Categories
Economics

[1812] Of 2008 fiscal stimulus 2.0 may prevent a lemons market

Yet another fiscal stimulus is proposed and this time, Bernanke backs it.

Oct. 20 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke endorsed additional fiscal stimulus, saying the credit crunch is “hitting home” as Americans find it harder to get loans, threatening a prolonged economic slump.

Lawmakers “should consider including measures to help improve access to credit by consumers, homebuyers, businesses and other borrowers,” Bernanke said in testimony to the House Budget Committee. “Such actions might be particularly effective at promoting economic growth and job creation,” he said, calling consideration of a stimulus “appropriate.” [Bernanke Backs More Stimulus, Citing ‘Weak’ Outlook. Scott Lanman. Bloomberg. October 21 2008]

Earlier in the year, a fiscal stimulus in form of a one-time tax break was executed. The rationale behind the first stimulus was unconvincing and true enough, it did not work as the proposers had hoped for.[1]

There is however hope for the second stimulus to succeed, unlike the first which fell victim to the game of expectation from the outset.

Access to credit in the real economy is the crux of the current crisis. Acts to improve access will go a long way in making the stimulus matters.

While I opposed the first stimulus, I may be supportive of the second effort, especially if the plan seeks to untighten credits. It is becoming clear to me that the banks’ reluctance to lend money may be a form of market failure, similar to the idea of lemons in the used cars market where there is a lack of trust as well as a form of negative externality. Banks simply do not know who to trust and hence, hoard money at the expense of the economy.

In the used car market, market failure occurs when buyers simply do not know which used cars are bad (lemons) and which are good. Prices for good used cars are higher than lemons for the obvious reason. With information asymmetry faced by buyers and sellers enjoying complete information, sellers have the incentive to sell the lemons at the prices of good cars, thus gaining handsome profits. Buyers, realizing this, simply refuse to participate in the market to avoid from being cheated and losses. Hence, market failure as transactions do not occur.[1a]

This however is not to say that the whole crisis is caused by the market. The US government has blood on its hand. Government interference in the market has caused a cascading effect throughout the US economy, leading to a government-induced market failure.

As a green libertarian conscious of the fact that market can fail and government does have a role in combating market failure, I think I can support the second, more properly tailored fiscal stimulus.

I do wonder however how could a fiscal policy improves credit access? Could the government lends directly to the market? Would the government become a guarantor to various borrowers?

But hey, since the US government already owns some banks, why not just order those banks to lower down their rates… (sarcasm) What better way to untighten credit in the market than that?[3]

On a separate note, Mark Sunshine at the Economix writes that a tax-rebate might work because the US economy might have entered into a liquidity trap in which the economy becomes unresponsive to monetary policies.[2] While I do think fiscal stimulus might work, the effectiveness of one-time tax rebate is suspect for the same reason the first stimulus failed. A fiscal stimulus based on government spending might work better than a one-time tax cut.

Whoa. What am I talking about? Heresy!

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] — Momentum for fresh measures built after an earlier stimulus package failed to prevent a jump in the unemployment rate to a six-year high and the longest slump in retail sales since at least 1992. [U.S. Moves Toward Stimulus as Bernanke, Bush Shift. Ryan J. Donmoyer. Scott Lanman. Bloomberg. October 21 2008]

[1a] — See The Market for Lemons on Wikipedia for more information on the subject.

[2] — Momentum for fresh measures built after an earlier stimulus package failed to prevent a jump in the unemployment rate to a six-year high and the longest slump in retail sales since at least 1992. [Will Paulson’s Two Plans Unplug the ‘Liquidity Trap’?. Mark Sunshine. Economix. October 4 2008]

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[3]p/s — Apparently, there is a rumor about that flying around…

Categories
Photography

[1811] Of the photographer returns!

Enough economics and politics because now is a time to take a break.

Some rights reserved. By Mohd Hafiz Noor Shams.

This was on a tea farm in Cameron Highlands. This is the reason why this blog was quiet for three full days.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

p/s — since Boris (not Boris the mayor. It’s this Boris instead) commented on my Flikr site and said he wanted to check my blog to find out more about the picture, I am only compelled to offer more description.

These are firewoods for the furnace. Waiting to be sacrificed to transform tea leaves into tea powder, this is just outside of the tea processing plant. Our tour began from the beginning of the process where fresh leaves are left to be dried before further processing. As we moved farther along the processes, the smell of fresh tea leaves began to succumb the smell of real tea.

