Krugman

Paul Krugman, latterly the Nobel Prize honouree in the field of Economics, was one of the first people to acknowledge the effectiveness of Malaysia's policies to combat and contain the effects of the so-called Asian contagion in 1998.

In his latest piece as columnist in the New York Times Krugman tips his hat to the British Prime Minister, Gordon Brown. I highlight some of Krugman's observations on Brown and the British Government's unusually decisive moves as a lesson in economic management. Mind you, neither Britain, nor the other Western economies, not, for that matter, the rest of the world, Malaysia included, are out of the woods. It is hard to forecast and project ahead in the thick fog of an economic turmoil. We appear to be in the eye of the economic hurricane. Weather buffs will know that when placed in the eye of a hurricane there is a disturbing calm followed by anything else.

Krugman observes that the Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. And this combination of clarity and decisiveness hasn’t been matched by any other Western government.

Krugman also said that, The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.

What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.

This sort of temporary part-nationalization, which is often referred to as an “equity injection,” is the crisis solution advocated by many economists.

But, he cautions, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?

Yesterday in the morning Q&A session in Parliament, MOF II used his stentorian voice to remind all and sundry that the Malaysian solution of 1998 appears to be emulated by the West in dealing with the economic turmoil. That was a good lesson in recent economic history.

That aside, what troubles me is that the Malaysian government is still choosing to stick with the paternalistic playbook that requires the stern and aloof parent to tell the rakyat that they are safe and secure ... for now. Those last two words or, similar words and phrases also typify recent analyst remarks about Malaysia's liquidity comfort zone in the banking sector.

The problem is that the Malaysian government is choosing not to disclose their concerns about the economic sectors in the Malaysian economy that are most at risk of being affected by the economic turmoil. Some members of the Establishment have even uttered bizarre remarks that exports constitute a mere 30% of Malaysia's GDP. Therefore, they do not see a major problem even if there was a major reduction of exports due to a global recession. Really? The mind boggles at this approach to dispense placebos that achieve little effect when real bad things start to happen.

Surely the Malaysian government can start on the premise that there will be problems. In doing their job as economic managers, the MOF I and MOF II needs to provide guidance in the form of alerts and warnings. That will enable economic players to anticipate problems that may arise. The ones in risky sectors can manage their finances and inventory. The economic players that I mean are NOT the large corporations who have direct access to economists and analysts. I mean the poor fellows in the small- and medium-enterprises, the SMEs, who are so busy trying to make a living that they have no time to ruminate and reflect on high finance and mull over economic data.

Why can't the economic data be made available to the general public? This is where the Opposition's call for more economic information to be made available becomes relevant.