Recently I finished the book "Manias, Panics and Crashes" by Charles P. Kindleberger.
A bit out of the league for me. Half of what he says I don't understand, and he analyse each crisis as if the reader already has some background knowledge(which I don't).
Nonetheless, there is a particular piece that caught my attention regarding the economics of a free market.
"...individual actors all act rationally but in combination produce an irrational result, such as standing to get a better view as spectators of sport, or, more dramatically, running for the exit in a theater fire."
Quite interesting. Seems to be in direct contrast to the invisible hand at work.
Minsky was also introduced, with the theory that crises are always caused by an external event.
Another point is that easy credit is almost always a precursoer to crises. Which is what is happening now.
Speaking of irrationality, I really have no idea why the STI and Nikkei rose so dramatically just because it is the start of the (Chinese) new year. I mean, over the festive period, more and more bad news on unemployment, export figures and retrenchment are bubbling up yet stocks climbed rapidly when the market opened.
I dunno, perhaps it's due to orders that are not executed before the market closed on the previous working day? Or maybe too many people placed orders over the weekend when they thought the market at the close seemed to be attractively priced.
Saturday, January 31, 2009
Saturday, January 24, 2009
Lending
From Mr Wang:
"...What does this mean? Well, in a nutshell, Ecuador doesn't have much money. We know why. Ecuador sells oil, and oil prices have collapsed, so Ecuador is broke. So Ecuador decided not to pay its creditors.
Next, you need to find a reason not to pay. So you set up an official presidential commission and have it recommend that Ecuador should refuse to pay interest on USD $4 billion of its debt. Need some moral justification? Well, just accuse the banks of making irresponsible profits out of these deals. But didn't Ecuador's own government approve of these deals in the first place? Oh. Well then, let's just choose a few government officials and make accusations against them too. Simple as that.
So in the past few months, this is the repeating story of my working life. As mentioned earlier, I'm not involved in the Ecuador matter at all, but I am looking at many cases where the client is broadly just doing the same thing - in other words, anything and everything it can to try to wriggle out of a deal gone bad. That includes employing tactics which are dishonest and unethical, and sometimes frivolous to the point of being baffling."
From Manias, Panics and Crashes (after it was revealed that an employee, Yasuo Hamanaka, of Sumitomo Corporation lost $2.6 billion in copper derivatives trading instead of the $1.8 billion reported):
"On June 3, 1999, it[Sumitomo Corporation] announced suits against the Union Bank of Switzerland for $230 million and the Chase Manhattan Bank for $532 million, having already sued J.P. Morgan & Company. The suits against Chase Manhattan and Morgan were for almost $1 billion and for lending to Hamanaka when they knew he lacked the authority to commit the company"
I understand the rationale for the such laws, to make banks more accountable in their risk assessment and lending practices. Yet, I still feel it to be quite disturbing that not only does the lender has to run the risk of default by lending capital to you, he also has to take the risk that he may get sued for lending the capital to you.
Whenever a scandal or crisis erupts(like now), you, as the lender, may very well suffer a double whammy. Not only will you fail to recoup the loan, you may even stand to lose more as companies slap you with lawsuits. The borrower, on the other hand, may default on his loan, and at the same time, win money from the lawsuits.
Disturbing.
"...What does this mean? Well, in a nutshell, Ecuador doesn't have much money. We know why. Ecuador sells oil, and oil prices have collapsed, so Ecuador is broke. So Ecuador decided not to pay its creditors.
Next, you need to find a reason not to pay. So you set up an official presidential commission and have it recommend that Ecuador should refuse to pay interest on USD $4 billion of its debt. Need some moral justification? Well, just accuse the banks of making irresponsible profits out of these deals. But didn't Ecuador's own government approve of these deals in the first place? Oh. Well then, let's just choose a few government officials and make accusations against them too. Simple as that.
So in the past few months, this is the repeating story of my working life. As mentioned earlier, I'm not involved in the Ecuador matter at all, but I am looking at many cases where the client is broadly just doing the same thing - in other words, anything and everything it can to try to wriggle out of a deal gone bad. That includes employing tactics which are dishonest and unethical, and sometimes frivolous to the point of being baffling."
