Saturday, March 08, 2008

Asian Crisis vs Subprime Crisis ...

It looks like a simple question to answer : How long and how serious is the US recession? But if you have been watching CNBC, you will realise that the views on where the US economy is headed are diverse. You can find economists who believe the US will avoid a recession and economists who think that this is the worst recession since the Great Depression. After hearing many contradictory views from economists with Phds, you start to think of them as highly paid fortune tellers.....

Two crisis 10 years apart on opposite sides of the Pacific Ocean. While you sitting comfortably in your HDB flat whining about those price increases, several million Americans are on the verge of losing their homes and many are losing their jobs. Their currency is getting walloped and banks are in trouble. About 10 years ago, Asians faced a similar situation during the Asian crisis. I went through it and it was a terrifying but unforgetable experience.

The Asian crisis started with the collapse of the Thai Baht and turned into a worldwide meltdown. It is extremely difficult to figure how a crisis will spread and when it will stop. A large part of it depends on confidence of investors and the actions of central banks to stem the crisis. Also key are the action of hedge funds who will sieze any opportunity to make money from your misery. Asian currencies shorted by hedge funds and the falling currencies caused a loss in confidence which eventually led to a collapse of the stock markets in Asia. During the last stages of the Asian Crisis, hedge funds decided to pound down the Hong Kong markets. Money was systematically made by pressuring the HK$ peg and shorting the Hang Seng Index. They did that by putting pressure on the Hong Kong dollar peg against the US$, that caused the interest rates in Hong Kong to rise and the Hong Kong stock market to tank. The Hong Kong government decided to burn the speculators in by buying into their own stock market with their massive reserves. The Malaysia govt decided to implement currency controls and peg the ringgit against the US$. It was surprise interference in the free market that ended the crisis.
A few years ago Bernanke gave a speech saying the best way to halt a rapid market decline is to surprise the market. Bernanke has done it twice, once in Aug 2007 and then in Jan 2008. Each time buying him some time to fix the credit crunch. The Fed and US Treasury have actually acted quite swiftly during this crisis - rapid rate cuts, creation of TAF (Term Auction Facility) to pump liquidity, $150B stimulus package, and yesterday night expansion of the TAF to pump even more liquidity into the banks. The problem with the subprime crisis is it is spreading faster than what they are doing. The subprime crisis initially resulted in a surge in the LIBOR rates (interbank rate) as banks refused to lend to each other. With the TAF, the Fed was able to get the LIBOR rates down but the crisis started spreading to other areas. Yesterday night Thornburg Mortgage a finance company holding mostly Alt-A and AAA mortgage backed securities defaulted on its debt because it was unable to meet its margin calls. The problem is the market for even the better quality paper has disappeared and banks strained by their own balance sheet demanded more collateral from Thornburg when the Alt-A MBS started trading 70cents to $1. Most market observers agreed that Thornburg is a company that "shouldn't collapse" but the credit crunch has resulted in mispricings (?) and dislocations. Other places where the credit crunch has showed up in very safe municipal bonds which are now offering very good yields vs US treasuries.

The Fed really has a tough job going ahead - it has to fight this credit crunch at the same time the US economy is slowing and inflation worsening. The Fed has decided it is not going to win on all fronts and decided the abandon the fight against inflation first. The slowdown and credit crunch can probably be fixed with the same tools. So how is all this going to unfold? ....

1. Are we at the beginning, middle or end of this mess? I like to think we at the end of this mess but my gut feel tells me we are probably only half way through. There were many false hopes during the Asian crisis every time you think it was going to end another unforeseen problem pops up. In his Financial Times article "12 Steps to Financial Disaster" Prof Roubini outlines perhaps the worst case scenario. We are now only in step 3 or the 12 steps.

