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THE current economic crisis engulfing the world, however intractable it may appear now, is susceptible to human solutions. It can be said to have originated from the financial excesses of sub-prime housing loans.
How a substandard mortgage can be sold as a sub-prime loan is in a knowledge domain outside economics. Unlike forensic accounting, there is as yet no forensic economics.
Toxic financial products have precipitated a full-blown global economic meltdown, threatening to undermine world trade through a credit crisis. For the first time in recent memory, banks are refusing to lend to each other. Without the lubricant of finance, trade will grind to a halt and, with it, the real economy.
The economic crisis (2008-2010) threatening the world today is similar yet different from the Great Depression which started in 1929. Then, men and machines were idling. Thrift, a virtue, was turned into a millstone around the neck of the economy. Budget deficits were politically out of bounds. Pump priming was vigorously opposed.
A contrarian thinker, John Maynard Keynes, proposed that governments incur budget deficits to stimulate demand so that idle men and machines could be put back to work. The wheels of economic laws may grind slowly but they grind inexorably. That is why I believe that mainstream economic thinking on the economic crisis today is wrong and even dangerous.
Unlike the Great Depression, where lack of demand was caused by excessive thrift, the crisis today is caused by overleveraging of financial assets fuelled by the United States Federal Reserve Bank. The Fed cut its discount rate again and again, almost to zero, and hence opened full throttle the faucets of money supply. As a regulator, the Fed should have known that when banks are flush with liquidity, bankers (being human) will be less careful - even careless - in lending.
Sub-prime mortgage lending was fuelled by easy credit. Banks securitised assets at escalating prices and sold down the risk to millions of retail investors. Some time, some day, the asset bubble had to burst - as it has today.
Counterproductive
At present, governments all over the world including our own are scrambling with 'stimulus packages' to mitigate the effects of the economic meltdown. 'Stimulus packages' sound good on paper but may turn out to be counterproductive. The American government proposes to spend billions of their taxpayers' dollars to buy highly leveraged 'toxic' financial products from investment banks and hedge funds to enable them to recoup their losses.
The founder and former chairman of the American Insurance Group (AIG), after disingenuously declaring that he was blameless for the disastrous fall of the US insurance giant, was reported to have said that 'the government's US$170 billion bailout had failed and that taxpayers would have been better off letting the company go bankrupt' (The New York Times, April 2, 2009).
I have no way of knowing what goes on in Hank Greenberg's mind but if, by his statement, he means that overleveraged financial assets should be allowed to decline in value to more realistic levels, I cannot agree with him more. Only then would there be willing buyers for these toxic products.
Hopefully, the financial markets will sputter to life again to drive the real economy.
To me, 'bailouts' mean propping up financial assets at highly inflated prices. No sensible buyer would think that such stratospheric prices are sustainable. What is even more puzzling is how bailouts can 'stimulate' an economy.
The local newspaper headlines today are replete with stimulus programmes which seem to change by the day. In my view, many of the stimulus programmes are misconceived.
The Jobs Credit scheme in Singapore is one glaring example. How a country like Singapore - which is a price taker - can sustain wage subsidies is beyond my comprehension. The way ahead for countries like Singapore is not to attempt stimulating consumption through wage subsidies.
By whatever name policymakers may call 'job credit schemes', they are wage subsidies which an open economy like ourselves can never sustain. Instead of using soft stimulus packages, Singapore has to methodically restructure its economy.
Our government has rightly introduced schemes for skills upgrading, beefing up our infrastructure and raising our knowledge domains through higher education.
While we will still be able to attract some high-end foreign direct investments because of our technical competence and sound infrastructure, we have to be aware of our relatively higher costs vis-à-vis the BRIC (Brazil, Russia, India and China) economies. The worst predicament we can get into is to slide into becoming a high-cost, low-tech economy.
It is said that the current economic crisis is the worst since the Great Depression. The weaknesses of every economy will be mercilessly exposed. I need not dwell further on our own.
Repositioning
I end with some trepidation. More and more, I hear remarks being made that Singapore - being the world's most open economy (not by choice but by necessity, I might add) - was the first to go into a recession. Ipso facto, when recovery comes, we will also be the first off the starting block.
This sounds like wishful thinking to me. In the aftermath of the current crisis, we will need to reposition ourselves for the new international economic structure that is emerging.
Those who are not our friends are already pointing out that our export- oriented economic model will no longer work in the new, post-crisis global economy. As our costs rise, we will no longer be able to compete with the BRIC economies in the production of goods and services.
There is no reason why we should produce goods and services only in or from Singapore. If we had just gazed at our own navel, there would be no Singapore Airlines today.
I was one of the founding directors of SIA; the taunt that SIA would be an airline that flies only between Changi and Seletar still rings in my ears. As permanent secretary of the Communications Ministry then, I negotiated a dozen air services agreements with other governments that gave SIA access to intercontinental routes. Such routes helped us overcome our limitations of size.
We need to ask ourselves: what can SIA export? It can export our knowledge of building up an international airline from scratch.
As we have shown in SIA, we can develop a dozen more SIAs in other knowledge domains. And we have to do it ourselves; no one else will. We need to wean ourselves from our recently acquired habit of hiring outside consultants or foreign CEOs to do the job for us. Enduring achievements have to be won by the people from within.
To sum up, to survive in the brave new world that is emerging, we need to export knowledge, and leverage on the resources of other countries to increase our gross national product (GNP). We have to transform ourselves into an export-oriented, knowledge-based economy.
The writer is a former senior civil servant who served as permanent secretary in several ministries. This article is sourced from the July-Dec issue of 'Inter Se', the official journal of the Singapore Academy of Law
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