Economists no longer able to predict economic crisis, says ISIS chief

By Lee Wei Lian
The Malaysian Insider
Sep 14, 2011

KUALA LUMPUR, September 14 — The global economy is now so unbalanced that economists are no longer able to predict crises, said Institute of Strategic and International Studies (ISIS) chief Datuk Mahani Zainal Abidin today.

This comes as the global markets continue to be plagued with uncertainty due to the lingering effects of the 2008 financial meltdown that hit the United States and Europe.

While Malaysia was spared from the financial crisis and has resumed economic expansion after the 2009 recession, its stock market has been rocked by global volatility, while inflation has soared due to pressure from high commodity prices. Property prices have also jumped dramatically owing to ample liquidity.

The think tank chief said that the problem was that the financial economy has become much larger than the real economy and admitted that assumptions used by economists no longer work.

“If you look at the world, economic theory has not kept up with what’s happening,” said Mahani at the launch of the Asia-Pacific Trade and Investment Report 2011 today.

“We can’t predict the future as assumptions don’t reflect reality. The financial part of the economy is bigger than the real part.”

She added that a key factor was that financial institutions were now compensating their CEOs based on profits, which encouraged too much risk taking.

“You look at how much a top banker gets paid versus a good engineer. Good engineers studied very hard. What does a good banker do? Basically shuffling papers,” she said.

The former member of the National Economic Action Council that crafted the New Economic Model for the Najib administration said another factor was that financial products and services have become too complex, which made it easier for speculators to manipulate prices.

“These financial people are very clever,” she said. “All the best brains are going into finance. Financial engineering has become far more complex than real engineering. You look at the high price of gold and other commodities. It is not that we are eating more rice. It is because of financial engineering.”

Mahani also warned that the situation is expected to deteriorate further, with the ratio of the financial sector to the larger economy worsening and potentially causing social problems.

“It is easy to create money, you just print,” she said. “The US quantitative easing pumped in US$600 billion (RM1.8 trillion) just like that. But the effects are (destabilising) capital flows. First, the stock market will go up and down. Now, when I see the stock market go down, I don’t worry anymore. Second, it will bite into property. The non-bankers will no longer able to afford property. Only people who know how to manipulate money can buy property.”

She said that Malaysia was lucky in some respects as it had learned from the 1997 Asian financial crisis and was not “gung-ho” about financial liberalisation.

The ISIS head added that Malaysia needed to prepare for the future by building a balanced economy.

“Although we want strong exports we also need a strong domestic economy,” she said. “Don’t forget about agriculture. Last time agriculture was not interesting but now it is considered very important.”

She added that the country needed to take steps to tackle its household debts levels.

As a percentage of GDP, Malaysia’s household debt increased from 66.7 per cent in 2004 to 76 per cent in 2009, which is uncomfortably close to the levels seen in the US prior to the 2008 financial crisis.

“Households have large debts because we encourage consumption,” she said. “Then when there are external shocks, they cannot cope.”

  1. #1 by yhsiew on Thursday, 15 September 2011 - 1:37 am

    Some degree of economic normalcy will return if there is tighter control on speculators/manipulators of the financial economy.

  2. #2 by Bigjoe on Thursday, 15 September 2011 - 8:21 am

    High prices of gold and other commodities is not because we are eating more rice but financial engineering? High price of gold is because of risk aversion. Gold is a risk haven because there is a large demand for it and its actually limited in quantity. Commodities prices have come down, the recent rise has been due to currency manipulation AND increase demand (maybe not Malaysian but Indonesian and Chinese ARE eating more rice).

    Economist can’t predict markets because its in the hands of policy makers that can’t lead/decide.

  3. #3 by k1980 on Thursday, 15 September 2011 - 8:35 am

    Like the US, Malaysia also has its lost decade

  4. #4 by undertaker888 on Thursday, 15 September 2011 - 12:13 pm

    Normalcy will return if we get rid of those pious thieves whose hands are at every cookie jars in this country.

  5. #5 by dagen on Thursday, 15 September 2011 - 6:49 pm

    Dear ISIS chief,

    I am throughly confused by your remark that economists are no longer able to predict the economy.

    Do you mean to say that in the prevailing situation:

    1) economists’ predictions are rubbish and not to be believed; or
    2) inspite of the economists’ predictions of gloom malaysia will still see sunshine; or
    3) jibby jib can make better predictions.

    Let me consult the dog next door. Maybe the big book of Prinsip2 Ekonomi Pokok Rambutan has all the correct answers. Hoi cintanegara, where is my cup? Celaka betul budak tu.

  6. #6 by dagen on Thursday, 15 September 2011 - 6:51 pm

    ps. Are you an economist? Are you making predictions, too?

  7. #7 by Jeffrey on Friday, 16 September 2011 - 3:19 am

    ///The global economy is now so unbalanced that economists are no longer able to predict crises/// – ISIS chief.

    Well 30 years ago when global economy was more balanced, it was just as difficult to predict crises. Professor Ravi Batra is good example. He predicted a great world depression in his famous book “The Great Depression of 1990”. 20 years later I am still waiting! The good thing about being an economic prophet of doom is that your book will sell and make money, and you’re Ok even if by fluke depression comes. If your prediction doesn’t come as predicted, then to save face you either move the date back, or wait until something similar does happen and then claim that that’s what you were referring to all along, though it came late due to some unexpected factors!

  8. #8 by HJ Angus on Friday, 16 September 2011 - 9:13 am

    I believe that economists cannot predict anything now as the world does not operate on basic economic principles anymore.
    How does anyone apply the rules of supply and demand when the issues are so complex with speculators creating markets and deriviatives that are many times more valuable(in trading volumes) than the actual commodities or even virtual products?
    Even the Captcha code has mirages and upside down letters!

  9. #9 by monsterball on Friday, 16 September 2011 - 12:31 pm

    The UMNO b so call think tank experts..know very well…the future cannot be predicted as we are joining the rank and file of countries that are heading towards economy crisis….like Libya..and most African countries.
    But we have oil..we export oil earning billions per year…yet we cannot think when we are so rich?
    Our Govt. think thank experts have no guts to expose crooks to protect their intelligence.
    The must think and sometimes behave like fools to say…they cannot think accurately anymore.
    Everything have reasons…and we don’t get the reasons…just a statement..cannot think anymore.

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