2. Is Asia decoupled from this mess? Of course we will be affected the question is how badly. Stock markets are directly affected, our exports to US will slow. The silver lining is even if the US goes into a moderate recession, India & China will continue to grow because of infrastructure spending and domestic demand. There are parts of the world like the middle east is relatively unaffected because they export very little to the rest of the world except oil and oil money fuel their economies. Our MM believes we will escape this recession:

"This economic downturn will mark the first time that when America sneezes, Asia doesn't catch a cold. Yes, Asia will be affected, but not as severely. Because China and India will not experience a recession, Japan, South Korea, Taiwan and the Asean countries will avoid it. Hence, Asian stock markets will rise from their lows of the selloff to reflect the real strength of their economies" - Lee Kuan Yew {article}

Yes sir, we are still in our Golden Years. Although I haven't seen that "strength" that MM Lee is talking about, it is going to come soon.

I spoke to some American friends recently while those in the financial sector feel totally pessimistic while those in the IT industry (Silicon Valley people) remain unaffected. I also noticed the Nasdaq is starting to fall less than the DOW - perhaps it is saying something about the tech sector. We won't know yet but keep an eye on it. The electronics sector has been in a long slumber it is either going into a coma or waking up - the downside isn't much anyway.

Investor confidence has alot to do with how this whole mess will unfold. The Asian crisis was exacerbated by a (total) loss of confidence and I think the Federal reserve undersands that if confidence is lost due to a stock market collapse or the collapse of a major bank, the US economy will have to walk the whole "12 steps of Roubini". ....we in Asia will also have to take cover and prepare for an economic winter. Right now there is time to stem the contagion. The lesson in Asian Crisis is that if more is done in the beginning the less pain we will have to go through to reach the end. It is better for the Fed & US Treasury not to be too optimistic and do as much as possible now even bailing out financial institutions and risking moral hazard to get out of this one. The people who started this subprime mess have already stepped down with their multimillion remuneration - they will not be learning the painful lessons of their greed if they go for a "no bail out" approach. My message for all of you is hope for the best and prepare for the worst - this one can get ugly.


Anonymous said...

Brilliant and well researched post.

Anonymous said...

This economic downturn will mark the first time that when America sneezes, Asia doesn't catch a cold. - MM Lee

Really? After losing S$10 billions in 3 short months through UBS, Citigroup and Merrill Lynch?

But you're probably right, MM. Singapore is no longer part of Asia but a colony of the US. Only a colony obeys to its colonial master. How else can be explain those deals?

In the meantime, Singaporeans must continue to toil harder to boost the CPF deposits so that you can use them to further prop up the American banks.

Anonymous said...

PAP is a "kiss up, kick down" government.

It uses a very strong hand on its own people but when it comes to dealing with a big brother demanding $billions from it, it is as weak as a snail.

Minister Vivian Balakrishna says in Parliament yesterday that "no one will go hungry in Singapore".

Yes this can be done with 2 meals a day for the needy. It can also be done by escalating high taxes and levies and then giving back little. Still got food to eat what.

Why cannot be done?

But if in such a so-called developed nation as Singapore, our ministers are regularly being engaged in Parliament on those basic survival issues, then you know how bright the future is for the people.

More and more young people are not marrying or are not intending to. Some explicitly tell you that it is because of the problem of economic survival in Singapore.

Others are largely acting out of a collective instinct. This will eventually turn out to be correct.

And why?

Because PAP is not looking after the people in the right way, if at all. Just escalating health care and housing costs alone are enough to trouble Singaporeans.

Anonymous said...

another cycle of 10 years to wait?

yamizi said...


these financial thingy is your professional skills or your hobby?

LuckySingaporean said...


I'm definitely not a pro so take what I said with a pinch of salt. Its just a hobby.

Anonymous said...

The real US economy is still pretty ok. A crisis of confidence can only be resolved by sensible regulation and political will.

The yankees will do ok even in an recession. But Singapore? Remember what our gahmen did during the Asian crisis?

*get ready for a painful ride*

Jan 2000: STI= 2582.94
Mar 2008: STI= 2866.28

Having said that, in Singapore, the PAP gahmen has a wonderful opportunity to solve our aging issue by creating a fund to shore up our local equity market at the curent prices. Just like the HK did in the asian crisis. If it really has been a golden era, surely the STI should be closer to say 4000 ?


