Prof mohd nazari ismail faculty of business and accounting university of malaya
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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. 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

Prof. Mohd Nazari Ismail

Faculty of Business and Accounting

University of Malaya

Financial Crises: Can They Be Prevented?


Financial crises 3a can they be prevented 3f

Prof. Paul Krugman , Princeton U.Winner of 2008 Nobel Prize for Economics


Alan greenspan chairman of us federal reserve board 1987 2006

Alan GreenspanChairman of US Federal Reserve Board, 1987-2006


Prof jeffrey sachs director earth institute columbia university

Prof. Jeffrey SachsDirector Earth Institute, Columbia University


Plenty of brains still cannot solve problem so how

Plenty of brains… still cannot solve problem? So how?

Massachusetts Institute of Technology


Hmmm how are we gonna solve this problem

Hmmm….. How are we gonna solve this problem?


Financial crises 3a can they be prevented 3f

I don’t have a clue too…


Presentation outline

Presentation Outline

Reasons for concern

Different types of financial crises

History of finance industry

Central argument

Conclusion


Financial crises 3a can they be prevented 3f

….financial crises at their core are outcomes of over-lending and over-borrowing and are thus integral to the industry itself.

CENTRAL ARGUMENT


Asian financial crisis worse economic damage

Asian Financial Crisis – Worse Economic Damage…


Compared to the asian tsunami

…compared to the Asian Tsunami !


Us sub prime crisis

US Sub-prime crisis…


Impact in all corners of the world

… impact in all corners of the world


Financial crises 3a can they be prevented 3f

We are victims of the Jews ….


Honest it wasn t me

Honest, it wasn’t me…


Financial crisis

Financial Crisis

“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


Financial crises 3a can they be prevented 3f

Economics Crisis

Financial crisis


Other causes of economics crises

Other Causes of Economics Crises

  • Wars

  • Earthquakes

  • Floods

  • Draughts

  • Plagues


Types of financial crises

Types of Financial Crises

  • Currency crisis

  • Banking crisis

  • Market crashes


Asian financial crisis

Asian Financial Crisis


Overinvestment in real estate

Overinvestment in Real Estate


Asian financial crisis1

Asian Financial Crisis


Inflow of foreign funds prior to crisis

Inflow of foreign funds prior to crisis


Bank run

Bank Run


Financial crises 3a can they be prevented 3f

Source: Worldbank


Argentina

Argentina

  • Fiscal indiscipline

  • Public debt:

    • 1983 USD46 billion

    • 1989 USD65 billion

    • 1999 USD130 billion

  • Trade deficit

  • Bank run


Argentina riots

Argentina riots…

Sorry, you cannot withdraw any money today…


Financial crises 3a can they be prevented 3f

Open up the bank! We want our money back….


Argentina foreign debt in 2007

Argentina Foreign Debt in 2007:

USD127 billion!


Financial crises 3a can they be prevented 3f

Market Crash


Bubble

Bubble…


Examples of market crash

Examples of Market Crash

  • Japanese property crash (1990)

  • Dot.Com crash (2000)

  • Sup-prime mortgage crash (2007)


Japanese crash a puzzle

Japanese Crash – A Puzzle?

  • Successful exporter

  • Trade surplus

  • High savings rate

  • Hardworking and skilled workforce


Japanese problem

Japanese problem

  • banks

  • over-borrowing

  • debt

  • speculation


Here is how it happened

Here is how it happened…

Savings/funds

deposited into banks

Banks increased lendings

Asset prices skyrocketed

?


Financial crises 3a can they be prevented 3f

land surrounding the Imperial Palace in Tokyo estimated to be worth more than whole of California…


Created a massive bubble

….created a massive bubble…


Which soon burst

… which soon burst!


Effect of bubble burst

Effect of Bubble Burst

  • Trillions of yens wiped out in markets

  • Spending slowed down

  • Economy sputtered to a halt


Financial crises 3a can they be prevented 3f

Japanese Poorest and Weakest


Financial crises 3a can they be prevented 3f

A side of Japan that is not often seen…


Sub prime mortgage crisis

Low interest

rates, excess

liquidity

in 1990s

Banks lent

to

Sub-prime

borrowers

Housing

boom

CDOs act

as booster

Sub-prime Mortgage Crisis


Sub prime mortgage crisis cont

Housing

prices

skyrocketed

Interest

rates

rose

CRASH!

