Hi Donaldson,

Welcome to TOC. Well done for your first article. It is well researched and addresses the key points of the global financial crisis.

The two key problems are:

> write down of assets to market
> freezing of credit

Both of these issues are being addressed. Today, the Singapore accounting standards body have adopted new rules that allow certain assets to be re-classifed so that they can be kept at their book value. Similar practices are being implemented in the other countries, notably the USA.

The central banks have adopted measures to unfreeze credit. The US Fed is injecting billions in to the banking system. Several countries, including Singapore, have guaranteed bank deposits.

These measures will help to reduce the seriousness of the recession. But, going forward, the global financial system has to be re-built. It will be a different world, and perhaps a better one.

What’s the main point of this article? I think although good research was done for this article, the introduction and sub-headings were a little too mis-leading for the reader.

So what’s the historical experience of emerging markets pulling the world economy along all about? Are the conditions similar to that of today? This was only mentioned at the start and at the end, with China the only example given. Also, WILL recession engulf the world economy? I feel as though the writer was avoiding taking a stand on tough questions that, even renowned economists would argue among themselves.

Hello Donaldson.

I’m glad you wrote on a complex issue. Half a decade later, we can all start quoting your misguided foresight against you.

I also believe the most important topics receive the least comments. Perhaps your article discusses one of them.

I think although good research was done for this article, the introduction and sub-headings were a little too mis-leading for the reader. – b (#2)

The article aims to highlight the level of uncertainty faced by key decision makers. For example, the Feds are only made known about Lehman Brothers’ financial condition about 3 weeks before its collapse. The Feds can only demand the financial institution to be transparent when the financial institution is asking for the Feds’ help. This applies in many countries too, including Singapore.

Yet when the Singapore government declares to provide 100% bank guarantee for deposits until 2010, it shocked me because the government effectively looses a trump card to demand the financial institutions to be transparent about their dealings.

There is no general consensus among renowned economists and central bankers, other than something should be done. So what position do you expect me to take? As far as I understand what about the global financial crisis, it is thought that decoupling will save the global economy, ie. the emerging market economies will continue to grow despite the credit crunch in the west. I argued that decoupling theory is not valid, but rather diversification leads to overflourishing of systematic risk at the regional and global levels. To me, a global recession is certain.

I can’t conclusively tell you that China will indeed save the world economy, given there are mixed signals from the Chinese leaders and the Chinese economy. The only reason why I used China as an example because China has been the mainstay of world growth over the last couple of years. However, I am very sure that the Singapore economy will not be able to alleviate global economy. For now, distrust in the banking system has become such a huge problem that nobody is lending money in the USA and Asia. It is known that many Asian banks have started to tighten their credit lines against western companies despite.

I don’t know about you..
But the one key thing an article (as opposed to an academic paper for your professor to read) needs to do is to inform and convince the reader of your viewpoint.

Your article is so dense and linking stuff here and there, it is totally incomprehensible for low IQ people like me. I believe a lot of your readers here might feel the same way…

But if you can KISS, then the article might not be suitable to be only 1 article.

Before i get lambasted by anyone out there i must state clearly that i am no financial expert. In fact, I cannot even be bothered about all these financial stuff.

But I did spend some time to read Donaldson’s article and i find it is quite easy on the ears and has managed to convince me that numbers do not always have to be so complicated to understand.

Well, for the experts out there, they may be able to find fault with the opinion of the writer but for me, it has given me the opportunity to learn something different.

Whether the assessment is accurate or not is another matter altogether?

I’ve learned something new and now I am keen for more knowledge.

Thanks Donaldson.

Half a decade later, we can all start quoting your misguided foresight against you – Dingfeng (#3)

The harbinger of bad news is never welcomed in Singapore. Bad news hurts, reality bites. Why did Lehman Brothers’ woes take so long to reach mainstream media in Singapore when people like me are already aware of it about 6 weeks in advance? Since April 2008, I already know Lehman Brothers Singapore stopped receiving oil trading data because they defaulted on their subscription. If a big company like Lehman Brothers can default on something so essential to their oil trading desk, it is not hard to guess that their financials is in big trouble. Singapore is the next biggest oil trading centre after New York and Tokyo.