Tea powder was everywhere inside and I was kind of concerned how that might affect my camera. The heat was also slightly unconfortable, despite the fact that Cameron Highlands has a cool environment and that it had rained just earlier.

You liked that Boris?

Man, you have to visit Malaysia while I am still here. And time is running out!

Categories
Economics

[1810] Of more government intervention

What?

KUALA LUMPUR: The government will invest an additional RM5 billion into Valuecap Sdn Bhd to double the latter’s funds to RM10 billion, Deputy Prime Minister Datuk Seri Najib Razak said today.

[…]

Established in 2002, Valuecap is a fund management company created to invest specifically in the Malaysia equities market. Jointly owned by Khazanah Nasional Bhd, Permodalan Nasional Bhd and Kumpulan Wang Persaraan Diperbadankan (or better known as KWAP), Valuecap’s key mandate is to undertake investments in equities listed on Bursa Malaysia on a portfolio basis. [Govt to pump extra RM5b into Valuecap. Surin Murugiah. The Edge Daily. October 20 2008]

Why?

KUALA LUMPUR, Oct 20 (Bernama) — The government will provide RM5 billion in additional funds to double the size of Valuecap Sdn Bhd to RM10 billion and to invest in undervalued stocks and protect investments in government-owned companies, Deputy Prime Minister Datuk Seri Najib Tun Razak said Monday. [Government Provides RM5 Billion In Additional Funds To Invest In Undervalued Stocks. Bernama. October 20 2008]

I am sure even honest Keynesians would raise their eyebrows upon reading this.

Categories
Economics

[1809] Of Anna Schwartz talks

Federal Reserve Chairman Ben Bernanke has called the 888-page “Monetary History” “the leading and most persuasive explanation of the worst economic disaster in American history.” Ms. Schwartz thinks that our central bankers and our Treasury Department are getting it wrong again.

To understand why, one first has to understand the nature of the current “credit market disturbance,” as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads — the difference between what it costs the government to borrow and what private-sector borrowers must pay — are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. “The Fed,” she argues, “has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.” [Bernanke Is Fighting the Last War. Brian M. Carney. The Wall Street Journal. October 18 2008]

Categories
Politics & government

[1808] Of the continuing relevance of racial politics and its implication to Barisan Nasional

These days, it is presumed that racial politics in this country is dead. It is understandable why this conclusion is appealing but it is certainly wise to refrain from signing off racial politics as a factor in Malaysia politics.

This presumption has its basis in the outcome of the March 8 general election. Barisan Nasional lost considerable number of state and federal seats to the alliance of DAP, PAS and PKR on that historic day. With Barisan is seen as the symbol of racial politics and the three-party alliance — Pakatan Rakyat — is viewed as the antithesis, it is absolutely tempting to relate the electoral outcome to the dichotomy between racial and non-racial politics.

The competition between the two ideas does have a role in the outcome of the election but it is definitely not the sole factor.

Prior the general election, the Barisan-led government on almost daily basis continued to insult the intelligence of Malaysians through its control over the mainstream media. That insult later turned into a battle of credibility as many fought back on the internet and with other means. What happened afterwards was a very personal and public battle between the former Information Minister Zainudin Maidan and the local blogosphere.

BERSIH, meanwhile, took to the streets to demand democratic reforms. This not only attracted sympathizers of DAP, PAS and PKR but also those that truly believe in the need for better democratic system. Others just simply wanted to express their general discontent with the BN-led federal government.

Corruption, meanwhile, was perceived as rampant thanks to several cases such as the ones involving Zakaria Mat Deros, ECM-Libra and even the procurement of weapons. The 2007 Auditor-General’s report, which lists down the excesses of various ministries, made the situation even worse for the BN.

Crime also was on the list. The tragic story of Sharlinie remained unsolved unresolved while the Altantuya murder case with its links to the upper echelon of government very much unsettled ordinary voters.

There are more but while these issues are racially neutral, they do not fit into the racial-non-racial dichotomy. One can definitely be a believer in racial politics but at the same time be concerned with issues of crime, corruption and democratic reforms.

One could even fight against Barisan while believing in racial politics and in Barisan. The anti-Abdullah fraction is one group falling in this category. The former Prime Minister Mahathir Mohamed went as far as encouraging UMNO members to vote against Barisan.

In short, people on both sides were angry at Barisan. All things considered, protest votes rather than believe in non-racial politics may have played a larger role in the result of the March 8 general election.

