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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?


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




Presentation outline
Presentation Outline

Reasons for concern

Different types of financial crises

History of finance industry

Central argument

Conclusion


….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… over-lending and over-borrowing and are thus integral to the industry itself.


Compared to the asian tsunami
…compared over-lending and over-borrowing and are thus integral to the industry itself. to the Asian Tsunami !


Us sub prime crisis
US Sub-prime crisis… over-lending and over-borrowing and are thus integral to the industry itself.


Impact in all corners of the world
… impact in all corners of the world over-lending and over-borrowing and are thus integral to the industry itself.


We are victims of the Jews …. over-lending and over-borrowing and are thus integral to the industry itself.


Honest it wasn t me
Honest, it wasn’t me… over-lending and over-borrowing and are thus integral to the industry itself.


Financial crisis
Financial Crisis over-lending and over-borrowing and are thus integral to the industry itself.

“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


Economics Crisis over-lending and over-borrowing and are thus integral to the industry itself.

Financial crisis


Other causes of economics crises
Other Causes over-lending and over-borrowing and are thus integral to the industry itself. of Economics Crises

  • Wars

  • Earthquakes

  • Floods

  • Draughts

  • Plagues


Types of financial crises
Types of Financial over-lending and over-borrowing and are thus integral to the industry itself. Crises

  • Currency crisis

  • Banking crisis

  • Market crashes


Asian financial crisis
Asian Financial Crisis over-lending and over-borrowing and are thus integral to the industry itself.


Overinvestment in real estate
Overinvestment in Real Estate over-lending and over-borrowing and are thus integral to the industry itself.


Asian financial crisis1
Asian Financial Crisis over-lending and over-borrowing and are thus integral to the industry itself.


Inflow of foreign funds prior to crisis
Inflow of foreign funds prior to crisis over-lending and over-borrowing and are thus integral to the industry itself.


Bank run
Bank Run over-lending and over-borrowing and are thus integral to the industry itself.


Source: Worldbank over-lending and over-borrowing and are thus integral to the industry itself.


Argentina
Argentina over-lending and over-borrowing and are thus integral to the industry itself.

  • Fiscal indiscipline

  • Public debt:

    • 1983 USD46 billion

    • 1989 USD65 billion

    • 1999 USD130 billion

  • Trade deficit

  • Bank run


Argentina riots
Argentina riots… over-lending and over-borrowing and are thus integral to the industry itself.

Sorry, you cannot withdraw any money today…


Open up the bank! We want our money back…. over-lending and over-borrowing and are thus integral to the industry itself.


Argentina foreign debt in 2007

Argentina Foreign Debt in over-lending and over-borrowing and are thus integral to the industry itself. 2007:

USD127 billion!


Market Crash over-lending and over-borrowing and are thus integral to the industry itself.


Bubble
Bubble… over-lending and over-borrowing and are thus integral to the industry itself.


Examples of market crash
Examples of Market over-lending and over-borrowing and are thus integral to the industry itself. Crash

  • Japanese property crash (1990)

  • Dot.Com crash (2000)

  • Sup-prime mortgage crash (2007)


Japanese crash a puzzle
Japanese Crash – A Puzzle? over-lending and over-borrowing and are thus integral to the industry itself.

  • Successful exporter

  • Trade surplus

  • High savings rate

  • Hardworking and skilled workforce


Japanese problem
Japanese problem over-lending and over-borrowing and are thus integral to the industry itself.

  • banks

  • over-borrowing

  • debt

  • speculation


Here is how it happened
Here is how it happened… over-lending and over-borrowing and are thus integral to the industry itself.

Savings/funds

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

….created a massive bubble… be worth more than whole of California…


Which soon burst

… which soon be worth more than whole of California…burst!


Effect of bubble burst
Effect of Bubble Burst be worth more than whole of California…

  • Trillions of yens wiped out in markets

  • Spending slowed down

  • Economy sputtered to a halt


Japanese Poorest and Weakest be worth more than whole of California…


A side of Japan that is not often seen… be worth more than whole of California…


Sub prime mortgage crisis

Low interest be worth more than whole of California…

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 be worth more than whole of California…

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 % be worth more than whole of California…


20 of total economic output used to pay interest

… 20% of total economic output used to pay interest be worth more than whole of California…


Sub prime mortgage crisis cont1
Sub-prime Mortgage Crisis (cont.) be worth more than whole of California…

Housing

prices

skyrocketed

Interest

rates

rose

CRASH!

Borrowers

go bust


Sub prime mortgage crisis cont2

Lenders be worth more than whole of California…

go bust

Credit

Crunch

Global

Recession?