Correction:

Singapore is the next biggest oil trading centre after New York and London

I’m not against the accuracy or whatever was written in this article, in fact I think this article tried to simplify complex issues for the average person on the street. However, what I’m trying to highlight is the discrepancy between what is stated in the introduction and the key questions in the subheadings.

For example, when the author states in the introduction, “Although the immediate outlook for the world economy looks grim, the historical experience of the emerging markets pulling the world economy along will point the way forward when recovery gets under way”, there is little discussion on the HISTORICAL EXPERIENCE to substantiate his claims. Besides, by discussing decoupling under the question “Will recession engulf the global economy?”, may be relevant but it is not clear that the substantiation adequately answers the question the author may want to answer. Claims should be substantiated with proper arguments, and the arguments should be relevant to the claims.

I’m not against the accuracy or whatever was written in this article, in fact I think this article tried to simplify complex issues for the average person on the street. – b (#10)

Yes. It is meant to simplify complex issues for the average person without overhyping the good news and without downplaying the bad news.

“ Besides, by discussing decoupling under the question “Will recession engulf the global economy?”, may be relevant but it is not clear that the substantiation adequately answers the question the author may want to answer. – b (#10)

Let’s put it this way. We can divide the world into OECD and non-OECD. It is pretty clear that OECD countries are heading into recession. So in order to evaluate if there would be a global recession, one has to consider the likelihood of the non-OECD countries to enter recession.

Singapore is the first among the non-OECD countries to enter recession, while there are signs in the Chinese economy that Chinese may enter recession too. If China faces the prospects of a recession too, why would any other non-OECD countries to be in a better position? I did mention that a non-OECD recession must involve additional risks such as a slump in the domestic investment and consumer confidence.

However, what I’m trying to highlight is the discrepancy between what is stated in the introduction and the key questions in the subheadings. – b (#10)

I actually agree with you on this one. It was never meant to be part of the introduction, but the last section the light at the end of the tunnel. The editor most probably moved it because my article sounds grim right from the start. It is only meant to be part of 2nd last paragraph in the last section. In fact, the introduction should be “As the global financial crisis continues to unveil itself, leading OECD economies…” Being the harbinger of bad news is never politically correct, but I will still do it because it concerns the strategic interest of our island-state.

6 weeks before the collapse of Lehman Brothers, the Feds actually asked the Bank of England (BoE) if BoE would help out with Lehman Brothers in Europe. So when BoE said “no”, we at Canary Wharf in London already expected the Feds to say no to bailing out Lehman Brothers USA. Then a week later, the Financial Times reported that Lehman Brothers had entered into talks with soverign wealth funds from the Gulf and East Asia for funding. It was a clear hint that Lehman Brothers can’t secure any funds from the Feds or the BoE. However, the Feds and BoE are typically the lender of last resort, so if they don’t lend money, why would any rational fund managers would?

I am sure Straits Times didn’t cover Lehman Brothers at all for the one month period prior to its bankrupcy.

A Muslim scholar once told me that according to the Koran, investment should be done thorugh equity rather than through lending. Equity requires all the people to share the risk. The Koran is against payment of interest on lending of money.

The Christians told me that the Bible also have similar teaching.

The collapse of the global financial system is the heavy reliance on debt (or credit) to finance the world of business. I was shocked that Lehman Brothers have debts that are 30 times of the equity. When the debit is withdrawn (due to fear of insolvency), Lehman Brothers collapsed. They are the counter party to many swap arrangements, which caused a bigger house of cards to fall.

If business is financed with equity and long term borrowings (rather than short term borrowings), we will have a stable financial system.

We have to think about the new global financial system, to replace the old system that has collapsed.

Hi Donaldson,
Can you send an email to kinlian@gmail.com. I like to discuss this matter with you.

Hi Donaldson,

Good effort. It is a herculean task to condense the complex financial crisis into a single article. If one were to be picky, one can even link the story of LTCM into it.

FYI.. LTCM has even at one time leverage more than 50 times ….

In any case, the current financial system and economic growth is based on debt…dangerous.

Hi Kin Lian,

I am not sure about the bible mentioning it (ie equity investing not interest). Maybe I ought to check it out.

regards
Chih-Yang

i find it very informative, thank you donaldson, although this can be further expanded on into 2 articles.

and good job!

