Trivia: 167 years ago, on this day, Sarawak was ceded by the Sultanate of Brunei to James Brooke.
Trivia 2: Early Portuguese catographers identified Sarawak as Cerava.
Unlike in the realm of physical sciences, one of the most frustrating aspects of economics is its dependency on natural experiments. Far too many hypotheses cannot be tested in sleek laboratories. As a direct result, it may take some time before anyone can comfortably pinpoint the causes of the unraveling financial crisis across the Pacific Ocean.
Yet, hunting season for a scapegoat has begun as the US government unveils the largest plan to intervene in the market since the Great Depression of the 1930s. Sweeping premature conclusions are fast becoming the preferred way of answering questions while scientific methods are thrown out of the window at a terrifying rate; centuries of scientific progress has come to naught.
As some observe the crisis with the valiant intention of pushing the boundary of ignorance outwards to populate the libraries of the world, statists have wasted no time in scapegoating and making sweeping premature conclusions. Their scapegoat: free market capitalism. Their conclusion: greater government intervention in the market.
An honest observer would recognize the fact that candidates for the cause or causes of the crisis cut beyond the rigidity of ideologies and this is where statists find themselves in trouble. While the story revolving the sub-prime mortgage crisis and the current financial crisis may have to do with lack of regulation in the proper place, two major potential causes of the crisis originated from government interventions. The two are bailouts of the past and low interest rates set by the state.
In comprehending how the two factors contributed to the whole fiasco, context is essential and it requires us to go as far back in time as the 1980s, back when another crisis was haunting the US economy.
It was the savings and loan crisis.
It is absolutely crucial to note that crises have happened in the past. Booms and busts are part of business cycles and there is really no reason to say your prayers for free market capitalism. Adherents of the Austrian school of economics may wish for a different path to be followed but the fact remains that such a business cycle is essentially the characteristic of the current setup of the system.
As proven in the past, each time the symbols of capitalism are burned to the ground, the whole system will rise up even stronger. Free market capitalism is a phoenix in the truest sense of the legend.
This is untrue for socialism or most of its variants. Once it is burned, it stays down and is forever maimed. Statists will do well to commit this to memory.
The most important aspect of the 1980s crisis is the action taken in its aftermath. The US government bailed out a number of troubled companies on the pretext that these companies were too big to fail. The idea was that these companies were too entangled in the economy and their failure would send destructive ripples throughout the system. And just before the beginning of the decade, there was the bailout of Chrysler rationalized by the same thinking.
The benefits of bailouts are immediately apparent but the side effect will pop up only later down the line: while bailouts tend to compensate downsides of the business cycle, they adversely affect the structure of the economy. It is a seed for yet another crisis in the future.
Any bailout essentially creates a problem called moral hazard. In a situation when profits are made private and losses are socialized, participants of the market have the incentive to undertake large risks incomparable to its rewards. In the case of the sub-prime mortgage crisis, the manner in which lenders of money swam in the sea of fire was indicative — no, instructive — of an awfully misaligned carrot and stick model.
Statists have called for more regulations to mitigate the effects of moral hazard but it must be highlighted that without the state-created moral hazard, there will be less requirement for regulation; the only regulation required in a situation which the state refrains from interfering in the market, with all else being equal, will be the rule of market Darwinism.
In true free market capitalism, profits and losses are internalized and thus eliminate the source for the explained moral hazard. With a more balanced risk-reward model, the severity of the crisis could have been reduced.
While moral hazard may have a role in the whole mess, an even bigger potential culprit is the low interest rates, courtesy of the state. This is so because the prevalent low interest rates environment in the early 2000s provided cheap financing which in turn fueled demand for, among others, homes. The environment was made possible as the Federal Reserve tried to maneuver the economy to a soft landing after the bust of the dotcom bubble. Needless to say, the Federal Reserve is an arm of the state and therefore, the tweaking of the interest rates is an act of intervention by the state.
If the setting of interest rates was left to the means of the market, it would have gone up and not down as lenders seek to compensate the prevailing risk.
