Wednesday, November 5, 2008

Can Governments Avert A Global Armageddon?

While I had taken a long break from blogging with the arrival of my beautiful baby girl, many momentous things have also occurred outside the tranquility of my home.

It appears that the partial nationalisation of the banking system in the U.S. and parts of Europe following the pioneering rescue plan of British Premier Gordon Brown has saved the world from a major economic and financial meltdown. Brown's £500 billion plan includes £50 billion to recapitalise banks and accounts for up to one third of Britain's GDP.

This year, regional stock markets around the world have fallen by 40-50% with Malaysia apparently outperforming with one of the lowest decline of 40.9%, more by default than on its own merit. If this is not a financial meltdown then what else can be called a meltdown? Jim Rogers says these type of market crashes occur only 8 times in a 100 years. That is a probability of 8% with a collateral damage of 50%. However, Naseem Taleb thinks that worse case scenarios may have higher probabilities than we wish to think because stock markets do not follow the bell curve's distribution.

Today, stock markets have cheered the end of the U.S. election with the appointment of America's first black President. Is Barack Obama likely to rescue America out of its economic malaise? Or will he be another Herbert Hoover who succumbed to the folly of government thinking by raising taxes, tariff barriers and worsened the Great Depression of 1929-1933?

Here are some very insightful articles I read today that will shed some light on the current economic crisis. One is by Paul Wilmott, a finance lecturer and the other by Dr Arthur Laffer, the supply side economist who created the Laffer curve.

With half of the world going into recession (U.S. and Europe) in 2009, can Asia withstand the slowdown? To answer this question, we need to understand that the underlying drivers of robust global economic growth in the 2003-2007 period was caused by the housing bubble and credit bubble that started in the US and spread throughout Europe. This asset-fueled consumption growth was the driver of economic growth in export-based economies of Asia and emerging economies. So the big economic question is how much will we be affected in Asia? Will Asia be strong enough to withstand the coming storms of banking collapses in the West?

Before I share more thoughts on Malaysia's economic and political outlook in 2009, I would like to say that recessions are very good for economies as long as governments allow economies to reduce their excesses, reduce fat and be more efficient.

Like Japan in the 1990s, the U.S. is doing the opposite of sound economics by bailing out the speculators of Wall Street and taking money from healthy tax payers to pay for the mistakes of foolish tax payers with unmanageable housing loans.

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