It doesn’t seem to me the emerging economies are steering this mess, more likely they are the (eventual) victims of this mess, how many times did the Russian exchange halt trading? How much has the Korean won dipped? What is happening to the Pakistani economy? What is happening to economies dependent on commodities export? (Say Brazil and oil exporters). If capital market are direct correlation of a countries economic outlook, the trend seems to be ‘get out and get out fast’, when previously they are rightly the beneficiary of excesses and hedging.

There are red herrings in this article as well…

“Sustained high growth in the emerging market economies has been supported by successful diversification in the engines of growth, with stronger dynamics in domestic consumption in the emerging market economies offsetting slower growth exports to OECD countries.”

It might serve us well to explain this historical perspective. Sounds like a textbook worth of information and research.

I too thought the title is misleading, ‘unwrapping the financial crisis’ does that mean an account of how it happened? Doesn’t read like it though,

By my account, the build up to this crisis, has to do with the twin peaks, its beginning, the dotcom bubble, to resolve the aftermath, and its replacement the housing bubble, the deregulatory zeal, along side ideologically driven politics and financial innovation that has never been stress-tested.

It doesn’t seem to me the emerging economies are steering this mess, more likely they are the (eventual) victims of this mess – Aphaville (#16)

I don´t think they are steering the direction of the mess now. But I think they will start to show the way out of the mess towards the end of the mess. The credit crunch is far from over.

Sustained high growth in the emerging market economies has been supported by successful diversification in the engines of growth, with stronger dynamics in domestic consumption in the emerging market economies offsetting slower growth exports to OECD countries. – Donaldson Tan

This view has also been echoed by organisations such as INSEAD, Wharton Business School and RAND Corporation. Plus I did mention:

In fact, the share of emerging market economies‘ exports to the US has dropped below 15% of the total from the peak of about 25% in 1997. – Donaldson Tan

By my account, the build up to this crisis, has to do with the twin peaks, its beginning, the dotcom bubble, to resolve the aftermath, and its replacement the housing bubble, the deregulatory zeal, along side ideologically driven politics and financial innovation that has never been stress-tested. – alphaville (#16)

An alternative view? Please elaborate. There is no general consensus or agreement on the events and mechanism leading the global financial crisis. I hope my article would spark a debate here. By no means is my article an authoritative paper but only my opinion of the global financial crisis.

I too thought the title is misleading, ‘unwrapping the financial crisis’ does that mean an account of how it happened? Doesn’t read like it though, – alphaville (#16)

I should have given more thought to the title. WouldMaking Sense out of the Global Financial Crisis be a better title?

Donaldson Tan, good article by you. No matter how much research had been done, at the end of the day, we must make a commercial decision and just go and get the deal done.It is not easy to anticipate such a this global financial crisis is so huge,far worse than 1997 Asia Financial Crisis.I doubt China would come to rescue the Global Economy as China herself is facing more severe financial crisis which can lead to political unrest throughout the nation.

Regards
Andrew Chuah

Thanks for the article and I think it was very well written. you must either be a journalist or a writer by profession?

I am no economist or analyst but my only worry is that our people may find the tough times difficult. During the 1997 and 2001 crisis, many people were laid off and it was a very bleak period. History repeated itself now and I can see the cycle getting shorter. Unemployment was prolonged and many families broke up. Some even committed suicide as they could face up to their families as breadwinner.

I remember a case whereby a breadwinner father committed suicide by jumping off the MRT station as he was jobless for about a year plus. He was a blue collared worker and could not find alternative work easily. It was reported that he only had less than $20 in his wallet before he committeed suicide.

This recession if I read correctly will be hard and long – some predicted that it could last between 2-3 years. The worse fear is deflation when everyone does not spend money and goods of prices keep falling and companies have to lay off staff as there is no work to be done due to a dratic drop in consumption. Japan suffered from a decade long of deflationary pressure and only got out of jail recently. Now, it has to face another recession on a larger scale.

As Singapore prepares itself for a grim future ahead, let us unite together and help one another out.

Hi Lim Chih-yang (#14)

I asked a Catholic priest last night. He said that this advice (against interest on borrowing) is contained in the Old Testatment. The Koran also refers to the same scripture.

Excellent piece, Donaldson. Thank you for educating me! May I ask, what is your profession?

