Economic Issues for Class Room Discussion(FNU)
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1 Foreword 2 Preface In addition to teaching and research activities undertaken during my teaching career which began in 1998, I have been writing for the newspa- pers in Fiji for more than a decade. The present volume contains 50 se- lected articles, which appeared in The Fiji Times and The Fiji Sun during the past 14 years. Teachers in schools in Fiji have been using my articles for their tutorials. I was recently approached by some teachers who were also my students in the University of the South Pacific, to publish the selected articles in a single volume which can be readily used by them as teaching material. In response to their wishes, I sought permission from the editors and pub- lishers of both newspapers, for reproducing the articles. They welcomed the idea and readily gave permission. I am grateful to The Fiji Times and The Fiji Sun for their permission. I am also grateful to the Acting Vice Chancellor, Fiji National University, Prof. Ian Rouse, for the Foreword to this edited volume and for all support and encouragement in bringing out the volume as a Fiji National Univer- sity publication. T.K. Jayaraman 3 Contents 1. A financial disaster to remember_________________________5 2. Do economic crises ever end?_____________________________8 3. Banks play safe_________________________________________11 4. Central banks’ challenges________________________________14 5. Central banks and governments__________________________17 6. An unusual monetary policy action _______________________20 7. “Seoul” Search: self before global Interest?_________________23 8. Policies and economy: the return of the ‘bubble’____________27 9. Policies and jobs ________________________________________30 10. Stock market and the economy: another week of US share marketrally_____________________________________________33 11. Financial crises and lessons for Fiji_______________________36 12. A tremor effect__________________________________________39 13. Can we ignore inflation?_________________________________43 14. Another crisis, another country!__________________________46 15. Inflation and falling commodity Prices____________________51 16. Difficult times, but a daring budget!______________________54 17. Debt and deficits________________________________________57 18. Another successful bond issue____________________________60 19. Does Fiji need a debt ceiling?_____________________________63 20. Our economic health: what two reports mean______________66 21. Foreign aid and growth___________________________________69 22. Who gives more aid to Pacific island countries?_____________73 23. A budget funded by foreign aid____________________________76 24. Economic lessons from Vanuatu’s performance_____________79 25. Dilemma to up-value our dollar___________________________82 26. Currency war between giant Economies____________________85 27. Consider flexible rates___________________________________89 28. Choice of devaluation____________________________________93 29. Gold standard, a jealous goddess__________________________96 30. Gold is losing its shine___________________________________99 31. The rising Aussie dollar and Fiji_________________________102 32. Dilemma before Papua New Guinea______________________105 33. Another financial scandal_______________________________108 34. One more currency into Fiji’s basket!_____________________111 4 35. Fear of kina appreciation________________________________115 36. Globalisation taketh away!_______________________________118 37. Foreign direct investment________________________________121 38. Plan must be for the Pacific______________________________124 39. A very un-Pacific meeting of Pacific leaders________________128 40. Sub-regional cooperation in the Pacific____________________132 41. Who killed Doha?_______________________________________135 42. A Greek tragedy________________________________________139 43. Common currency dilemma______________________________142 44. Griffin or Frijin cookies__________________________________145 45. Being least developed____________________________________148 46. Challenges of Fiji’s mining sector_________________________152 47. Lessons from Argentine crisis____________________________156 48. Money and what it’s really worth_________________________159 49. The power of a village___________________________________163 50. Of economists, dentists__________________________________166 5 1. A Financial Disaster to Remember Aug 16, 2012 Nobody would like to recall bad events, let alone make a ceremony out of any remembrance! Yet, there are exceptions. They are solemn anniversaries, though they are never looked forward to year after year. However, they serve the purpose: strengthening our resolve to take remedial steps for ensuring such events do not re-occur. One example: the annual remembrance of the atomic bombing of the two Japanese cities of Hiroshima and Nagasaki, on August 6 and 9, in 1945. Perilous journey with a single step How about series of events, though of less intensity, the first of which took place on the seventh of August, five years ago? On that day, a French bank terminated withdrawals from three hedge funds citing “a complete evaporation of liquidity.” That was a dangerous development, as it indicated an impending deterioration in the balance sheet of banks. A year later, Bear Stearns went bankrupt, followed by the collapse of Lehman Brothers on September 20, 2008. A ten-member Financial Crisis Inquiry Commission (FCIC), appointed by the US President in 2010, observed: “There are more than 26 million Americans who are out of work, cannot find full-time work, or have given up looking for work. About four million families have lost their homes to foreclosure and another four and a half million have slipped into the foreclosure process or are seriously behind on their mortgage payments. Nearly US$11 trillion in household wealth has vanished, with retirement accounts and life savings swept away. Businesses, large and small, have felt the sting of a deep recession”. The contagion spread far and wide. It became a global financial crisis (GFC) in 2008 and then a world recession, which is now a bottomless pit. 6 A combination of factors The GFC stemmed from a combination of factors. The first and foremost was increased savings from high growth emerging economies, whose investors entered capital markets in the developed countries. The “Giant Pool of Money” led to a rise in the global pool of fixed-income securities: from approximately $36 trillion in 2000 to $70 trillion by 2007. Such an immense flow of savings into USA, the UK and Europe, was a challenge to regulators. Lenders and borrowers went mad with generating bubbles after bubbles. Reckless lending and risky financial adventures followed. Fancy financial products emerged and they were used by financial institutions as collaterals to borrow against. Easy credit conditions prior to 2007 encouraged lending and risky borrowing practices; trade deficits; housing and real estate bubbles; budget deficits, and measures bailing out banks, all created a financial nuclear bomb. Excess supply of housing and commercial property led to a burst in the real estate market. There was a domino effect. Asset prices began to decline. Liabilities owed by financial institutions to global investors did not go down in value, generating questions regarding the repaying ability of consumers, governments and banking systems. Thus, the solvency question not only of households and business houses, but also of financial institutions, emerged. A disaster It was a disaster of unprecedented proportions. Banks cut their lending as they were scrambling for liquidity. A credit crunch followed. Households, business houses and governments were no longer able to borrow and spend at pre-crisis levels. As demand declined, firms reduced investments and cut jobs. Unemployment compounded the sufferings of households. They failed to meet their repayment obligations to financial institutions. 7 As documented by FCIC, five major investment banks in 2007-Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley- were operating with inadequate capital. Their leverage ratios were as high as 40 to 1. For every $40 in assets, there was only $1 in capital to cover losses. Major financial institutions collapsed, deepening the credit crunch. In its final report submitted to the US President in January 2011, the FCIC did not spare the US Federal Reserve and policy makers. The report concluded: “The crisis was caused by: • widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; • dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk; • an explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; • key policy makers ill prepared for the crisis, lacking a full under standing of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels.” As we remember the first episode of the financial disaster, which happened this month five years ago, any excuse that it was inevitable and was to happen, would not be acceptable. The FCIC observed: “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again.” At the beginning of 2013, one question looked large: would the