Not only the role played by racial politics is pushing votes away from Barisan may be overemphasized, the role of racial politics in attracting votes to Pakatan has also been underemphasized.

This can be proven through how PKR place itself in front of a less liberal Malay audience with regard to matter concerning the New Economic Policy. While PKR as well as Pakatan indeed promote an inclusive merit-based affirmative action dubbed the New Economic Agenda as an alternative, the argument against the NEP — the one policy with great association with the racial politics of Barisan — is not position diametrically.

On the contrary, PKR continues to persuade the average Malays to abandon the NEP or its legacy by impressing on the idea that the implementation of the NEP has been corrupted over the years by the corrupt UMNO. PKR is happy to point out that the implementation of the NEP nowadays is flawed while acknowledging the past success of the NEP which improved in the Malay lot. One will be hard-pressed to find a statement which PKR officially stated the NEP is conceptually flawed. PKR simply will not do that, much to the dismay of its sympathizers of libertarian leaning.

Furthermore, PKR does endeavor to convince the average Malays that the welfare of a lot of Malays would continue to be guaranteed under the NEA since the Malays, as it is generally believed, make up a majority of the Malaysian underclass.

The point with the position of the PKR with respect to the NEP and the Malays is that the average Malays are still concerned with the well-being of their race. PKR recognize this and with this cognizance, have frequently pointed out that the party will defend Article 153 of the Constitution of Malaysia, which safeguards the special position of the Malays in the country. If PKR is to outright reject Article 153, it would be interesting to see how the average Malays, even those supportive of PKR, would react.

While there is a hint of racial politics in the way PKR handle the NEP in front of average Malay audience, the tactics leads to a strategic end of a non-racial outcome, i.e. the end justifies the mean. After all, the creation of a right egalitarian society is dependent on convincing the average Malays the needs and benefits of an egalitarian society.

Even stronger case of racial politics in Pakatan can be observed within PAS. The existence of PAS itself is closely predicated upon racial politics. Within the Malaysia context, religion is a component of racial politics, as with language and education among others. This is especially so when Article 160 of the Constitution defines a Malay as a Muslim.

If that is an unconvincing point, then consider the existence of factions within PAS which wish to cooperate with Umno in order to secure Malay-Muslim influence in local politics. The prospect of non-Malays, non-Muslims dominating Pakatan is enough of an incentive for some in PAS to work with UMNO.

And surely, Pakatan has been the great beneficiary of racial politics as demonstrated by the support the coalition receives from Hindraf and the sympathizers of the movement. While it is possible to see Hindraf as a civil liberty movement which seeks equality, the movement undeniably positioned itself well within the scope of racial politics.

Perhaps, the greatest proof of the continuous relevance of racial politics is the oft-overlooked fact that Barisan actually won the general election in terms of popular votes and seats won.

Nevertheless, just as the success of Pakatan cannot be fully attributed to the appeal of non-racial politics, the victory of Barisan cannot be fully attributed to racial politics either. Yet, it is likely that after controlling for other factors, racial politics would still play a large factor.

Even if racial politics has lost its appeal to a many Malaysians, racial politics still appeal to considerable number — if not the majority — of Malaysians.

The only way to ascertain the end of the racial politics as a major factor of Malaysian politics is to see how large a factor racial politics will play in the next general election or even the one after. Everybody should be wary of making one grand conclusion based on one observation, however reliable the observation is.

All that brings me to one question: what is the possible implication of continuing relevance of racial politics?

The most obvious is the possibility of heeding the call of Dato’ Onn: for Barisan Nasional to abandon racial politics in one way or another.

If indeed racial politics still has great relevance in Malaysian politics, the abandonment of racial politics by Barisan would see schism in its three great parties, namely UMNO, MCA and MIC. Though purely a conjecture, the prospect of ethno-nationalists — be it Malay, Chinese, Indian or the mysterious others — breaking away from a unitary multiracial Barisan is not an outlandish possibility.

Maneuvered unwisely, the new Barisan Nasional may find itself sandwiched between Pakatan on the left and a new ethno-nationalists entity on its immediate right. Hitler lost his war by fighting on two fronts simultaneously; a new Barisan, finding itself in between a rock and a hard place, may just share the same fate.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

A version of this article was published in The Malaysian Insider. Two paragaphs (the question and the reference to Dato’ Onn) were removed from the TMI version.