From Manias, Panics and Crashes (after it was revealed that an employee, Yasuo Hamanaka, of Sumitomo Corporation lost $2.6 billion in copper derivatives trading instead of the $1.8 billion reported):
"On June 3, 1999, it[Sumitomo Corporation] announced suits against the Union Bank of Switzerland for $230 million and the Chase Manhattan Bank for $532 million, having already sued J.P. Morgan & Company. The suits against Chase Manhattan and Morgan were for almost $1 billion and for lending to Hamanaka when they knew he lacked the authority to commit the company"
I understand the rationale for the such laws, to make banks more accountable in their risk assessment and lending practices. Yet, I still feel it to be quite disturbing that not only does the lender has to run the risk of default by lending capital to you, he also has to take the risk that he may get sued for lending the capital to you.
Whenever a scandal or crisis erupts(like now), you, as the lender, may very well suffer a double whammy. Not only will you fail to recoup the loan, you may even stand to lose more as companies slap you with lawsuits. The borrower, on the other hand, may default on his loan, and at the same time, win money from the lawsuits.
Disturbing.
Tweaking the Statistics
I've been thinking about our Budget
"We start from a position of low unemployment, the lowest in Asia
last year. The resident unemployment rate was 3.3% in September. However,
given the severe economic recession, we have to expect many more jobs to
be at risk this year."--from Budget Speech 09
"IN what an expert called a “doomsday prediction”, two economists say Singapore may lose 300,000 jobs by next year, of which two-thirds would belong to foreigners."--Today, Wed, Jan 21, 09
"...an Employment Pass is tied to a specific employer. If the expat loses his job, the EP becomes invalid and the expat has to leave Singapore more or less immediately (7 days, to be precise). His family has to leave with him too."--Mr Wang
When you add all these excerpts together, looks like the government will still have something to show despite the financial crisis. At least, unemployment rate should not rise too high. In the first place, if, like what the analysts at Credit Suisse forecast, most jobs will be lost by foreigners, who, like what Mr Wang notes, "has t leave Singapore more or less immediately" once they lose their jobs, the unemployment rate should remain more or less constant. The Budget will further ensure this by subsidizing the wages of local employees, thus preventing loss of jobs by Singaporeans.
Not to run down the Budget or anything but if December's headline should read--"Unemployment rate remains low despite economic downturn.", AND the media once again spin it as another great accomplishment by our elite government, it is probably due to the change in statistics. Statistically, unemployment rate may get affected less, when retrenched personnel are immediately packaged out of the country. But one point to take note is that the low unemployment rate means Singaporean workers have been able to retain their jobs, which means that the Budget has worked, to the government's credit. It does not mean that we will have the same number of jobs then as we have now, and that from now until then, few people have lost their jobs.
Unemployment rate as an indicator of economy should thus be taken with a pinch of salt. Performance of the economy by looking at the GDP and net exports should be of more relevance when considering how Singapore as a whole has fared through the crisis.
"We start from a position of low unemployment, the lowest in Asia
last year. The resident unemployment rate was 3.3% in September. However,
given the severe economic recession, we have to expect many more jobs to
be at risk this year."--from Budget Speech 09
"IN what an expert called a “doomsday prediction”, two economists say Singapore may lose 300,000 jobs by next year, of which two-thirds would belong to foreigners."--Today, Wed, Jan 21, 09
"...an Employment Pass is tied to a specific employer. If the expat loses his job, the EP becomes invalid and the expat has to leave Singapore more or less immediately (7 days, to be precise). His family has to leave with him too."--Mr Wang
When you add all these excerpts together, looks like the government will still have something to show despite the financial crisis. At least, unemployment rate should not rise too high. In the first place, if, like what the analysts at Credit Suisse forecast, most jobs will be lost by foreigners, who, like what Mr Wang notes, "has t leave Singapore more or less immediately" once they lose their jobs, the unemployment rate should remain more or less constant. The Budget will further ensure this by subsidizing the wages of local employees, thus preventing loss of jobs by Singaporeans.
Not to run down the Budget or anything but if December's headline should read--"Unemployment rate remains low despite economic downturn.", AND the media once again spin it as another great accomplishment by our elite government, it is probably due to the change in statistics. Statistically, unemployment rate may get affected less, when retrenched personnel are immediately packaged out of the country. But one point to take note is that the low unemployment rate means Singaporean workers have been able to retain their jobs, which means that the Budget has worked, to the government's credit. It does not mean that we will have the same number of jobs then as we have now, and that from now until then, few people have lost their jobs.
Unemployment rate as an indicator of economy should thus be taken with a pinch of salt. Performance of the economy by looking at the GDP and net exports should be of more relevance when considering how Singapore as a whole has fared through the crisis.
Friday, January 23, 2009
Misled
Found this video on George Soros, back in 2006 via Diary of a Singapore Mind
The last part of what he says is quite interesting. About how we don't care whether we are being misled...we just care about success. I think that applies to a lot of things in life.
