Hendri Tanjung, Islamabad | Opinion | Sat, May 22 2010, 9:06 AM
Agus Martowardojo has been appointed by President Susilo Bambang Yudhoyono to replace Sri Mulyani Indrawati as finance minister of Indonesia. This policy is part of the President’s effort to improve the Indonesian economy, at least to reduce the effect of the global financial crisis.
Agus’ background as an economic agent (banker) is important because the current crisis is caused by the bank’s failure. For a professional banker who has experienced so many years in the banking sector, there is trust that he could solve the bank’s problems. This is my prediction as to why Yudhoyono chose a new finance minister who is a banker, not from academic.
What is happening in “Greece is not the crisis of the country, but a fundamental question for Europe and the euro” said Martin Blessing, Commerzbank’s board chairman of managing directors, at a conference in Munich on April 29, 2010. It seems the crisis will also hit Germany, Spain, Portugal and Ireland. That’s why countries in the G20 would have been arranging a yearly meeting since last year until 2020 to determine strategies to combat the crisis.
The result of the G20 summit held on April 3, 2009 in London, instilled fear in bankers all over the world. It recommended deregulating the banking industry including the measure to stop banker’s unlimited fringe benefits. Their recommendations do not flatter the bankers. It implies that the bonuses which have been received by the bankers for almost a decade will come to a halt. It apparently means tumbling down the income of the bankers and turns out that the London summit interspersed the comfort of the bankers.
Now, the most important questions we have is why deregulation was recommended? It seems that there is a lack of adequate regulation these days and that has been vindicated by the current global crisis.
Some economists analyze that the existing crisis is deeper than the great depression because of the huge impact that is affecting people’s lives, government, business and the community as a whole. The IMF said that the banks and other financial institutions around the world faced losses, which could amount to US$4.1 trillion. The leader of the rich countries promised that they would inject $1.1 trillion worldwide, which would take their collective contribution in the fight against the economic meltdown to $5 trillion by the end of the next year.
What went wrong with the economy that caused the crisis? At least there are five reasons to answer the question.
First, the excessive discounted trading in debt. Because of the booming housing prices, people rushed to borrow from banks for buying houses and banks lent money more than their Capital Adequacy Ratio (CAR), which should be at least 8 percent. Then how to increase lending at the same time as not violating the 8-percent CAR? Bankers started to securitize the debt and account it as CAR. The debt then was sold to other institutions (governments or businesses) by receiving a fee through selling it at cheaper price. The debt was further securitized and again sold to others. This process was repeated. As a result, the housing bubble emerged. When the housing market collapsed, the effect was transferred to other parties. This chain process of transfer actually made the crisis huge and deep because it affected all institutions, governments and businesses.
Second, it is a type of selling without owning. The example of this transaction is a short selling. Bankers borrow securities and sell them in the market. Most investment banks sell an exposure portfolio which they have never owned. Around 97 percent of assets of investment banks in the West is in from an exposure portfolio like this, not cash.
Third, there is action, which is similar to gambling, i.e. speculation in the stock market. Actually, the return of investing in the stock market could not be predicted. According to my investigation by using data of Karachi Stock Market from July 2, 1997 to Feb. 18, 2005 (1,835 daily data), it was found that the return of stock market was not normal, even the 5 sigma occurred. It means we might have a crash or a boom in the economy. Hence, the economy will collapse or boom in one day unpredictably. Therefore, the effect of the stock market on the economy is very harmful in the sense that it will make the economy veritably instable. It means that getting a profit through speculation in the stock market proved totally unfounded.
Fourth, there was a lack of adequate regulation. Before the 1990s, the regulator was so strict, but after that the regulator became relaxed. A number of bad products came out in this period, which exacerbated the global catastrophe. Many bought complex derivative contracts that proved to be worthless and now count among the toxic assets sitting on the bank’s balance sheet. They lent millions to companies that could not repay their loans.
Finally, it is the greediness and selfishness of economic agents: Bankers are greedy to make huge profits, investors are greedy to make quick profits by speculating in the stock market and savers are greedy to have high interest. Bankers, businessmen and governments are selfish by transferring the risks to others. Greediness and selfishness are the ubiquitous characteristics of most economic agents.
Subsequently, this economic crisis leads to social as well as economic problems. Some people who were fired by their companies killed their wives. Some of them committed suicide. Others became mad and distressed.
The cost of this social crisis is so costly and untenable. At the macro level, the World Bank has warned that the impact of global recession on the poorer countries would be severe and the 129 poorest nations would face a shortfall of up to $700 billion in foreign aid and investment.
These are the challenges of the new finance minister on how to call economics agents to obey such strategy: (1) don’t do trading in debt, (2) don’t sell what you do not own, (3) don’t do trading in excessive risk, (4) deregulating the banking system, and (5) promoting generosity and cooperativeness of economic agents.
These five fundamental principles of banks are healthy, promising and hopefully will change the world.
Therefore, what the finance minister should do is to deregulate the Indonesian financial market based on those five principles. This is very urgent for Indonesia in order to avoid the crisis wave that has hit Greece.
The writer is a PhD economic scholar at the International Islamic University Islamabad, Pakistan. – See more at: http://www.thejakartapost.com/news/2010/05/22/great-agenda-new-finance-minister.html#sthash.zi0uMUvY.dpuf