Prof mohd nazari ismail faculty of business and accounting university of malaya
Download
1 / 151

Financial Crises: Can They Be Prevented? - PowerPoint PPT Presentation


  • 106 Views
  • Uploaded on
  • Presentation posted in: General

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.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha

Download Presentation

Financial Crises: Can They Be Prevented?

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


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 GreenspanChairman of US Federal Reserve Board, 1987-2006


Prof. Jeffrey SachsDirector Earth Institute, Columbia University


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

Massachusetts Institute of Technology


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


I don’t have a clue too…


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…


…compared to the Asian Tsunami !


US Sub-prime crisis…


… impact in all corners of the world


We are victims of the Jews ….


Honest, it wasn’t me…


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


Economics Crisis

Financial crisis


Other Causes of Economics Crises

  • Wars

  • Earthquakes

  • Floods

  • Draughts

  • Plagues


Types of Financial Crises

  • Currency crisis

  • Banking crisis

  • Market crashes


Asian Financial Crisis


Overinvestment in Real Estate


Asian Financial Crisis


Inflow of foreign funds prior to crisis


Bank Run


Source: Worldbank


Argentina

  • Fiscal indiscipline

  • Public debt:

    • 1983 USD46 billion

    • 1989 USD65 billion

    • 1999 USD130 billion

  • Trade deficit

  • Bank run


Argentina riots…

Sorry, you cannot withdraw any money today…


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


Argentina Foreign Debt in 2007:

USD127 billion!


Market Crash


Bubble…


Examples of Market Crash

  • Japanese property crash (1990)

  • Dot.Com crash (2000)

  • Sup-prime mortgage crash (2007)


Japanese Crash – A Puzzle?

  • Successful exporter

  • Trade surplus

  • High savings rate

  • Hardworking and skilled workforce


Japanese problem

  • banks

  • over-borrowing

  • debt

  • speculation


Here is how it happened…

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…


… which soon burst!


Effect of Bubble Burst

  • Trillions of yens wiped out in markets

  • Spending slowed down

  • Economy sputtered to a halt


Japanese Poorest and Weakest


A side of Japan that is not often seen…


Low interest

rates, excess

liquidity

in 1990s

Banks lent

to

Sub-prime

borrowers

Housing

boom

CDOs act

as booster

Sub-prime Mortgage Crisis


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 %


… 20% of total economic output used to pay interest


Sub-prime Mortgage Crisis (cont.)

Housing

prices

skyrocketed

Interest

rates

rose

CRASH!

Borrowers

go bust


Lenders

go bust

Credit

Crunch

Global

Recession?

Sub-prime Mortgage Crisis (cont.)


All in Serious Trouble…


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


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


If bailout plan does not work… Global Recession…


starvations, homelessness, chaos…


Financial crises… how and when did they all start?


600 years ago…


Human existence started 2 million years ago…


Human History of 2 million yrs

no finance industry

16th century


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.

USURY


Ancient Philosophers against Usury

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


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


Judaism forbids it (if practiced among fellow Jews)

USURY


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


The medieval Christian church condemned it

USURY


“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

  • 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


“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.”

(Quraan 2:276)

USURY in Islam


John Eck (1486-1543)


John Calvin (1509-1564)


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


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


John Whipple


"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….


"…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!


Innocent victims


Another victim of financial `accident’?


Tulips Mania Crisis 1637


London in 1720


South Sea…


Crisis….


Overend, Gurney & Co


City of Glasgow Bank


Financial crises in the US, too


Bond Certificate


US Stock Market Crash 1929


The Great Depression


World War II expenditures moved the US economy again


Stock market boom

Roaring 1980s


Leveraging!

Or `borrowing’


Franco Modigliani

Merton Miller


1980sLeverage buyouts, mergers, takeovers and junk bonds


Crash! USD500 billion gone!


Savings and Loan Scandal/Crisis


Savings and Loan Scandal/Crisis


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?


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


Before: Heroes of Deregulation & Growth

Robert Rubin – Former Treasury Secretary

Sanford Weill - Citibank

Alan Greenspan – Former Fed Chairman


After: Culprits of the Crisis


Dr Zeti


Derivatives? CDOS? CDSS?


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


Derivatives is outcome of dynamic and developed financial markets!


Abandonment of Gold Standard?


Gold standard abandoned completely in 1971 Nixon Vietnam War


Growth of financial industry require abandonment of Gold standard


Gold Standard will constrain growth of finance industry


Optimistic Risk-taker?


Buddies now…


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


Heroes now…..

Nazir Razak, CIMB

Amirsham, Ex-CEO of Maybank

If there is a crisis….. greedy villains?


Before – “Admired”

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


Findings of Study by C. Reinhart & K. Roggof

  • asset prices

  • real economic growth

  • and public debt


Charles P. Kindleberger

Ford International Professor of Economics at MIT


`over-trading’


`Financial Distress’


`confidence’


“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


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


"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


Financial Crises

over-lending

over-borrowing

integral to the industry itself


Problems are not going to go away…

My Central Proposition:


…as long as financial industry exists.


Asian financial crisis worse than tsunami …

Asian Development Bank


Here we go again…


Popped!


When lending (for profit) became a legitimate industry


ad
  • Login