The last part of what he says is quite interesting. About how we don't care whether we are being misled...we just care about success. I think that applies to a lot of things in life.
Keeping Consumption Down and Picking Winners
From WSJ, Jan 22, 2009
Two points.
1) "Consumption composes only about 40% of GDP -- far less than other developed Asian economies, nearer to 55%."
very true. and what's more,
"Singaporean workers and businesses invest a total of 34.5% of wages into the state pension fund, but receive less than a 2% return from the government. That's a measly payout compared to what private funds return over long investment periods. "
2)"...the city-state's bureaucrats have a habit of trying to pick winners, which sometimes works and sometimes doesn't. In recent years the bets have been on financial services, biotechnology and gambling."
On financial services, perhaps Sg might succeed, because of its tough secrecy laws and relatively stable political climate. Tax haven, ya know?
On biotech, my take is that the local foundation is not strong enough. We rely too much on foreign talent, who can simply pack up and leave for greener pastures when opportunity arrives. Can we sustain this front purely with our locals? (No offence to locals, but in stuff like biotech which requires plenty research, it is always good to have the experience. I just don't think we have built up that kind of experience in our local environment yet.)
On gambling, I kind of doubt that it would take off and be the wild success that everyone is hoping for. Our Marina Bay Sands Resort is set to open this year, likely in the middle of recession. Are there still going to be big gamblers when so many of the rich are already licking their wounds in the aftermath of the financial crisis? The IR may not be another Crazy Horse, but it may very well not turn out to be a money-spinning machine either.
Singapore's Limits
It's time to rethink the corporatist model.
It's not often that a Singaporean official concedes the limits of the city-state's economic engineering. But the downturn is proving so severe that the Finance Minister said in yesterday's budget speech that the government's stimulus package "will not get us out of the recession," but rather "help avert an even sharper downturn."
That ought to be a wake-up call for Singapore, where government built a modern metropolis by hoarding its citizens' capital, plowing those savings into designated industries and opening itself up to foreign trade. Yesterday's S$20.5 billion ($13.7 billion) package -- a whopping 8% of GDP -- looks like past stimulus plans: a broad mix of supply-side measures to help businesses, public-sector spending and cash handouts to stave off social discontent. What it doesn't acknowledge is that Singapore's growth model itself needs rethinking.
The export-led economy is falling on its face. Minister Tharman Shanmugaratnam predicts the city-state is "likely to experience" the deepest recession in its history. The government will tap its reserves to help pay for the stimulus package. Growth contracted 16.9% in the fourth quarter last year. The Ministry of Trade and Industry has revised down GDP forecasts twice this month already, and expects the city-state's growth to contract 2% to 5% this year. The pain is now leaking into the domestic economy as consumers retrench.
Singapore's economy would be more resilient if it were better balanced. Consumption composes only about 40% of GDP -- far less than other developed Asian economies, nearer to 55%. Yesterday's budget doesn't do much to change long-term incentives to consume. The government announced a 20% income-tax rebate for one year, but no permanent cuts. Nor did it cut the 7% goods and services tax. Singaporean workers and businesses invest a total of 34.5% of wages into the state pension fund, but receive less than a 2% return from the government. That's a measly payout compared to what private funds return over long investment periods.
The government could unleash more productive, sustainable growth by trimming back its public sector and allowing the economy to diversify on its own. Cutting the corporate tax to 17% from 18%, as it announced yesterday, will help attract investment. But the city-state's bureaucrats have a habit of trying to pick winners, which sometimes works and sometimes doesn't. In recent years the bets have been on financial services, biotechnology and gambling. Yesterday's budget contained special tax incentives for the fund-management industry. Better to let private actors make those decisions based on market forces.
Mr. Tharman said yesterday that "no one knows how prolonged or deep this recession is going to be" and he pledged further measures to help if needed. The best help for Singaporeans would be expanded, permanent opportunities to work, save and invest with more of their own money, rather than relying on government to do it for them.
Two points.
1) "Consumption composes only about 40% of GDP -- far less than other developed Asian economies, nearer to 55%."
very true. and what's more,
"Singaporean workers and businesses invest a total of 34.5% of wages into the state pension fund, but receive less than a 2% return from the government. That's a measly payout compared to what private funds return over long investment periods. "
2)"...the city-state's bureaucrats have a habit of trying to pick winners, which sometimes works and sometimes doesn't. In recent years the bets have been on financial services, biotechnology and gambling."
