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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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Financial Crises: Can They Be Prevented?

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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 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


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


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


  • 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


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…


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


in 1990s

Banks lent






CDOs act

as booster

Sub-prime Mortgage Crisis









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.)









go bust


go bust





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.


Ancient Philosophers against Usury

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

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

Judaism forbids it (if practiced among fellow Jews)


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

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

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”


"…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


Innocent victims

Another victim of financial `accident’?

Tulips Mania Crisis 1637

London in 1720

South Sea…


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


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….


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


`Financial Distress’


“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.


Financial Crises



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…


When lending (for profit) became a legitimate industry

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