This CEO is no ordinary CEO but the king of Wall Street, Jamie Dimon, one of the most astute bankers around. The bank went through the financial crisis unscathed but suffered heavy losses last week when a unit of the bank took on complex derivative positions that resulted in unexpected losses:
“This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” - Jamie Dimon, CEO JP Morgan.[Link[
If Jamie Dimon and his bank can't figure the risk they were taking, how will the rest of us ever fully appreciate the risks we are exposed to? The risk we are taking sometimes only becomes apparent when we are faced with the dire consequences. In today's world, financial risk is not so apparent. With all the technology that mankind has evolved and 2000 years of civilization, you would think that we should be able to run stable financial systems that don't erupt into chaos - but it does look that way in the last 2 decades ....we have had crisis after crisis....
Sometimes we are persuaded to take risks because everyone around is doing the same thing. In Singapore, taking a six figure loan for a car and 30 year mortgages are common practices. People think it is safe. But just look around the world at what has happened. The people in Ireland and Spain, 4 years ago also thought that housing was an excellent investment. Both countries along with the USA have brought down by housing bubbles that burst. Yet, many Singaporeans refuse to believe the same thing can happen here. If you go back to 2005, US home prices have not fallen for several decades so nobody expected housing to collapse. Ireland's economy was so strong, it was known as the Celtic Tiger and the people there too thought that housing prices would never fall. Even before the US housing bubble, we have Japan that saw home prices falling for more 20 consecutive years after its housing bubble burst. With so many examples around the world showing us the dire consequences of housing bubbles, our leaders still kept on telling us that our expensive housing is affordable - even a person earning $1000 can/should take up a 30 yr mortgage for a home. Instead of learning from what has happened to so many countries in recent years, the govt simply allowed the same thing to happen here and pass the risk to Singaporeans as it fills its coffers with the sale of new HDB flats. The high prices and ability of Singaporeans to service loans are build on dangerous assumptions of low interest rates, low unemployment and stable incomes - things than can change abruptly.
Earlier this month when our inflation rate hit 5.2%, Minister Tharman said:
Speaking at the May Day dinner on Sunday, Tharman said that, while the Consumer Price Index (CPI) rose by about 5.2 per cent in March in this year from the same month last year, “it does not mean that the average Singaporean will feel this high inflation”.
He explained that people who already own homes and are not buying new cars are not affected, because more than half of the inflation is due to higher cost of new car ownership and higher housing rents" - Link
So ordinary Singaporeans are not hurt by the high inflation because they have no aspirations to upgrade their homes and cannot buy cars. If the price of meat increases, you can avoid the inflation by not eating meat. If the price of clothes go up, most people don't feel it because they bought all their clothes during Chinese New Year? Our ministers are great at inventing funny logic when problems show up.
The main problem with high inflation is it erodes our savings and income. A 5% inflation means that your income fell by 5% even if you're paid the same numerical amount. High inflation is extremely dangerous when we have CPF returns fixed at 2.5%. A sustained period high inflation will hurt Singaporeans' ability to retire. For this reason almost all other pension funds such as Malaysian EPF and Hong Kong MPF invest their money with the goal of beating inflation and achieving real returns. Fixing returns on CPF is not safe but dangerous because the buying power of money is relative cost of goods we need to purchase when we retire - the safest approach has always been to properly invest the funds in assets that preserve the buying power of the money and this is not the approach undertaken by the Singapore govt - it passes on the risk of inflation to Singaporeans by fixing the low returns.
Ordinary citizens in whatever country are often blissfully unaware of what is going on in govt, how the system works and what dangers lurk in the system they belong to. If you talk to a Greek citizen or an Icelander 4 years ago, they won't be able even to imagine that their countries were about to sink into the depth of crisis and despair. But all the troubles are not entirely unpredictable if govts operate with full transparency and check and balance is in place to stop the missteps.