February 2010


Violet Wurfel ASEAN Lecture Series held at the Claro M. Recto Conference Room, Rizal Hall, UP Diliman on March 11, 2009.
“Unless we understand what happened in the past, we can never understand what’s happening now and what would happen in the future,” said Dr. Michael Lim Mah-Hui, in reference to the global financial crisis in a public forum dubbed, “The Origins of the Global Financial and Economic Crisis and its Impact on Asia.” The forum was part of a set of lectures and discussions about politics, ethnicity, and economics in Southeast Asia under the Violet Wurfel ASEAN Lecture Series held at the Claro M. Recto Conference Room, Rizal Hall, UP Diliman on March 11, 2009.

Lim Mah-Hui said the collapse of the US economy and the resulting global financial crisis are rooted in theoretical or methodological causes, industry practices and deregulation, and structural economic causes. These caused the emergence and adoption of several financial and economic theories, policies, and regulations that eventually resulted in the collapse of the US economy and recession in countries heavily dependent on the US financial sector.
Discussing theoretical and methodological roots, Lim Mah-Hui cited the adoption of the efficient market hypothesis or EMH resulting in a loosely regulated micro-economic system that allowed price speculation. He argued that this belief that the market decides the prices of goods can only be applicable to consumer goods.  What happened in the US was that the hypothesis was applied even to debts, loans, and mortgages, resulting in unpredictable prices and excessive price speculation.

Discussing deregulation and industry practices, Lim Mah-Hui said the repeal of the 1933 Glass-Steagall Act, which regulated the US financial sector in the 1970s, allowed commercial banks to take on the functions of investment banks. This made commercial banks vulnerable to the dangers usually faced by investment banks from non-performing assets, loans, and mortgages. The deregulation of the financial sector also resulted in financial innovations which actually circumvented taxes and government regulations under the guise of reducing the so-called “risks” to businesses.

Lim Mah-Hui identified the structural causes as excessive liquidity or the vigorous flow of cash in the financial system, income imbalance, and wealth imbalance. Institutions, practices, and schemes that allowed people to easily acquire property and institutions to profit through credits and loans—all at low interest rates—proliferated. This resulted in the ballooning of debts of average Americans to US financial institutions. According to Lim Mah-Hui, this excessive liquidity or excessive supply of money started with President Richard Nixon’s changing of the US financial standard from gold reserves to fiat money. This meant that the US did not need to have a huge gold reserve but only a steady supply of currency whose actual value may be dubious.

Income imbalance means a disproportionate distribution of earnings in the US. While the government and the financial sector urged the average American to purchase products to stimulate economic activity, the lower income groups resorted to the use of credit cards, loans, or debts to the point of excess. In 2007 alone, debts through credit cards increased to $500 billion.

On the other hand, business executives whose salaries are several times higher than the ordinary worker enjoyed huge bonuses and incentives. Lim Mah-Hui said 85 percent of income in the US belongs to the top 20 percent of the US population. But instead of putting their money in the banks to stabilize the banking sector, the higher-income groups entrusted their money to people like Bernard Madoff.

Madoff was the former chairman of the NASDAQ stock exchange who defrauded investors of almost $64.8 billion under a Ponzi scheme. A Ponzi scheme, named after an Italian swindler Carlo Ponzi, is a ploy similar to the “Pyramid” scheme where earlier investors are paid off with the money of later investors without the company actually earning profits through sales in products or services.

Lim Mah-Hui said that the impact of the recession can only be felt by Asian institutions or countries whose financial and economic structures and practices are tied to or heavily dependent on the American financial sector. Asian financial markets may feel the effect of the recession during the third and fourth quarter of this year, but this may be cushioned by relatively healthy financial systems, big monetary reserves, and the limited exposure to toxic assets. The bad news is that most of the Asian economies are export-dependent, remittances-driven, and linked with the US financial sector. The effects of the American economic crisis may then be felt in China, South Korea, Taiwan, and Singapore—all huge trading partners of the US. “The Philippines has not felt the financial crisis because the boat left the port late, not because it has a fantastic economy,” Lim Mah-Hui said. The Philippine economy is so far behind the leading economies for the latter to affect it significantly.

Dr. Michael Lim Mah-Hui is a Fellow at the Social, Economic, and Environment Institute (SERI) in Penang, Malaysia. His professional background spans 30 years as an international banker and academician. He has recently conducted public lectures on the financial crisis, including one at the UN High Level Policy Dialogue on Food, Fuel, and Financial Crises in Bali and at the Experts Workshop on Financing and Development of the UN Economic Commission on Asia and the Pacific. Lim Mah-Hui has written articles on the financial crisis for the UN Department of Economic and Social Affairs and the Journal of Applied Research in Accounting and Finance.

Aside from the public forum, he also delivered the lectures titled “Ethnicity and Politics in Malaysia,” “The US Financial Crisis and Alternative Paradigms,” and “Trends and Prospects in Malaysian Politics” from March 10 to 12  in venues at UP Diliman and the Philippine Social Science Center on Commonwealth Avenue.

The Violet Wurfel ASEAN Lecture Series is sponsored by the UP Office of the President and the Office of the Vice President for Academic Affairs. The Lim Mah-Hui lectures were co-organized by the UP Diliman (UPD) Third World Studies Center, UPD Asian Center, the UPD Department of Political Science; the UPD Department of Sociology; and the Philippine Social Science Council.

This article was taken from the University of the Philippines Newsletter

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By Dr.Michael Lim Mah-Hui

Journal of Applied Research in Accounting and Finance, Vol. 4, No. 2, pp. 12-19, 2009

Abstract:
The roots of the present financial crisis can be traced to the significant structural changes in the United States economy and its financial system after the 1960s. Paramount among these is the growth of the financial sector and its overshadowing of the real economy. With a slowdown in long-term growth rates, the United States progressively became a debt-driven economy, evidenced by debt explosion in all sectors, particularly the financial sector and household sectors. This is related to the increasing imbalance in wealth and income distribution that produces under-consumption for the vast majority and excess savings for a small minority. Under-consumption by the former is ‘solved’ through debt assumption, while excess savings for the latter is ‘solved’ through financial innovations to enhance profits and yields for investors. Changes in the financial industry in terms of heightened speculative and Ponzi financing resulted in greater fragility and instability in the financial system. Consequently, what has become known as a ‘Minsky moment’ arrived in 2007/8. The financial sector and financial instruments such as derivatives, instead of deriving from and serving the real economy, have become the drivers of the real economy.

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