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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?

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

slide9
….financial crises at their core are outcomes of over-lending and over-borrowing and are thus integral to the industry itself.

CENTRAL ARGUMENT

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

slide17
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
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…

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

?

slide36
land surrounding the Imperial Palace in Tokyo estimated to be worth more than whole of California…
effect of bubble burst
Effect of Bubble Burst
  • Trillions of yens wiped out in markets
  • Spending slowed down
  • Economy sputtered to a halt
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.)
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.)
how serious is current crisis
How serious is current crisis?
  • USD16.3 trillion wiped out
  • deep and prolonged recession
  • Major economies slowing down
slide59
Human History of 2 million yrs

no finance industry

16th century

ancient philosophers against usury
Ancient Philosophers against Usury

Cato the Elder

Aristotle

slide63
"...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
slide68
“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
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

slide75
Adam Smith (1723-1790)

Jeremy Bentham (1748-1832)

slide76
“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
slide77
“…debt forgiveness is not in our vocabulary. But we can help them by giving them additional loans.”Senior executive, ADB
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”

slide81
"…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
leveraging

Leveraging!

Or `borrowing’

slide101
Franco Modigliani

Merton Miller

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….
before heroes of deregulation growth
Before: Heroes of Deregulation & Growth

Robert Rubin – Former Treasury Secretary

Sanford Weill - Citibank

Alan Greenspan – Former Fed Chairman

slide125
“Perception of greed as being responsible for the current financial crisis is a misplaced perception.”Prof. Barry EichengreenU of California, Berkeley
slide126
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”

slide128
Clear Cases of Greed

Nick Leeson – Baring Bank

Jeff Skilling - Enron

slide129
“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
slide131
Charles P. Kindleberger

Ford International Professor of Economics at MIT

slide138
“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

slide140
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

slide142

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
Financial Crises

over-lending

over-borrowing

integral to the industry itself

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