Anonymous said...

When the shares of faltering US banks have reached a low enough price, the well-funded investors - including American hedges funds & banks, and SWFs - will start scooping them up.

Already the share prices of these failing banks have lost between around 20 to 40%. So how much lower can they plunge before the "smart money" go in?

This should resolve the problem of money not circulating at the higher end.

At the lower end the US govt had already passed bills to help homeowners and unemployed.

It is only the fool called PAP that went in just prior and at the height of the problem and has already lost at least S$12 billion of people's money.

Anyway, because of the subprime crisis, critics in the US are saying that one of the major causes of it is "fiat money", money not fully backed up by gold.

This is silly because which country's money is fully backed by gold? In fact many countries also have large holdings of US dollars as foreign reserves. So these many other countries' money are also in question?

Fiat money has been in use since the Great Depression and to now say it is the cause of their economic problem is wrong.

The value of the currency of a country is much like the value of a company which is not so much measured in tangible assets like what property it owns, let alone gold. Its value is more a case of its business setup or system, the transactions going on, the public goodwill it enjoys and other tangibles it has.

The US is like that, its economy is fully developed, the infrastructure is there, its technologies are advanced, there are many experts in various field, trade with other countries is not compromised, the political situation however perverted over the last 8 years is about to be set right.

The only problem is that the market sentiments are down due to the subprime issue caused by the lack of controls over the financial industry.

The US govt or rather Feb in fact has the capacity to bail out the failing banks and if I am not mistaken there is in fact a US law to ensure that their banks will never go bankrupt because they are too fundamental to the economy.

But Fed is not doing this because it is not a prudent, lucrative move, the Feb being owned by a group of private bankers.

So let SWFs come in first. And the biggest taker being GIC and Temasek combined.

China with 5 times more money was far more prudent and took up only a token stake, just to "yin zhou, yin zhou" as the Chinese might say.

RapidTrends said...

Great post and thread.

I am an American and have studied economics and the global economy up to 16 hours in a day.

I have to say from my standpoint, that if you get all of your facts from the American media you will not have a clear picture of what is going on.

They only report what they want people to know, and we all have to dig a little deeper to see what is really going on.

That being said, the US economy has alot farther to fall. Continual repercussions from last summers 'sub-prime crises' are not yet over, and we will see continued mortgage resets into 2009, that will force US banks to report billions in additional write downs.

The idea that fiat is ok simply because the economy lasted since the last great depression is a terrible error in judgement. If you study history, you will see that every fiat currency over thousands of years of recorded history that ever existed ended in hyperinflation and currency crash. We are seeing the beginning stages of this now.

All the best to you all,


Anonymous said...

Then with all due respect how does one explain that all currencies in the world are fiat?

Anonymous said...

Dear Alex

You are correct but Cheer up! The hyperinflation that u read in history usually occurs in the final days of the dominant empire of the day and the death throes of an empire usually take decades (fortunately Bush is limited to 2 terms) and its early days yet. :-)

We probably be dead (of old age) by then.
In the alternative scenario, it will be WWIII. Then we will be dead very quickly.

No worries yes?


Anonymous said...

Alex above is an American, hope you can have more faith in your own country, one that is tens of thousand of times larger than resourceless Singapore.

Why are there are so many fatalists there, like economists and hedge funds, who are influencing the people in a big way? Being leaders of their society, why did'nt they do something to check the escalation of the subprime problem over the years instead of doomsaying now and telling people to sell out their own country by dumping the US dollar?

If a lot of your people really do that, then should not the governments of many countries which are holding vast sums of US dollars as foreign reserves also follow suit?

If that really comes to pass, then who in fact have been the initial protagonists of this sorry fate of the US?

America is a great country, the world still looks up to it, despite the political fallout over the last 8 years. Stock markets everywhere still swing in tandem - and more violently so - with Dow Jones.

Where are the voices of the optimists and the motivators that America is so known for, at a time when they are most needed?

In fact Lucky also wrote in one of his Aug 2007 articles that American economists are a bunch of whiners.