Borrowers

go bust

Sub-prime Mortgage Crisis (cont.)


Total uk and us debt to gdp ratio of 300

Total UK and US debt to GDP ratio of 300 %


20 of total economic output used to pay interest

… 20% of total economic output used to pay interest


Sub prime mortgage crisis cont1

Sub-prime Mortgage Crisis (cont.)

Housing

prices

skyrocketed

Interest

rates

rose

CRASH!

Borrowers

go bust


Sub prime mortgage crisis cont2

Lenders

go bust

Credit

Crunch

Global

Recession?

Sub-prime Mortgage Crisis (cont.)


All in serious trouble

All in Serious Trouble…


How serious is current crisis

How serious is current crisis?

  • USD16.3 trillion wiped out

  • deep and prolonged recession

  • Major economies slowing down


Us 700 billion bail out plan

US$700 billion bail-out plan


Us federal government s total accumulated debt is now more than usd10 trillion

US federal government’s total accumulated debt is now more than USD10 trillion


Japan s public debt more than 195 5 of its gdp

Japan’s public debt more than 195.5% of its GDP


If bailout plan does not work global recession

If bailout plan does not work… Global Recession…


Financial crises 3a can they be prevented 3f

starvations, homelessness, chaos…


Financial crises how and when did they all start

Financial crises… how and when did they all start?


600 years ago

600 years ago…


Human existence started 2 million years ago

Human existence started 2 million years ago…


Financial crises 3a can they be prevented 3f

Human History of 2 million yrs

no finance industry

16th century


During previous 99 97 of human history there was no legitimate 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

In ancient India it was looked down upon by both Buddhists and Hindus.

USURY


Ancient philosophers against usury

Ancient Philosophers against Usury

Cato the Elder

Aristotle


Financial crises 3a can they be prevented 3f

"...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


What do you think of usury what do you think of murder cato the elder

“what do you think of usury?" - "What do you think of murder?Cato the Elder


Judaism forbids it if practiced among fellow jews

Judaism forbids it (if practiced among fellow Jews)

USURY


Interest charging same as people who have shed blood ezekiel

“interest-charging same as people who have shed blood…”Ezekiel


The medieval christian church condemned it

The medieval Christian church condemned it

USURY


Financial crises 3a can they be prevented 3f

“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


Old testament s descriptions of usury practitioners

Old Testament’s descriptions of usury practitioners

  • shedder of blood

  • the defiler of his neighbor's wife

  • the oppressor of the poor

  • the spoiler by violence

  • the violator of the pledge

  • the idolater

  • extortionists

  • Sabbath-breakers

  • who vex the fatherless and widows

  • dishonor parents

  • liar

  • the unrighteous

  • the backbiter

  • the slanderer and perjurer

  • the meanest and lowest of men

  • the vilest of criminals


Islam condemns usury

Islam condemns usury


Usury in islam

“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


Usury in islam1

“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.”

(Quraan 2:276)

USURY in Islam


John eck 1486 1543

John Eck (1486-1543)


John calvin 1509 1564

John Calvin (1509-1564)


Financial crises 3a can they be prevented 3f

Adam Smith (1723-1790)

Jeremy Bentham (1748-1832)


Financial crises 3a can they be prevented 3f

“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


Financial crises 3a can they be prevented 3f

“…debt forgiveness is not in our vocabulary. But we can help them by giving them additional loans.”Senior executive, ADB


John whipple

John Whipple


John whipple 1836 in the importance of usury laws

"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”


Financial crises 3a can they be prevented 3f

Wow….


Financial crises 3a can they be prevented 3f

"…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


Financial crises 3a can they be prevented 3f

Crash!


Financial crises 3a can they be prevented 3f

Innocent victims


Financial crises 3a can they be prevented 3f

Another victim of financial `accident’?


Tulips mania crisis 1637

Tulips Mania Crisis 1637


London in 1720

London in 1720


South sea

South Sea…


Financial crises 3a can they be prevented 3f

Crisis….


Overend gurney co

Overend, Gurney & Co


City of glasgow bank

City of Glasgow Bank


Financial crises in the us too

Financial crises in the US, too


Financial crises 3a can they be prevented 3f

Bond Certificate


Financial crises 3a can they be prevented 3f

US Stock Market Crash 1929


The great depression

The Great Depression


Financial crises 3a can they be prevented 3f

World War II expenditures moved the US economy again


Stock market boom

Stock market boom

Roaring 1980s


Leveraging

Leveraging!

