FINANCIAL MARKET STRESS

I recommended the two articles inserted at the page bottom to you just for the purpose of calling for your attention to the economic problems that occur quite regularly, not only to Americans but also to Malaysians as well. If you have no time to read all of them, then I hope you read the following excerpt:
“Secretary Paulson has been working on this package for about a year, so it’s not like pulling a rabbit out a hat,” Perino added. “It’s very constructive, deliberate thinking amongst the best minds in economics.”

For his part, Paulson rejected Democratic charges that it was lax regulation of mortgage brokers and the financial industry that had led to the current problems.

“I do not believe it is fair or accurate to blame our regulatory structure for the current market turmoil,” he said. “I am not suggesting that more regulation is the answer or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years.”

The last sentence of Perino has called upon my special attention: “I am not suggesting that more regulation is the answer or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years.”

In Malaysia, I remembered that we had a bad year of financial market stress in 1988. When I came back to Malaysia from the United States in early 1989, a lot of local university graduates from the Malaysian Government operated universities were drawing a financial aid of RM600 per month from the government’s special grant programme for helping the unemployed graduates. In early 1989, I managed to get my first job as an analyst programmer for a salary of RM900 per month. I later quit the job and went to Singapore to find a higher-pay job of Systems Analyst. Malaysia had its commendable economic recovery only after 1990, even though Singapore had already had a tourism boom and electronics boom in 1989.

In 1998, we had the worst financial market stress in history since Ringgit and the currencies of neighbouring countries like Thailand and Indonesia had been severely attacked by the currency speculators. Ringgit dropped from RM2.30 against USD1 in June 1997 to RM4.20 against USD1 in August 1998.

This year 2008 also seems to be a year of financial market stress for most Malaysians. The commercial banks have worked diligently to do a margin call or loan callback on the borrowers and have efficiently taken legal actions against the delinquent loan borrowers within a selective prosecution court system that still lives in the darkness of the shadow of Ex-Premier Dr Mahathir. Our political turmoil seems to have been worsening off even after the General Elections had been satisfactorily held on 8/3/2008. The outcome of the general elections 2008 had created a lot of political predicaments for the leadership of the ruling coalition since the top leaders had been asked several times by the insider challengers to quit the party post as an indication of being a responsible person who bears the full responsibility for the poorer election performance in order to hold themselves answerable to the party members. MCA top leaders will be facing the music in the party election that is expected to begin in May 2008 and will last until October 2008. UMNO top leaders will also be challenged in the final party election that is supposed to be held in November 2008. It is quite likely that Pak Lah will be challenged by Tengku Razaleigh (Ku Li) this time for the post of party president and will quite likely be defeated by Ku Li if Pak Lah cannot manage to rebuild his fading political influence by middle of this year. The political instability in 2008 will most likely cause some negative impact on the economic growth since there will be an obvious slow down of foreign direct investment in the midst of political uncertainties. Meanwhile, increasing the internal demand by encouraging domestic spending that is supposed to be an intrument to be used to accelerate the economic growth rate will most likely not be functioning well this time since the government spending will be impeded by the quiet but ambitious top party post challengers who hold important ministerial position in the Central Government or the State Government.

Some fatalists like to predict that Malaysia will be having an economic crisis every 10 years and it is said that this destiny has been pre-destined by a curse in relation to the time and date of the Independence. Although I do not believe in fatalism, I do believe that there is certain structural flaw that has been built into our economic or financial systems. This suspected unnoticed structural flaw may have caused a cyclical downturn of economic growth in our country due to the economic excesses reaching its peak after every 10 years. However, no one in so far is able to accurately pinpoint which suspected unnoticed structural flaw has actually hidden in our economic or financial systems and how it can be triggered off in order to jeopardise our economic growth every 10 years. Therefore, a lot of Malaysians still have to suffer from the cyclical repetitions of financial market stress as pre-destined by fatalism.

Economic fatalism is really a big puzzle for most Malaysians. Who will be the white knight to help solve the puzzle for us, do you know?

Desmond Wong
31.03.2008

Paulson proposes financial overhaul
By MARTIN CRUTSINGER, AP Economics Writer 31.03.2008

WASHINGTON – The Bush administration Monday proposed the most far-ranging overhaul of the financial regulatory system since the stock market crash of 1929 and the ensuing Great Depression.

The plan would change how the government regulates thousands of businesses from the nation’s biggest banks and investment houses down to the local insurance agent and mortgage broker.

Treasury Secretary Henry Paulson unveiled the 218-page plan in a speech in Treasury’s ornate Cash Room. He declared that a strong financial system was important not just for Wall Street but also for working Americans.