With demand built-up fueled by cheap sources of funds, as well as several other factors which are mostly irrelevant to the issue at hand, the housing bubble grew and grew until the exuberance caused by the state was met with the cold logic of the free market. Slowly but surely the market overcame the interventions of the state, and brought about unintended consequences. The bubble burst and along with it the inability of borrowers to repay their mortgage loans.
The sub-prime borrowers were the first to suffer and as the borrowers defaulted on their loans, the lenders who suffered from moral hazard — no thanks to the actions by the state — began to realize the gravity of the crisis.
With the two factors considered, would it be fair to make free market capitalism a scapegoat and call for greater government intervention in the market?
In any case, it is unlikely that Malaysia will suffer the full brunt of the crisis. That, however, does not mean that there is nothing to learn from land of the free.
First, it is that past interventions have the potential of adversely affecting the future. Malaysia has had its fair share of bailouts and the fact that a majority of large companies in Malaysia are owned by state-sponsored enterprises offers many with an exciting if not scary natural experiment in a case of system-wide crisis. It would definitely be interesting to measure the moral hazard co-efficient in this country.
Secondly is the independence of Bank Negara. It is unclear how independent the technocrats on Jalan Dato’ Onn are from the politicians in Putrajaya. If Putrajaya has considerable influence over the central bank, the pressure to lower interest rates when it should be high would be present. With that possibility comes the possibility of a bubble.
Even more important is the requirement for Bank Negara to refrain from tweaking various interest rates and instead to let those rates float to their free market levels. Only the market has the processing capability to calculate the right interest rates for a particular environment while considering all variables.
A version of this article was published in The Malaysian Insider.
The United States received tremendous sympathy after the September 11 attack. Yet, not too long after that, the US squandered all the goodwill it enjoyed at a dramatic rate. Teresa Kok is fast repeating that pattern.
These days, it seems the fastest way to gain credibility is to be arrested under the anti-liberty ISA. Once the person is put into the cell under the act, one can be sure of gaining hero status among the civil liberty-conscious members of the society.
Ms. Kok is one of those heroes. Or at this rate, was.
Her first mistake was at a press conference where she claimed to be served with something similar to dog food while under a week-long detention.[0] It was clearly a hyperbole to demonstrate the quality of the food she had to suffer[1] but in politics, especially in the extraordinary environment Malaysia is in, one plays with hyperbole at his or her own peril.
Immediately the government set to investigate the matter, taking the matter too seriously that hilarity ensued.[2] And this comedy, unfortunately for Ms. Kok, is unraveling at her expense.
Utusan Malaysia, the daily which published an article which helped sent Ms. Kok into the altar of heroes, reported Ms. Kok’s hyperbole in a very literal manner.[3] That got Ms. Kok doubly upset.
If V.K. Lingam’s slogan is “looks like me, sounds like me”, then Ms. Kok’s rallying call for the next election could possibly be “looks like dog food, tastes like dog food”.
In response to that literal report, Ms. Kok made a u-turn to her earlier statement, saying that she did not say she was served with something similar to dog food but rather, she was served with something slightly better than dog food. The UMNO-connected TV3 handled the matter in the most elegant way: they aired Ms. Kok’s second statement and then air that statement with the first statement she made earlier.
That juxtaposition does not look good for Ms. Kok because Ms. Kok said exactly as Utusan reported.
At this juncture, odd as it sounds, Ms. Kok should really apologize for the hyperbole she committed before this balloons into a larger comedy which could take Ms. Kok out of the picture if indeed Pakatan Rakyat is forming a new federal government soon.
The second mistake which she committed is arrogance.
In an interview with Guang Ming Daily, she had the audacity to say that “she would then become their boss”, if Pakatan Rakyat rose to power to her interrogators.[4] Not only it was arrogant of her to say a such thing and then made it public, the arrogance is very much premature, even if Pakatan Rakyat is really set for Putrajaya. More menacingly, the idea that Ms. Kok would make a public institution as her private playground does not differentiate Ms. Kok from the incumbent government.
