Crises Learnt

Learnt anything from the food, fuel and financial crises?

Here are some of the insights gained from the few shocks the world has gone through over the last two years.

THE world has gone through quite a few shocks over the last two years. First, it was high food prices. Then, record oil prices. Next came the global financial crisis and, to top it all off, we're dealing with a global recession now, the first worldwide slump since the 1940s.

So, what have we learnt so far? Here are some of the insights gained.

1. Our central bank has done a pretty good job.

When commodity prices shot through the roof and prices of goods and services were jumping in the first half of 2008, Bank Negara Malaysia did not bow to peer pressure.
Other central banks made the wrong call when they raised interest rates to fight inflation. The problem was that making money more expensive would probably work if the rise in prices was caused by people spending too much. We would think twice about buying that new iPhone if, suddenly, the monthly housing loan payments went up.

But Bank Negara recognised that inflation was caused by a shortage of supply and decided not to raise interest rates. Doing so would have probably hurt consumer spending, a major economic driver.

2. In the corporate "greed is good" world, the authorities are there for a reason.

Financial companies are slightly different from others because, more often than not, they are afflicted with moral hazard. This happens when a company takes excessive risk, secure in the knowledge that they will be rescued if anything goes wrong.

Take, for example, AIG - the insurance giant that had to be bailed out by the US government. Federal Reserve chairman Ben Bernanke said it found a gap in the rules, made irresponsible bets and took huge losses.

"This was a hedge fund, basically, that was attached to a large and stable insurance company."

But in Asia and, especially Malaysia, regulators take great pains to ensure the stability of the financial system and to protect investors. The Asian financial crisis was a good experience.

That's why, when AIG had troubles in the US, its Asian units were humming along nicely and customers did not rush to cancel their policies.

3. Even the smart ones are not that smart.

What does Europe's biggest bank HSBC, The Royal Bank of Scotland, and Japan's largest stockbroker Nomura have in common?

All of them were duped by Bernard Madoff's investment scam. So, don't fret if you think you're losing out on better returns from the stock market or some other fancy financial instrument that you do not understand. Some people are just born to be risk-averse, preferring to play it safe and be content with low but stable returns.

4. We need to produce enough food for ourselves.

The food crisis was a good reminder of what can happen if we continue to be dependent on others. Malaysia still imports part of its rice needs.

We must make sure that the plan to make Malaysia self-sufficient is a success. The crisis has shown the worst-case scenario whereby major food exporters can suddenly choose to restrict their overseas shipments.

Interestingly, a direct result of the food crisis is how rich countries are leasing land in poorer nations to ensure their food supply. Kuwait, for instance, is leasing land in Cambodia to produce rice.

5. Going green won't make you a hippie.

We need to realise that taking care of the environment is crucial for our future generation.

Keep on littering our beaches, towns and cities and our tourism industry will suffer. Keep on driving like a maniac and you'll spend more on petrol, a precious by-product of crude oil, which is getting harder to find.

Keep those five air-conditioners running and you not only get a hefty power bill but also waste precious subsidised gas, the main fuel for electricity generation. Petronas has already warned that gas for the power sector may run out after 2019.

Shahriman Johari of Business TImes
Saturday, June 13, 2009, 09.18 AM