Saturday, September 27, 2008

Some thoughts on the US financial crisis....

You might have experienced all three - drunk Dutch Lady Milk, invested in structured products and bought stocks that have been murdered in recent months due the US subprime crisis. I think I might have ingested some melamine when I ate a stick of YouCan ice cream a month a go, my highflying stocks? I think they must have hard landed somewhere ....I tell myself it is for the long term - although I did unload some towards the end last year I decided there were a number I should keep for the long term. The only thing I didn't do is invest in those structured products - they were so obviously bad.

The current US financial crisis was within my radar for sometime - I read George Soros' "Crisis of Capitalism", Ravi Batra's "Greenspan's Fraud" and have been keeping up with the thoughts of short seller Peter Schiff. I thought the crisis might have ended with Bears Stearns but it actually got worse. The Lehman collapse caused the credit market to totally freeze up - the CDS (credit default swap) is the latest shoe to drop. The pessimists have been spot on. The next few shoes may be consumer credit (credit cards, car loans) as unemployment rises, loans to businesses, US$ etc. But I'm here not to go too much into the detailed mechanics of how this crisis will get worse or better.

Last week I was listening to BBC and there was a interesting segment on the financial crisis. A British economist went on the air to present some interesting statistics on income distribution. I don't remember his name but he said he found out that the income inequality today is only matched in history by the period just before the Great Depression. He went on to hypothesize that the crisis will be over and the global economy will recover only when a sustainable income distribution is put in place.....similar to the New Deal(s) of the 1930s. I found this very interesting because I read something from Ravi Batra 2 years ago that predicted a crisis of the same magnitude as the one we are seeing. I knew he was onto something but the problems with predictions is you don't when exactly things will start happening. Ravi Batra's findings goes something like this:

  • In the past 2 decades, wages have been lagging productivity.
  • To consume all the goods produced, there has to be an expansion of credit. Household debt in US has indeed risen to all time highs.
  • By keeping wages low, corporations have reported huge increase in profits. Corporate profits as a % of GDP is at historical record levels.
  • This profit growth is unsustainable because it requires workers who are also the consumers to take up more debt.
Basically, workers are paid too little to consume all the goods they produce....they ended up borrowing more and more as corporations make record profits. The crisis moment was delayed only because financial institutions made even more irresponsible loans such as subprime "liar" loans, and issued more and more credit cards to keep this system going. These lenders are now imploding from defaults.

In Singapore it is interesting because the govt advocate that wage increases be kept smaller than productivity gains. The logic is to keep the Singapore work force competitive globally. We have also eliminated most of the workers' benefits such as retrenchment benefits, medical, etc to stay competitive. While Singapore banks have expanded consumer credit with the proliferation of unsecured personal loans and credit cards, they have not been as irresponsible as their American counterparts. Still I was quite shocked when I found out that NTUC was offering unsecured loans known as the Fair Price Plus Loan. These loans are necessary only because workers don't make enough to make ends meet and they are so stretched they have little savings to buffer against emergencies. In the name of competitiveness, we have also imported hundreds of thousands of foreign workers depressing the wages of our low income workers. If they don't borrow, the only way is for them to cut down on consumption. Eat less, use less electricity, live in rented flatetc. When he really cannot make it, his electricity is cut off and a meter is installed so that he can use electricity only when he has money in his cash card so that the govt owned monopoloy Singapore Power does not have to risk non-payment that will eat into its profits.
There is little doubt that the current crisis and the unavoidable recession that follow will cause the most pain to the lower middle and low income members of our society. My point is their plight is not caused by the own lack of ability to earn more but by a system that our govt has chosen and bought into to achieve a high rate of economic growth. This govt is allegic to higher corporate tax as it is to welfare for the poor. The system is not equitable, it is not just...things have to change.


family man said...

I find this an insightful article. Kudos.
Yes things have to change, and I hope some PAP ministers realise this and allow for quick changes from within.
Not some demonstrations at Hong Lim that gets out of control. A good reality check would be a by election at Jurong to let off some steam, instead of an overnight government change at the next major elections.
That would be too late, and too much a change.

Anonymous said...

The best place to protest now is not Hong Lim Park but F1 circuit. Imagine sport car meets Dr Chee on the roadside. That will be world's news.

The first in the history of F1 circuit to be stopped by human.

Singapore's world's first again.

Anonymous said...

this PAP government has been sleeping with the foreign corporate executives in a way just like the Bush administration has been sleeping with the oil man......

The PAP government wants to invite more millionaires to come to Singapore to sleep around with women. that's the kind of activites the PAP is interested. Obscene profits.

Death to PAP.

Nick said...

Contrary to what the main stream media says, wall street as a whole (capitalism) should not be blamed for the actions and policies set forth by OUR congress. There are, in fact, corrupt men in wall street who partnered with corrupt men in government to engineer a win-win situation at the expense of the taxpayer. Capitalism (and our nation or any nation) will only survive when the good and virtuous people are running it. Which means, come this November, you must vote for good men and women who stand by principle and uphold our constitution and not just give lip service to causes that seem noble and just.

Ivan said...

Thanks, Tee for the interesting perspective. Yes I agree with Nick that 'Capitalism will only survive when the good and virtuous people are running it' but I also believe reality goes in cycles. It's impossible to sustain 'goodness' in any system and sooner or later the bad and corrupt will catch up, it just human nature.

I think we can expect to see some big socio-political changes in Singapore in the next 10 years. Although the government/PAP keeps trying to re-invent Singapore but the focus on economic growth has essential remained unchanged.The neck-breaking speed of Singapore's growth has changed the whole dynamics and psychology of the nation and we are near the end of a cycle (perhaps we are trailing behind the US). We can't apply the same solution to a different situation anymore.

Anonymous said...

In a nutshell, lucky has summed up the economic consequences of unchecked capitalism gone rampant. Economic cycles comes in boom and bust. Unprecedented and sustained boom was experienced in the past decade in the US, naturally when the bust comes it will be of equal magnitude.

Notice the PAP's solution to the impending economic crisis - more and more growth. We have to wonder how and at what price, especially socially (imflux of foreigners) and politically (the pap govt will face greater instability).

Onlooker said...

Low wage workers cannot sustain a high income corporation.
As the money they take back home get lower.
And as Corpse report higher earning thus higher salaries for CEOs.
The CEOs themselves cannot efficiently distribute the wealth back to the system thus creating a "Luxury industry" but in truth the inability to sustain the greater population of such system will be ultimately the cause of it's own demise.
That is also why a certain lady "who Think that she can get away with squandering the wealth accumulated by the people" Would not be forgiven if the situation get out of hand.

AlphavilleSG said...

Yes, Capitalism has failed dramatically, and Marx was right and the current situation has proven his thoughts on unbridled capitalism was true, not for the first time...

And just look at how hypocritical things are panning out, the Asian Economic Crisis was a victim of short selling and the damage was much worst than monetary...

But remember isn't a comparison of which is best but as Friedman himself had said, of which fare the better of the worst.

I think the pragmatist is the survivor here, ideologues on both side have to come to a conclusion this weekend.

Anonymous said...

capitalism will still survive becos of globalisation. why? this is because those riches can still move out of a trouble area easily like for example the recent ceo who quited his insurance firm to join an overseas rival.

another example is one who sold his telco and is welcomed in other countries, even able to buy a football club

Anonymous said...

“When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist”

–Dom Helder Camara, Brazilian archbishop