team of corporate finance, accounting and legal boys and girls, "I f*****ing want the product ready to roll when Tokyo opens. If you don't have the f*****ing product in place, I'm gonna sack the lot of you". And, he walks off chomping his Cuban cigar.
Do you think any of the boys and girls would dare to raise a hand to say, "Excuse me Mr CEO, I think there's a problem here....."? Die. Fired. Pack your belongings and run it through security!!!!
Thanks for your response, which addressed my thoughts. My main concern is that I work in one of those large GLCs where we have this bunch of consultants helping us with our risk management methodology. Now we have mountains of paper work and hundreds of risks to monitor. But all these look operational to me and I sometimes think that if our systems have proper check and balance, these known possibilities will be picked up and attended to or prevented from happening. But bigger strategic decisions which can have severe impact on the comapny have their risk considerations glossed over, often in the interest of time (like you said 'race against the sun') or due to strategic/political considerations (we all hope it pans out somehow). Hmmmm..guess I'll have to find a way around all this to improve the value add of the process in my little area :-)
Hi shari
Now that I understand better where you're coming from in your query, I must tell you what Obi Wan Kenobi to Luke Skywalker. You must trust your instincts. All of us have a sense of risk. We are wired by Nature.
The only thing is make sure that you and your colleagues get plenty of exercise and rest in-between tasks. A high-pressure environment caused by compressed time-frames leads to stress and fatigue.
This leads to errors and a "cepat mengalah" syndrome because we're just too tired to argue with the a**holes who sit in their plush leather chairs and want to seal the deals quickly.
Trust your instincts. Don't trust what is written in the documents 100%, maybe just 75%. Don't trust the financial ratios fully either, because they are only as good as the underlying numbers that support the ratios.
Above all, check out the people involved in each deal. A sleazebag is a sleazebag. For me, the sleazebags are the ones who are most anxious to wrap up the deal. I always ask, "Why the hurry?". Always ask that question. Never be afraid to sound stupid. In my experience the stupid-sounding questions are the ones that stump the hotshot go-getters.
Thanks de minimis.
i guess what the current financial crisis taught us is not all ideas work at all times.
keynesian economics didn't help much during the 70s as it gives rise to big govt policies while stagflation hits the world over. like you mentioned, the govt could intervene via fiscal policies but more often that not, fiscal policies are lagging and it is exactly these time lags that fail to fix the root problem.
instead when they started to liberalise the market and the only intervention more often that not we see is via adjusting official interest rates in response to inflation. also, believe the equilibrium will be established by market forces, they don't want the quite visible big hand of the govt intervening anymore.
today, we know this policy is somewhat flawed because there is no perfect market situation. the whole aspect of limitless suppliers and customers with no information barriers or transaction costs which dictate many economic models are obviously no longer working.
so what do we have? a crisis... people who are powered by herd instincts with little understanding or knowledge doing what they are comfortable with since it didn't break them in the last 10 or 20 years (assuming it is safe of course).
would a new keynes emerge to suggest solutions that will fix the current crisis for a season? perhaps...but i don't quite want to rely on that fellow too much.
hi myop101
A healthy does of cynicism is important. I don't think the current turmoil will create a New World Order. But, I hope there will be some serious soul-searching in the way modern economies work though, especially in the area of high-finance. There's some seriously flawed thinking there.
In all the arguments for and against regulation and govt. intervention, this type of economic policy and that type of economic policy (mainly being carried out by economic experts) no one mentions greed. Greed lies latent in every human being and given the right atmosphere it thrives. How do you factor a human element in an inorganic equation.
My concerns are :-
1) Immediate - to prevent the consumption from seizure. Today MOF 1 is still taking his own sweet time to reduce the petrol price. According to Sharir, if the crude oil is US$72 per barrel, then petrol at the pump will be RM1.92. But today the crude oil price is US$64, which means that the petrol can be set to below RM1.92. He said it'll be decided end of the month.
According CNBC, at current price the US consumers will have US$650b at their disposal compared to the peak of US$147 per barrel but it's not having any positive effect because the consumer confidence is so badly effected that they become paranoid. So we don't want a similar situation to happen because it's very difficult to create the feel good factor when the consumer confidence is broken. So every counts. The sooner the reduce the petrol price to reflect the market price, the more disposal cash consumers will have to keep the economy going. Even with the 3 price reductions, the inflation is still very high at 8.2 for Sept. The latest news from Sharir that it can be reduce maximum of 15 cents is likened to shifting goalpost which will upset consumers further. But more important it'll kill the consumer confidence and then what ?
2)Next year - we need to revise the budget now and reprioritise the big fat contracts and purchases and avoid throwing scarce fund into waste such as the RM5b for Valuecap to prop up the market which doesn't has economy multiplier impact. Projects like corridors need to be differed and concentrate of stalled projects due to lack of funding such as building of flyover instead of closing off a lane and then say there is no fund to continue. The net effect is further burden to motorists still railing from the fuel hike. Unlike, in develop countries like Australia, when they embark on highway/traffic eradication project, they work on it round the clock because any delay will have an impact on the economy ie traffic jams, wasteful of resources, stress to workers, productivity, healthcare,etc
Govt must focus on people centric projects such as improving public transportation to give immediate relief to consumers facing high inflation environment. Instead of waiting for long gestation project like extension of LRT, they could instead concentrate on buses which could be rolled out quicker and make it more efficient.
It's good to hear that MOF 1 announced today that the purchase of Eurocopter will be aborted after pressure from the public.
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