13) Tan Kin Lian
14) Lim Chih-Yang

Yes, there are quite a few references to “usury” (lending with interest) in the Old Testament. See http://www.tentmaker.org/lists/UsuryScriptureList.html

Specifically, Jews are prohibited from lending with interest to:
a. Fellow Jews (ie, their brethren)
b. Poor people

This seems fair and reasonable to me. I’m guessing the Quran’s restrictions are similar. Perhaps someone could enlighten me.

Hi Donaldson,

Allow me to elaborate my account…

The story begins with Reaganomics and Thatchrism and their allied ideological principle of the self regulating free market, reduction in the role of governments, opposition to labour unions as an arbiter of wages, privatisation of state-owned industries getting rid bureaucratic bloat . There had been the emphasis on direct tax-cuts (say capital gain tax), in hope the wealth would trickle down, tax revenue can growth via indirect taxation (say GST).

This was presented as the Laffer curve and supported by proponents of supply-side economics. On the other side of the Atlantic, the answer to that calling in the UK would be big bang event of 86′, freeing up the capital markets (basically allowing foreign competition, and being allowed to trade in anything) , where, as of today, the financial sector contribute roughly 1/5 of UK’s GDP.

The allure of this idea is that an exercise of free will and choice would triumph over government bureaucracy, reward the individual entrepreneurism, presenting greater efficiency, where an increased in wealth would float all boat, allowing people decide how and where to spend their money. This is the tenet of free market capitalism as popularise by Milton Friedman, the one with the quote “there’s no such thing as a free lunch”, and his book Capitalism and Freedom.

How did this seed the change? The dogma attached to this school of thought came to form the ‘Washington consensus’, with IMF being a shadow agency of its execution (although IMF have other contributors, their right to veto are never used), as the international lender of last resort, where access to funds dictate the adoption of these policies.

Now back to the deregulation of the market, on the backdrop is the introduction of new financial instruments that allow leveraging and increase risk management, where before a futures contract states the price of purchase, with Options, one would simply pay a premium to hedge the risk at no obligation to purchase. A time of optimism where risk could be calculated, volatility predicted, all you need is the next ‘Dutch tulip mania’ to fuel a speculative bubble.

Step forward the take off, the dotcom bubble, in the six years run-up to the burst (1995-2001), a period of sheer insanity with the participation of banks raking in profit from IPOs. The belief that an efficient market prescribe the price as an reflection of the information available, hence why would a bubble exist?

In the aftermath, it was Fed to the rescue, within a year (2001) the Fed funds rate went from 6% to 1.75%. This is the advent of cheap credits. The Fed has effectively replaced the dotcom bubble and seeded the housing bubble, Greenspan was conferred the title of ‘maestro’.

The next period (2001-2008) saw the Bush administration brought back adherence of the same principle established by Reagan, at the same time, financial markets were bundling up mortgage loans into securities, chopped up, repackaged, traded with the help of globalisation and free flow of capital, ended in the hands of minibond investors. Anyone who had gleam the prospectus can see how complex and opaque this has become. Bank business model that relied on cheap money are frog march to nationalisation. And so here we are sitting on a global recession.

But the story doesn’t end, currently unfolding is the unwinding of Credit Default Swap (CDS) and the contagion that comes with it. If you say to a bondholder, you could buy insurance to protect yourself against a company going bankrupt, he/she would likely answer, sounds like a good idea. This is the premise that sold CDS, as a method of risk management.

But what if CDS could be traded or manipulated, where investors infer the cost of CDS as a reflection of the health of a company? But how can this happen? Lack of regulation. This is the point where a new financial instrument is stress-tested.

The quote about emerging market being less reliant on export, buoyed by domestic demands is a myth that everyone brought, the decoupling that never occurred. The current resilience of the dollar in this crisis reinforces its role as the reserve currency. I wish that was not the case but it is apparent.

Now to interject to this state of affairs, I believe capitalism performs better when there’s an ideological challenge to its orthodoxy. Think back to the suspicion and fear when the Soviets were building a new world of socialism with hanging chandeliers in their Metro networks and the impending space race. Fast forward to its collapse, to a world dominated by a single superpower, with an ideological driven mindset where it has taken unilateral action to spread its version of liberal democracy.

Now to support my opinion, do this exercise yourself, go to Yahoo finance, plot the S&P500 (^GSPC) from 1978 to 2008, look at the extrapolated linear trendline (or simply use a ruler), you will clearly see two period of ‘irrational exuberance’ (the twin peaks) that coincide with my emphasis.