The administration’s plan was already drawing criticism from Democrats that it does not go far enough to deal with abuses in mortgage lending and securities trading that were exposed by the current credit crisis.

The plan, which would require congressional approval for its biggest changes, seeks to trim a hodge-podge collection of overlapping jurisdictions that date back to the Civil War.

It would give the Federal Reserve more power to protect the stability of the entire financial system while merging day-to-day bank supervision into one agency, down from five at present.

It also would create one super agency in charge of business conduct and consumer protection, performing many of the functions of the current Securities and Exchange Commission.

It would propose eliminating the Office of Thrift Supervision and the Commodity Futures Trading Commission, merging their functions into other agencies.

It would ask Congress to establish a federal Mortgage Origination Commission to set recommended minimum licensing standards for mortgage brokers, many of whom now operate outside of federal regulation, and it would also take a first step toward federal regulation of the insurance industry by asking Congress to establish an Office of Insurance Oversight inside the Treasury Department.

Paulson acknowledged in his remarks that most of the changes will not occur until after a lengthy debate in Congress, leaving it to the next administration to deal with the biggest changes proposed by the report. He also said the Bush administration’s focus would remain on getting through the current severe credit crisis, which has roiled financial markets since last August.

President Bush’s aides said Monday after the announcement that Bush was happy to let Paulson be the lead figure on this issue.

“The president’s point of view is that he trusts Secretary Paulson to put forward what he thinks is a constructive plan,” White House press secretary Dana Perino told reporters traveling with Bush aboard Air Force One to Ukraine on Monday.

She said administration officials will work with lawmakers in hopes of having constructive conversations. Asked if Bush’s goal is to get the overhaul approved before he leaves office, Perino said: “We’ll have to see. It’s a big attempt.”

“Secretary Paulson has been working on this package for about a year, so it’s not like pulling a rabbit out a hat,” Perino added. “It’s very constructive, deliberate thinking amongst the best minds in economics.”

For his part, Paulson rejected Democratic charges that it was lax regulation of mortgage brokers and the financial industry that had led to the current problems.

“I do not believe it is fair or accurate to blame our regulatory structure for the current market turmoil,” he said. “I am not suggesting that more regulation is the answer or even that more effective regulation can prevent the periods of financial market stress that seem to occur every five to 10 years.”

Banking groups raised strong objections to the plan while other industry groups had mixed reactions.

“Dismantling the thrift charter and crippling state banking charters will weaken banking in America,” said Edward Yingling, president of the American Bankers Association.

In Congress, House Financial Services Committee Chairman Barney Frank, who is working on his own regulatory revamp, called Paulson’s proposal a “constructive step forward” but said it wouldn’t give the Federal Reserve enough authority to carry out its expanded job to police the stability of the entire financial system.

Many Democrats said that Congress’ first priority should be to deal with the current mortgage crisis that is threatening millions of Americans with the loss of their homes and that an extensive debate on a regulatory overhaul should not occur until a new president is in office next year.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., said in an appearance on CBS’ “Early Show” that it was not a failure of the regulatory scheme but “a failure of leadership” that led to the current crisis.

The proposed overhaul would be the most extensive since the current regulatory system was created in response to the 1929 stock market crash and the Great Depression.

It comes at a time when the financial system faces its most severe credit crisis in two decades, one that has resulted in billions of dollars of losses for big banks and investment houses and the near-collapse of Bear Stearns, the country’s fifth-largest investment bank.

The rising tide of bad debt has made it harder for consumers and businesses to get credit, further weighing on an economy struggling with a prolonged housing slump and soaring energy prices. Many economists believe the country is already in a recession.

Financial overhaul at-a-glance
By The Associated Press Mon Mar 31,2008 3:12 AM ET

The Bush administration’s plan to overhaul financial regulation, as outlined in a summary obtained by The Associated Press, would:

_Expand the role of the President’s Working Group on Financial Markets to include the entire financial sector rather than just financial markets.

_Create a federal commission, the Mortgage Origination Commission, to develop uniform, minimum licensing standards for mortgage market participants.

_Close the Office of Thrift Supervision, which regulates thrift institutions, and move those functions to the Office of the Comptroller of the Currency, which regulates banks.

_Merge the functions of the Commodity Futures Trading Commission into the Securities and Exchange Commission to create one agency to provide unified oversight of the futures and securities industries.

_Establish an Office of National Insurance within the Treasury Department to regulate those in the insurance industry who want to operate under an optional federal charter.

_Work to establish as a long-term goal three major regulators: the Federal Reserve as a “market stability regulator”; a “prudential financial regulator” to take over the functions of five separate banking regulators; and a “business conduct regulator” to regulate business conduct and consumer protection.