Prof. Mohd Nazari Ismail Faculty of Business and Accounting University of Malaya. Financial Crises: Can They Be Prevented?. Prof. Paul Krugman , Princeton U. Winner of 2008 Nobel Prize for Economics. Alan Greenspan Chairman of US Federal Reserve Board, 1987-2006.
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Prof. Mohd Nazari Ismail
Faculty of Business and Accounting
University of Malaya
Financial Crises: Can They Be Prevented?
Prof. Paul Krugman , Princeton U.Winner of 2008 Nobel Prize for Economics
Massachusetts Institute of Technology
I don’t have a clue too…
Reasons for concern
Different types of financial crises
History of finance industry
….financial crises at their core are outcomes of over-lending and over-borrowing and are thus integral to the industry itself.
We are victims of the Jews ….
“a disturbance to financial markets, associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market’s capacity to allocate capital”
B. Eichengreen, 1986
Sorry, you cannot withdraw any money today…
Open up the bank! We want our money back….
Argentina Foreign Debt in 2007:
deposited into banks
Banks increased lendings
Asset prices skyrocketed
land surrounding the Imperial Palace in Tokyo estimated to be worth more than whole of California…
….created a massive bubble…
… which soon burst!
Japanese Poorest and Weakest
A side of Japan that is not often seen…
Total UK and US debt to GDP ratio of 300 %
… 20% of total economic output used to pay interest
US federal government’s total accumulated debt is now more than USD10 trillion
Japan’s public debt more than 195.5% of its GDP
starvations, homelessness, chaos…
600 years ago…
Human History of 2 million yrs
no finance industry
During previous 99.97% of human history there was no legitimate finance industry!
In ancient India it was looked down upon by both Buddhists and Hindus.
Cato the Elder
"...those who ply sordid trades, pimps and all such people, and those who lend small sums at high rates. For all these take more than they ought, and from the wrong sources. What is common to them is evidently a sordid love of gain...“ Aristotle
Judaism forbids it (if practiced among fellow Jews)
The medieval Christian church condemned it
“Now money, according to the Philosopher was invented chiefly for the purpose of exchange: and consequently the proper and principal use of money is its consumption or alienation whereby it is sunk in exchange. Hence it is by its very nature unlawful to take payment for the use of money lent, which payment is known as usury: and just as a man is bound to restore other ill-gotten goods, so is he bound to restore the money which he has taken in usury”Thomas Aquinas
“Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever”
(Quraan – 2:275)
USURY in Islam
“God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew.”
USURY in Islam
Adam Smith (1723-1790)
Jeremy Bentham (1748-1832)
“The interest or the use of money…is the compensation which the borrower pays to the lender, for the profit which he has an opportunity of making by the use of the money. Part of that profit naturally belongs to the borrower who runs the risk and takes the trouble of employing it; and part to the lender, who affords him the opportunity of making this profit”Adam Smith 1776
"If 5 English pennies ... had been ... at 5 per cent compound interest from the beginning of the Christian era until the present time, it would amount in gold of standard fineness to 32,366,648,157 spheres of gold each eight thousand miles in diameter, or as large as the earth."
John Whipple (1836) in “The Importance of Usury laws”
"…the purpose of money is to facilitate exchange. It was never intended as an article of trade, as an article possessing an inherent value in itself, (but) as a representative or test of the value of all other articles. It undoubtedly admits of private ownership but of an ownership that is not absolute, like the product of individual industry, but qualified and limited by the special use for which it was designed....“John Whipple 1836
Another victim of financial `accident’?
US Stock Market Crash 1929
World War II expenditures moved the US economy again
Stock market boom
Savings and Loan Scandal/Crisis
Savings and Loan Scandal/Crisis
But still failed to prevent occurrences of crisis after crisis…
USA has the Best regulatory framework
Repeal of 1933 Glass-Steagall Act and Bank Holding Act in 1999
Robert Rubin – Former Treasury Secretary
Sanford Weill - Citibank
Alan Greenspan – Former Fed Chairman
Derivatives? CDOS? CDSS?
Derivatives is outcome of dynamic and developed financial markets!
Abandonment of Gold Standard?
Growth of financial industry require abandonment of Gold standard
Gold Standard will constrain growth of finance industry
“Perception of greed as being responsible for the current financial crisis is a misplaced perception.”Prof. Barry EichengreenU of California, Berkeley
Nazir Razak, CIMB
Amirsham, Ex-CEO of Maybank
If there is a crisis….. greedy villains?
John Meriwether, LTCM
Chuck Prince, Citigroup
Dick Fuld, Lehman Bros.
After – “Greedy”
Clear Cases of Greed
Nick Leeson – Baring Bank
Jeff Skilling - Enron
“It's so difficult to pinpoint one person or two people…It really was the whole system”ReenaAggarwal, Professor of Finance, Georgetown University
Charles P. Kindleberger
Ford International Professor of Economics at MIT
“Sometimes in the next five years you may kick yourself for not reading and re-reading Kindleberger’s Manias, Panics and Crashes.”Paul Samuelson, Nobel Laureate and Professor Emeritus at MIT
At their core, financial crises are problems of over-leveraging, over-lending and over-borrowing
"I've been around long enough to see that we have these cycles. These guys get their cigars and champagne. They have a great time. The whole thing blows up. But then they re-emerge years later. This one is a really, really bad one. But I don't think Wall Street is dead”
Andy Serwer, the managing editor of Fortune Magazine
In reality we are not solving the problem but simply putting off the reckoning to a later date and to a later generation of citizens.
integral to the industry itself
Problems are not going to go away…
My Central Proposition:
Asian financial crisis worse than tsunami …
Asian Development Bank
When lending (for profit) became a legitimate industry