Worth a read for a proper perspective of the US debt issue in comparison with Singapore's.

Anonymous said...

I believe influential doomsayers of the West are indulging in their pessimism partly because they are a fairly comfortable lot of people, living in a country with vast resources, social welfare and a vast countryside to fall back into should anything goes wrong with the economy.

But in Singapore we cannot afford that. This is why I think they should not indulge in this past-time any longer because a global recession will hit us like a hammer just like 1987/88 and 1997/78 recessions.

Reading his posts, I know Lucky is someone who understand this completely.

The contagious fear, panic when stock markets crash is horrible. This is especially so when you are a stock market investor but then many people already are because given the lack of social welfare in Singapore and the low interest rate for CPF savings, people have to invest for their future.

The doomsayers should be stopped by the American government and agencies like IMF from negatively influencing the world any longer.

There is already enough pessimism in the stock markets for the last 6 months and they are wobbling for a crash. Anyone wants that to happen, resulting eventually in the loss of jobs and collapse of businesses worldwide? This is not a joking matter.

May be there are some who hope for this: the few cunning but cold-blooded hedge funds who are fomenting for the global dive so that they can scoop up the shares at bargain prices.

Anonymous said...

There is a colloquial Chinese saying:

"Gui Ye Shi Ni Zuo, Ren Ye Shi Ni Zuo" which means that someone is playing both the roles of the devil and the good guy.

This saying applies most accurately to the banks of Wall Street, the same ones that own the Fed.

It is an escapable fact that they were the very ones instrumental in creating the subprime mortgage sector. However when things turned sour, they played smart and refused to bail out the fallen ones of their ilk.

They kept the financial world in a state of limbo, gyrating from day and day, filled with trepidation as to when the stock markets everywhere are going to crash completely.

From all indications they also instructed the running dog PAP government to pump into the fallen banks more than USD30 billions of Singaporean's hard earned money since the middle of last year, only to lose USD9 billion or 30% of the investment since.

All this not forgetting that our esteemed MM was engaged in late 2006 as a Special Advisor of CitiGroup, which these big boys already knew well by then was in deep trouble.

If anyone has any doubt about this, then he or she had not followed the MediaCorp's interview with George Soros on TV in early 2006 wherein he warned about the subprime crisis which he said was slated, repeat, slated to break into the open in mid 2007.

Ah, what prescience! Really? Or was it all planned up by these big boys of Wall Street of which he was one?

Now that the share prices of the fallen banks have been so drastically reduced, these big boys judge it prudent enough for them to come in. Else if Dow Jones crashes completely and with that the whole economy, they too will lose their pants. A game for them can turn into real disaster if they are not careful. So fine-tuning is needed.

They have thus instructed 2 days back the Fed Chairman Bernanke to pump USD200 billions into the financial markets, much of which we can be sure is going into the same banks that GIC and Temasek had been forced into months back.

So in other words these same parties that have created the subprime crisis are now playing the role of the hero and savior. The devil has been transformed into an angel of light. The villian have become the champion of the US and the world.

But their game is not finished yet. They are still making sure the global stock markets are not going to recover so fast. The Asia stock markets tumble heavily again today (13 Mar 2008) just after a day of strong rally.

To these masters of the world, stock market stability is not profitable ; volatility is. Being the big movers of the stock markets, they determine their ups and downs. Sell heavily to panic and create a run on the stock markets, then scoop up the bargains. Do it every few days and imagine how much these big boys are making. This appears to be their current strategy since the subprime issue came to the fore.

The world is their chessboard. Crises have to be engineered and any reason can be used to justify a state of crisis because they are the ones defining it and the mass media being merely their running dogs and mouthpieces will parrot what they say.

The US Presidency, IMF, World Bank and major mass media are but mere underlings to them. Of course not forgetting some politicians in some countries who are paid by them to hand over their own people's money to them.

So let alone the masses of struggling humanity. What can they do or say to affect anything? They can only suffer under the tyranny of this mega-Mafia, the mega-AhLong of the world, the hidden Empire that rules over the world.