Last time, financial bubble burst, they say reason A. they say fixed liao.
then another fiasco. they give another reason B.

i really have no confidence in these economists when their guess are as good as mine.

meanwhile, to bring back the index, maybe , IF ETHICAL, will TVs be using stock market experts to urge people to bring money back to the market? Please observe all TV channels to find out what is happening.

If regulators are really doing a good job, why would it lead to such a big fiasco?
time and time again. and most believe another tsunami to come in future.

Excellent piece, Donaldson. Thank you for educating me! May I ask, what is your profession? – Gerald Giam (#21)

Thanks for the article and I think it was very well written. you must either be a journalist or a writer by profession? – Gilbert Goh (#19)

I am neither a journalist nor a professional writer. I have been writing and debating on international issues relating to politics, economics and security for 3+ years as my extra-curricular activities at university. My background is engineering, but I have interned and worked part-time in corporate finance advisory, hedge fund management and energy consulting. I am fairly acquainted with economics and finance, but I am still no expert.

Islamic finance forbids profiting from debt, so it is really quite interesting how an Islamic loan works out. It is actually similar to a lease financing scheme repackaged. In the case of an Islamic mortgage, the bank purchases the property and leases it out over a fixed period. At the end of the fixed period (e.g. 15 years), the resident is expected to pay a token sum to purchase the property from the bank. In this case, the bank takes on the cyclical risk of property valuation. Unlike the US Sub-Prime Mortgage crisis, in which the interest went up as soon as the property price dipped below the original loan value, the resident takes on the cyclical risk of property valuation.

Excellent piece, Donaldson. Thank you for educating me! May I ask, what is your profession? – Gerald Giam (#21)

Thanks for the article and I think it was very well written. you must either be a journalist or a writer by profession? – Gilbert Goh (#19)

I am neither a journalist nor a professional writer. I have been writing and debating on international issues relating to politics, economics and security for 3+ years as my extra-curricular activities at university. My background is engineering, but I have interned and worked part-time in corporate finance advisory, hedge fund management and energy consulting. I am fairly acquainted with economics and finance, but I am still no expert.

Islamic finance forbids profiting from debt, so it is really quite interesting how an Islamic loan works out. It is actually similar to a lease financing scheme repackaged. In the case of an Islamic mortgage, the bank purchases the property and leases it out over a fixed period. At the end of the fixed period (e.g. 15 years), the resident is expected to pay a token sum to purchase the property from the bank. In this case, the bank takes on the cyclical risk of property valuation. Unlike the US Sub-Prime Mortgage crisis, in which the interest went up as soon as the property price dipped below the original loan value, the resident takes on the cyclical risk of property valuation.

The quote about emerging market being less reliant on export, buoyed by domestic demands is a myth that everyone brought, the decoupling that never occurred. The current resilience of the dollar in this crisis reinforces its role as the reserve currency. I wish that was not the case but it is apparent. – alphaville (#22)

That is the case for China, not every emerging market economy. I denounced decoupling over grounds on growing domestic demand. Instead of decoupling, diversification of trading partners for each emerging market economy actually occured. This materialised in the form of increased trading among emerging market economies, thus being less reliant on trading with OECD countries.

I actually did not attempt to explain how we arrived at the Global Financial Crisis in my article, but rather stating what it is, with respect to consumers, and how it will affect us. Then I explored how the Global Financial Crisis will evolve from now by asking if we are entering a global recession followed by pondering whether the Chinese economic growth will indeed limit damage to the world economy.

I do not dispute that capitalism works for the common good if the capitalists share a common political ideology, united against a common enemy, but that is an American-centric view point as a Corporatist. But ideologies do not necessary generate revenue, but market trading does. I stand by the view point that systemic risk flourishes during good economic times. Let me illustrate this through a portfolio of equities:

Say you manage a portfolio of 5 companies, and their risk is given as:
2000- (a) 1.2% (b) 0.9% (c) 1.3% (d) 0.8% (e) 1.1%
2001- (a) 1.3% (b) 1.1% (c) 1.3% (d) 1.0% (e) 1.2%
2002- (a) 1.4% (b) 1.1% (c) 1.2% (d) 1.2% (e) 1.2%
2003- (a) 1.5% (b) 1.2% (c) 1.1% (d) 1.1% (e) 1.3%
2004- (a) 1.4% (b) 1.3% (c) 1.2% (d) 1.2% (e) 1.3%
2005- (a) 1.3% (b) 1.4% (c) 1.4% (d) 1.3% (e) 1.3%
2007- (a) 1.3% (b) 1.4% (c) 1.2% (d) 1.5% (e) 1.5%