On financial services, perhaps Sg might succeed, because of its tough secrecy laws and relatively stable political climate. Tax haven, ya know?
On biotech, my take is that the local foundation is not strong enough. We rely too much on foreign talent, who can simply pack up and leave for greener pastures when opportunity arrives. Can we sustain this front purely with our locals? (No offence to locals, but in stuff like biotech which requires plenty research, it is always good to have the experience. I just don't think we have built up that kind of experience in our local environment yet.)
On gambling, I kind of doubt that it would take off and be the wild success that everyone is hoping for. Our Marina Bay Sands Resort is set to open this year, likely in the middle of recession. Are there still going to be big gamblers when so many of the rich are already licking their wounds in the aftermath of the financial crisis? The IR may not be another Crazy Horse, but it may very well not turn out to be a money-spinning machine either.
Friday, January 2, 2009
Creative Destruction
I just read this article from wayangparty, criticizing our local media with its biased nation-building agenda. Basically, writer Eugene Yeo accused journalist Chua Mui Hoong of once again writing a feel-good article with entirely baseless conclusions. In effect, it is just a piece of propaganda and just serves to show how deplorable the state of media is in Singapore.
Well, I've never read the original Straits Times article, but it appears that Chua Mui Hoong claimed that “the traits that helped it(Singapore) get to where it is today are precisely the same traits that will get it back on a firm footing in the current crisis.”
Eugene Yeo begs to differ, saying "The traits of our parents and grandfathers which propel Singapore from a Third to First World country today - namely thrift, industriousness, stoicism and tenacity to endure hardships are not reproducible in a younger generation brought up in the midst of material comfort."
My take is that even if we have the traits of our parents and grandparents, it is still not enough to emerge from this financial crisis stronger than ever. Okay, maybe with those traits we can pull through this, but to pull ahead of our competitors?
The main reason is because this time, it is the global economy in crisis. We simply cannot export ourselves out of the crisis when worldwide demand for our products have taken a significant slump. Even if we have "thriftness, industriousness, stoicism and tenacity", willing to work hard and accept low wages, it merely results in perhaps our exports being cheaper. It might help, but not much. It certainly would not place us in a leading position once the global economy starts to recover.
I feel the most important trait to place us in a good position to ride out the crisis would be creativity. Those of us who did economics will be familiar(or at least heard of) Joseph Schumpeter's Creative Destruction principle. To borrow a phrase from Sudden Debt, during a recession "the response should have been a strong flow of investment in new industries (creation) to replace those damaged by the downturn (destruction)".
This can only be done when there are entrepreneurs abound in the economy. I have already listed my views on the state of entrepreneurship in Singapore. This crisis will prove Singapore's entrepreneurial environment once and for all. If creativity really does thrive in Singapore, new innovative businesses will be set up amidst all the gloom and doom and will strengthen Singapore's standing in the international arena once we have ridden out the crisis.
Well, I've never read the original Straits Times article, but it appears that Chua Mui Hoong claimed that “the traits that helped it(Singapore) get to where it is today are precisely the same traits that will get it back on a firm footing in the current crisis.”
Eugene Yeo begs to differ, saying "The traits of our parents and grandfathers which propel Singapore from a Third to First World country today - namely thrift, industriousness, stoicism and tenacity to endure hardships are not reproducible in a younger generation brought up in the midst of material comfort."
My take is that even if we have the traits of our parents and grandparents, it is still not enough to emerge from this financial crisis stronger than ever. Okay, maybe with those traits we can pull through this, but to pull ahead of our competitors?
The main reason is because this time, it is the global economy in crisis. We simply cannot export ourselves out of the crisis when worldwide demand for our products have taken a significant slump. Even if we have "thriftness, industriousness, stoicism and tenacity", willing to work hard and accept low wages, it merely results in perhaps our exports being cheaper. It might help, but not much. It certainly would not place us in a leading position once the global economy starts to recover.
I feel the most important trait to place us in a good position to ride out the crisis would be creativity. Those of us who did economics will be familiar(or at least heard of) Joseph Schumpeter's Creative Destruction principle. To borrow a phrase from Sudden Debt, during a recession "the response should have been a strong flow of investment in new industries (creation) to replace those damaged by the downturn (destruction)".
This can only be done when there are entrepreneurs abound in the economy. I have already listed my views on the state of entrepreneurship in Singapore. This crisis will prove Singapore's entrepreneurial environment once and for all. If creativity really does thrive in Singapore, new innovative businesses will be set up amidst all the gloom and doom and will strengthen Singapore's standing in the international arena once we have ridden out the crisis.
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