Or `borrowing’


Financial crises 3a can they be prevented 3f

Franco Modigliani

Merton Miller


1980s leverage buyouts mergers takeovers and junk bonds

1980sLeverage buyouts, mergers, takeovers and junk bonds


Crash usd500 billion gone

Crash! USD500 billion gone!


Financial crises 3a can they be prevented 3f

Savings and Loan Scandal/Crisis


Financial crises 3a can they be prevented 3f

Savings and Loan Scandal/Crisis


Other financial crises

Other Financial Crises

  • Long Term Capital Management 1998

  • Russian currency crisis

  • Mexican financial crises 1982; 1994-95

  • Brazilian Financial crisis 1999

  • European financial crisis 1992

  • Iceland financial crisis 2008

  • Etc., etc., etc….


Deregulation

Deregulation?


But still failed to prevent occurrences of crisis after 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

Repeal of 1933 Glass-Steagall Act and Bank Holding Act in 1999


Before heroes of deregulation growth

Before: Heroes of Deregulation & Growth

Robert Rubin – Former Treasury Secretary

Sanford Weill - Citibank

Alan Greenspan – Former Fed Chairman


After culprits of the crisis

After: Culprits of the Crisis


Dr zeti

Dr Zeti


Derivatives cdo s cds s

Derivatives? CDOS? CDSS?


Cds credit debt swap us 62 trillion at the end of 2007

CDS (credit debt swap)US$62 trillion at the end of 2007


Derivatives is outcome of dynamic and developed financial markets

Derivatives is outcome of dynamic and developed financial markets!


Abandonment of gold standard

Abandonment of Gold Standard?


Gold standard abandoned completely in 1971 nixon vietnam war

Gold standard abandoned completely in 1971 Nixon Vietnam War


Growth of financial industry require abandonment of gold standard

Growth of financial industry require abandonment of Gold standard


Financial crises 3a can they be prevented 3f

Gold Standard will constrain growth of finance industry


Financial crises 3a can they be prevented 3f

Optimistic Risk-taker?


Financial crises 3a can they be prevented 3f

Buddies now…


Financial crises 3a can they be prevented 3f

“Perception of greed as being responsible for the current financial crisis is a misplaced perception.”Prof. Barry EichengreenU of California, Berkeley


Financial crises 3a can they be prevented 3f

Heroes now…..

Nazir Razak, CIMB

Amirsham, Ex-CEO of Maybank

If there is a crisis….. greedy villains?


Before admired

Before – “Admired”

John Meriwether, LTCM

Chuck Prince, Citigroup

Dick Fuld, Lehman Bros.

After – “Greedy”


Financial crises 3a can they be prevented 3f

Clear Cases of Greed

Nick Leeson – Baring Bank

Jeff Skilling - Enron


Financial crises 3a can they be prevented 3f

“It's so difficult to pinpoint one person or two people…It really was the whole system”ReenaAggarwal, Professor of Finance, Georgetown University


Findings of study by c reinhart k roggof

Findings of Study by C. Reinhart & K. Roggof

  • asset prices

  • real economic growth

  • and public debt


Financial crises 3a can they be prevented 3f

Charles P. Kindleberger

Ford International Professor of Economics at MIT


Over trading

`over-trading’


Financial distress

`Financial Distress’


Confidence

`confidence’


Financial crises 3a can they be prevented 3f

“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

At their core, financial crises are problems of over-leveraging, over-lending and over-borrowing


Financial crises 3a can they be prevented 3f

sadly, the problems are not going to go away as long as the financial industry is legally part of our life.


Andy serwer the managing editor of fortune magazine

"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


Financial crises 3a can they be prevented 3f

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.


Thank you

THANK YOU


Financial crises

Financial Crises

over-lending

over-borrowing

integral to the industry itself


Problems are not going to go away

Problems are not going to go away…

My Central Proposition:


As long as financial industry exists

…as long as financial industry exists.


Asian financial crisis worse than tsunami

Asian financial crisis worse than tsunami …

Asian Development Bank


Here we go again

Here we go again…


Popped

Popped!


When lending for profit became a legitimate industry

When lending (for profit) became a legitimate industry


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