From 2000 to 2007, the world economy has been doing very well, so for each company, the senior management’s risk appetite has increased over the years, so that they can maximise return for their shareholders. They can do this by investing in risky projects or by adopting higher leverage ratio for their investment projects. Although the portfolio may have diversified into 5 companies, because each company suffers from the common adoption of increased risk appetite, your systematic risk increases anyway. Total risk also increases too.

What is the difference between systemic risk and systematic risk?

Systemic risk is inherent to the operation of a system, if any of its interconnected mechanism fails to function as it should, then there’s systemic risk.

Say your kidneys, integral to the blood circulatory system, fail, the impact is the slow poisoning of your body, follow by death.

Systematic risk points towards failure in a methodological procedure which can be avoided.

Say the method of tagging bonuses of RMs to the sale of financial products, with an emphasis on volume as a measure of performance leading to mis-selling.

alphaville (#28),

Do you agree or disagree that flourishing of systemic risk led to the cycle of financial crisis. It is a general sentiment that a financial crisis occurs every 5-10 years.

I don’t agree it has to be the case, to witness innocent bystanders caught up in a crisis not of their creation and suffer a great deal more is not acceptable to me. This has occurred during the Asian financial crisis and it is happening now and will eventually get worst.

A reflection will show the contrast, back in 97′, the effect of a massive outflow of foreign capital combined with speculators descending on the frenzy, suddenly bankruptcy of governments was a possibility. When the IMF moved in to provide liquidity to nations hit by the crisis, by the terms dictated by them, banks were allowed to fold (hypocrisy?), a nation in poverty ended in poorer, food riots and a dictator was disposed (could there be a less tragic way?)

Taking side, one can be detached, taking an analytical view, the theory say so, these events do and will happen, it is inevitable.

On the other hand, we don’t usually account for these negative externality. Banks require public funds to bail them out, preventing the devastation on Main St. Here’s the alternative, would you rather not prevent (or minimised) the circumstances from occurring and allocate resource to better use?

A debate on regulating the financial system
http://www.economist.com/debate/days/view/230

My view is it doesn’t has to be a matter of fact. This is change we can believe in! Under the governance of the PAP, we have see those GDP number grow but wealth is increasingly concentrated, wage gap increasingly widen.

So those profits you were talking about? To whom did it benefit? More good years?

I understand that the dot-com burst contributed to the current financial disaster through provision of cheap credit in the US financial market post 2001. However, it is not the only source of cheap credit. Asia is home to many high saving people, so Asia is also a cheap source of liquidity. Where there is cheap source of liquidity and credit, followed by light-touch regulatory approach, it is inevitable that another financial crisis will be in order some time in future.

My view is it doesn’t has to be a matter of fact. This is change we can believe in! Under the governance of the PAP, we have see those GDP number grow but wealth is increasingly concentrated, wage gap increasingly widen. – alphaville (#30)

How does this gotta do with PAP?

John Kemp from Reuters thinks that global recession has already started.

On the other hand, Ben Heineman from Havard University’s Belfer Centre for Science & International Affairs ponders over the lack of leadership in the financial sector for the tackling the global financial crisis.

Where are we heading from today? Who will President Obama appoint as the new US Treasury Secretary?

Yes, how does this gotta do with PAP?

Maybe to follow up that question, why or what do you think cause the increasing income gap? Both mirrored in the US and SG.

Why do you think the response to the minibond fiasco has been so lethargic?

Hi Donaldson,

I am not exactly sure how the emerging economies will pull the global economy forward?
The emerging economies of Europe (Hungary, Bulgaria, Estonia) are all suffering from a depreciating local currency and soaring foreign debt (EUR); much like the emerging economies of East Asia during the 1997 Asian financial crisis. There is little reason to see how these emerging European economies can help pull us out.
The commodities-dependent economies of South America and Russia have to live a lot less revenue given lower demand for commodities. These economies have over-spent in boom times and their financial budget was based on assumption of ever-higher commodity prices.
As for Asia emerging giants like India and China, their growth rate has sank to a mere 9% (both economies need to grow at minimum 8 to 10% just to stay afloat). Their economies are extremely export-reliant and unless they can boost domestic consumption, I cannot see how these two giants can lead us out of the current recession.
To summarize, if I try connecting the dots together, I cannot see through which mechanism (consumption?, capital investments?) that emerging economies will pull the global economies out of this recession.