Sub-prime Mortgage Crisis (cont.)


All in serious trouble
All in Serious Trouble… be worth more than whole of California…


How serious is current crisis
How serious is current crisis? be worth more than whole of California…

  • 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 be worth more than whole of California…




If bailout plan does not work global recession
If bailout plan does not work… than USD10 trillion Global Recession…




600 years ago

600 years ago… than USD10 trillion



Human History of 2 million yrs than USD10 trillion

no finance industry

16th century




Ancient philosophers against usury
Ancient Philosophers against Usury and Hindus

Cato the Elder

Aristotle


"...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






“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 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”

  • 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 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”


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) 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.”


John calvin 1509 1564
John Calvin (1509-1564) 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.”


Adam Smith (1723-1790) 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.”

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


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


John whipple
John Whipple help them by giving them additional loans.”


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”


Wow…. 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."  


"…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


Crash! 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....“


Innocent victims 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....“


Another victim of financial `accident’? 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....“


Tulips mania crisis 1637
Tulips Mania Crisis 1637 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....“


London in 1720
London in 1720 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....“


South sea
South Sea… 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....“


Crisis…. 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....“


Overend gurney co
Overend, Gurney & Co 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....“


City of glasgow bank
City of Glasgow Bank 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....“


Financial crises in the us too
Financial crises in the US, too 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....“


Bond Certificate 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....“


US Stock Market Crash 1929 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....“


The great depression
The Great Depression 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....“


World War II expenditures moved the US economy again 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....“


Stock market boom

Stock market boom 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....“

Roaring 1980s


Leveraging

Leveraging 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....“!

Or `borrowing’


Franco Modigliani 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....“

Merton Miller


1980s leverage buyouts mergers takeovers and junk bonds
1980s 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....“Leverage buyouts, mergers, takeovers and junk bonds


Crash usd500 billion gone
Crash! USD500 billion gone! 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....“


Savings and Loan Scandal/Crisis 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....“


Savings and Loan Scandal/Crisis 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....“


Other financial crises
Other Financial Crises 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....“

  • 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? 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....“


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- crisis… Steagall Act and Bank Holding Act in 1999


Before heroes of deregulation growth
Before: Heroes of Deregulation & Growth crisis…

Robert Rubin – Former Treasury Secretary

Sanford Weill - Citibank

Alan Greenspan – Former Fed Chairman



Dr zeti
Dr crisis… Zeti


Derivatives cdo s cds s

Derivatives? crisis… CDOS? CDSS?


Cds credit debt swap us 62 trillion at the end of 2007
CDS (credit debt swap) crisis… US$62 trillion at the end of 2007








Buddies now… standard


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


Heroes now….. financial crisis is a misplaced perception.”

Nazir Razak, CIMB

Amirsham, Ex-CEO of Maybank

If there is a crisis….. greedy villains?


Before admired
Before – “Admired” financial crisis is a misplaced perception.”

John Meriwether, LTCM

Chuck Prince, Citigroup

Dick Fuld, Lehman Bros.

After – “Greedy”


Clear Cases of Greed financial crisis is a misplaced perception.”

Nick Leeson – Baring Bank

Jeff Skilling - Enron


“It's financial crisis is a misplaced perception.”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 financial crisis is a misplaced perception.”

  • asset prices

  • real economic growth

  • and public debt


Charles P. Kindleberger financial crisis is a misplaced perception.”

Ford International Professor of Economics at MIT


Over trading

`over-trading’ financial crisis is a misplaced perception.”


Financial distress

`Financial Distress’ financial crisis is a misplaced perception.”


Confidence

`confidence’ financial crisis is a misplaced perception.”


“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


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


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 off the reckoning to a later date and to a later generation of citizens


Financial crises
Financial Crises off the reckoning to a later date and to a later generation of citizens

over-lending

over-borrowing

integral to the industry itself


Problems are not going to go away

Problems are not going to go away… off the reckoning to a later date and to a later generation of citizens

My Central Proposition:


As long as financial industry exists
…as long as financial industry exists. off the reckoning to a later date and to a later generation of citizens


Asian financial crisis worse than tsunami

Asian financial crisis worse than tsunami … off the reckoning to a later date and to a later generation of citizens

Asian Development Bank


Here we go again
Here we go again… off the reckoning to a later date and to a later generation of citizens


Popped
Popped! off the reckoning to a later date and to a later generation of citizens


When lending for profit became a legitimate industry

When lending (for profit) became off the reckoning to a later date and to a later generation of citizensa legitimate industry


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