Ms. Kok may do well to stop all the nonsense and concentrate on abolishing the ISA instead. This is an issue larger than her, or dog food. It is the ISA which should be at the center stage and not dog food.
The manner at which the issue is being played out at the moment, it only shows the shallowness of those involved, including Ms. Kok. Worse for Ms. Kok, she is on track to trivialize herself by making “dog food” the highlight of her experience, handing victory to the other side.
[0] — “The food was similar to dog food, there was one day that I was only given two hard-boiled eggs with gravy and cucumber for my lunch and dinner,”. [Teresa Kok. Accessed September 2008]
[1] — IPOH: Deputy Minister in the Prime Minister’s Department Senator T. Murugiah was aghast when told yesterday that suspects in police lock-ups were only allocated RM5.80 a day for meals. [RM5.80 for food in lock-ups ‘unreasonable’ . New Straits Times. September 22 2008]
[2] — KLANG: The government will conduct a serious investigation into claims by Seputeh MP Teresa Kok that she was served food that was ”almost like dog food” while detained under the Internal Security Act (ISA). [Govt to investigate Teresa Kok’s ”˜dog food’ claim. Dharmender Singh. The Star. September 22 2008]
[3] — KUALA LUMPUR 21 Sept. – Dakwaan Ahli Parlimen Seputeh, Teresa Kok kononnya makanan yang diberikan kepadanya semasa ditahan di bawah Akta Keselamatan Dalam Negeri (ISA) sama seperti makanan anjing adalah merupakan dakwaan yang tidak benar dan keterlaluan. [Makanan anjing: Bekas tahanan ISA sangkal Teresa Kok. Utusan Malaysia. September 22 2008]
[4] — (Teresa later said she even told the investigating officer that she was sleeping and eating well, and would take care of herself properly. She added that if the Pakatan successfully seizes power, she would then become their boss! She said the officer was dumbfounded upon hearing this.) [Teresa Kok: Not in vain. Dominic Loh. Sinchew. September 22 2008]
Too funny not to post:
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Hitler is Wolfowitz, the mastermind behind Malaysian politics, the architect of Pakatan Rakyat.
Far too many people are debating the morality of the political defection as advocated by the Pakatan Rakyat. Relentless debates have made the matter clear. The question of who is standing on which side is also easily answerable. The less talked about however is the process that entails the political defection.
How exactly power would change after defection has not been answered in a satisfactorily manner.
That changed today with an article by Malik Imtiaz Sarwar.
He lays six points which need consideration.
First is the requirement for the Prime Minister to command the majority confidence of the Dewan Rakyat.
Second is the two options which the “Prime Minister who no longer commands the confidence of the majority” has: a fresh election or resignation.
Thirdly is the way, or really the lack of rule or precedent, in gauging how much confidence the Prime Minister commands. A vote of confidence is not the only option and the government could resort to filibustering. Also noted is the power of the Agong in resolving the crisis of confidence.
The fourth addresses a situation where the Agong demands a vote of confidence and the responsibility of the Speaker of the Dewan Rakyat to execute the demand.
The fifth point relates to a situation where there is a need to call for a vote but yet, the Parliament is not in session or in sitting. How the Parliament is to be summoned is the central problem, especially so when while the Agong can demand it, the summoning itself is dependent on the advice of the Prime Minister. Without the advice, there can be no sitting and hence, no voting. Malik Imtiaz Sarwar however questions this and opines that the Agong’s responsibility is to ensure that the Prime Minister is he whom commands the confidence of the House while the Speaker is answerable to the Agong.
Sixth is the possibility of the Agong skipping the whole process of voting and simply appoint a new Prime Minister which commands the confidence of the majority.
He ends his thought by, I think, referring to a case which I have pointed out earlier.
On my end, while I am supportive of the defection, I demand that it follows the process which has been laid out. I personally believe that the process is reasonable and rights of those affected by the process must be respected. Adherence to the process is essential if we are sincerely interested in orderly transfer of power.