TR Emeritus
Sep 14, 2013
The collapse of Lehman Brothers, a sprawling global bank, in September 2008 almost brought down the world’s financial system.
Causes of financial crisis?
I refer to the article “The origins of the financial crisis
Crash course: The effects of the financial crisis are still being felt, five years on. This article, the first of a series of five on the lessons of the upheaval, looks at its causes” (The Economist, Sep 6).
It states that “The macroeconomic backdrop was important, too. The “Great Moderation”—years of low inflation and stable growth—fostered complacency and risk-taking. A “savings glut” – pushed down global interest rates. All these factors came together to foster a surge of debt in what seemed to have become a less risky world.
Investors sought out these – products because they appeared to be relatively safe while providing higher returns in a world of low interest rates. Economists still disagree over whether these low rates were the result of central bankers’ mistakes or broader shifts in the world economy. Some accuse the – of keeping short-term rates too low, pulling longer-term mortgage rates down with them. – defenders shift the blame to the savings glut—the surfeit of saving over investment
Low interest rates created an incentive for banks, hedge funds and other investors to hunt for riskier assets that offered higher returns. They also made it profitable for such outfits to borrow and use the extra cash to amplify their investments, on the assumption that the returns would exceed the cost of borrowing. The low volatility of the Great Moderation increased the temptation to “leverage” in this way. If short-term interest rates are low but unstable, investors will hesitate before leveraging their bets. But if rates appear stable, investors will take the risk of borrowing in the money markets to buy longer-dated, higher-yielding securities. That is indeed what happened.
When – housing market turned, a chain reaction exposed fragilities in the financial system.
Trust, the ultimate glue of all financial systems, began to dissolve
In effect they had bet on themselves with borrowed money, a gamble that had paid off in good times but proved catastrophic in bad.
Central bankers insist that it would have been difficult to temper the housing and credit boom through higher interest rates.
When economies are doing well there are powerful political pressures not to rock the boat. With inflation at bay central bankers could not appeal to their usual rationale for spoiling the party. The long period of economic and price stability over which they presided encouraged risk-taking. And as so often in the history of financial crashes, humble consumers also joined in the collective delusion that lasting prosperity could be built on ever-bigger piles of debt.”
Similarities with Singapore?
After reading the above, do you see any possible similarities with Singapore?
Singapore has one of the highest household debt levels in Asia, and we have arguably had one of the longest periods of good economic growth with very low interest rates.
Perhaps our greatest challenge and issue going forward, may be how long a Government can continue to literally not spend a single cent on healthcare, public housing and pensions? http://m.youtube.com/watch?v=RrAPE7lzakw&desktop_uri=%2Fwatch%3Fv%3DRrAPE7lzakw
Leong Sze Hian