I am not exactly sure how the emerging economies will pull the global economy forward? – Eaststopper (#34)

I have to re-iterate this: an editorial amendment to my article have modified the interpretation of my article. I never intend to put “Although the immediate outlook for the world economy looks grim, the historical experience of the emerging markets pulling the world economy along will point the way forward when recovery gets under way.” at the beginning. It is meant to be part of the last section. What I am actually saying is that when recovery is underway, then the emerging market economies might show the way out out of the global financial crisis.

Here’s the unabridged version of the article for anyone interested.

Maybe to follow up that question, why or what do you think cause the increasing income gap? Both mirrored in the US and SG. – alphavilleSG (#33)

What does increasing income gap has to do with the global financial crisis? I am no conspiracy theorist, but I see this issue as a problem of wall street versus main street. Yes, no doubt when main street raises, wall street raises too. However, when wall street rises, it is not necessary that main street rises too. This has to do with the practice of how salary and compensation are valued. This is best described by Albert Einstein in his essay Why Socialism published in May 1949 on the Monthly Review:

The essential point about this process is the relation between what the worker produces and what he is paid, both measured in terms of real value. Insofar as the labor contract is “free,” what the worker receives is determined not by the real value of the goods he produces, but by his minimum needs and by the capitalists’ requirements for labor power in relation to the number of workers competing for jobs. It is important to understand that even in theory the payment of the worker is not determined by the value of his product

But the story doesn’t end, currently unfolding is the unwinding of Credit Default Swap (CDS) and the contagion that comes with it. If you say to a bondholder, you could buy insurance to protect yourself against a company going bankrupt, he/she would likely answer, sounds like a good idea. This is the premise that sold CDS, as a method of risk management. – alphaville (#22)

Just like you said CDS functions like insurance, but it is not regulated in a similar manner to insurance. Hence, when CDS collapses, it definitely cause a huge worldwide fall-out.

To summarize, if I try connecting the dots together, I cannot see through which mechanism (consumption?, capital investments?) that emerging economies will pull the global economies out of this recession. – Eaststopper (#34)

I also make no mention what mechanism will enable the emerging economies will pull us out of global recession. I merely said that when the emerging markets actually start to pull us out of the global recession, that will be the indicator that global recession is coming to an end.

The world looks murky now. Your description of the state of emerging markets is no doubt accurate. I believe what is happening now is the global write-down of assets is inevitable, whether it is through market correction of toxic debt securities or falling asset prices such as properties and commodities. Once all the bad debt and over-valuation has been expelled out of the system, the market will start to function normally again.

Once all the bad debt and over-valuation has been expelled out of the system, the market will start to function normally again. – Donaldson Tan (#37)

However, I think the bail-out package in the US and Europe will prolong the market pain. I don’t think government officials actually know more than market participants about the true value of these illiquid assets. However, I think it is that government officials with access to taxpayers’ money have decided to ignore market forces to artificially support asset overvaluation, the original root cause of the problem. Instead of being the solution, the bail-out backed by the people’s money has become part of the problem.

“I also make no mention what mechanism will enable the emerging economies will pull us out of global recession. I merely said that when the emerging markets actually start to pull us out of the global recession, that will be the indicator that global recession is coming to an end.”

Donaldson, but you mention “the historical experience of the emerging markets pulling the world economy along will point the way forwad when recovery gets under way.”

What historical experiences are you referring to? How would the emerging economies “pull us out of global recession”? I did asked about this in previous reply. As Eaststopper was saying, can you explain in terms of Y = C + I + G + NX?
or simple marcoeconomics interdependence?

I think Eaststopper as did I, sense that you are a bit confused here.

As for my previous reply the question was, paraphrasing, to what effect PAP caused or fail to address the widening income gap. And yes I do not like the PAP.

Hey guys, so what is the most significant cause of this economic crisis? And why do you say so? Also, what is the significance of this crisis?

I feel that this is a hard piece for students like me to understand.Could u plz do a mmore simpler piece so tat i could use it in my recearch.thks