Friday, March 6, 2009

FINANCIAL CRISIS AND BAILOUTS


As posted by Dr. Mahathir Mohamad at Che Det on March 5, 2009 8:27 AM

1. I was in England recently and the newspapers were full of dismal reports on bank and business failures, the closure of well-known businesses like Woolworths and Baratt, the increases of unemployment rate with some 700,000 professionals among the 2 million laid off or unable to get jobs. And there were lots more bad news.

2. The British Government is busy bailing out banks and companies with hundreds of billions of pounds but the economy seemed to have gone into recession despite all these efforts. There is no sign that the crisis is on the mend.

3. Malaysia can feel vindicated because all the things we did in the 1997 - 98, crisis, which were condemned by the economists of Europe and America, are now being done by them blatantly and on a massive scale. They talk about trillions of dollars and hundreds of billions of pounds in bailouts. Where the money is coming from is not revealed. Have they been keeping these huge sums for such an emergency?

4. I am not a financier or even an economist. But somehow I think the bailouts are not going to work although they worked in our case.

5. This is because the banks and businesses we bailed out did not get into trouble because they abused the systems or indulged in fraud. They were forced into that situation because the currency was devalued by currency traders and they found themselves unable to meet their commitments. Once they gained access to funds through bailouts they were able to do business again and to repay the money they had received.

6. They were able to do this because, although Malaysia was in recession, the rest of the world was not. There was much less constraint in doing business.

7. The situation today is very different.

8. The collapse of the economies of the rich countries is due to extensive abuses of the financial and monetary systems so much so that the systems broke down completely. I doubt (not being an expert I can only doubt) that the trillions of dollars to bail out the failed banks and financial institutions will enable them or their economies to recover.

9. This is because their huge losses were due to fraud and they cannot recover the billions they had lost through ordinary business, i.e. through the financing of the production of goods and services. Only through doing the same things that had brought them down, i.e. through sub-prime loans, through investments in derivatives and hedge funds, through massive loans to currency traders etc. can they make the billions to return the money they had received through bailouts. Obviously they cannot be allowed to indulge in their old abuses. Through ordinary business it would take years and years to recover the money they had lost. In the meantime all these banks, financial institutions and businesses will belong to the bailor, the Government, i.e. they have effectively been nationalised. And that will spell the end of capitalism and the free market.

10. It should be noted that the East Asian countries have not yet recovered from the 1997 - 98 crisis. Their currencies have not regained their strength to the pre-crisis levels. They have all become poorer, or at least not as rich as they could be had there been no financial crisis.

11. It will be the same with the rich countries. Their GDP and per capita pre-crisis will not be restored despite the trillions they are spending on their bailouts. They are poorer now and will remain relatively poor even after they have put their houses in order.

12. I may be wrong of course. Maybe by more trillions of dollars of bailouts the rich would achieve recovery. But I have my doubts.

13. Unfortunately the poor countries will also become poorer.