Bangladesh and global financial crisis
Monday, 25 October 2010
Farida Shaikh
This was exactly two weeks after 9/11, September 24, 2001, when US President George W. Bush announced from the White House: 'This war on terrorism will be fought on a variety of fronts… the front lines will look different from the wars of the past… It is a war that will require the United States to use our influence in a variety of areas in order to win it. And one area is financial'.
The story of international finance after 9/11 is succinctly captured by John Taylor: Global Financial Warriors 2007, which has a 'gripping look at how politics, national security and global finances overlap and intersects,' said Alan Greenspan former chairman of the Federal Reserve Board. The same is described as a fascinating read '…for anyone who would understand the complexities and the challenges of the global economy in the era after 9/11,' by David M.Kennedy winning author of 'Freedom from Fear.'
The story continues to affirm that '…the war on terror is being fought not only in the streets of Afghanistan and Iraq but also in the corridors of international banking institutions… the imaginative ways in which the tools of global finances were brought to bear in the wake of 9/11,' said Dinesh D'Souza author of What so great about America?
The latest controversy over 9/11, and after Michael Moor's theory bearing financial implication, has that George Bush junior earned his first million as an employee of Bin Laden family. The $9.0 trillion losses in economic collapse and thousand of human casualties of Iraq-Afghan war have set the Americans to question the root cause of 9/11 (HOLIDAY, 1 October 2010).
But then, what happened in 2007? The big financial institutions in US collapsed, the ripple effect led to bank failures in Europe as well. There was a sharp fall in the major stock indexes, which in turn resulted in low value of equities and commodities world wide. The process of deleveraging of financial institutions in US and Europe speeded up the liquidity crisis. Referred to as 10/10, crash of the world stock market, '… has dramatically changed for ever the global financial system.'
The most obvious reason for the financial collapse was the sub-prime loan market within the bigger US mortgage market; the less obvious reason was huge corruption -- walking along the corridors of big and small financial institutions.
Beginning 1990, households with weak credit worthiness was a major financial concern across US. Said to be politically motivated, the operational responsibility rested with two largest government sponsored enterprises, GSEs, since 1968. They were the mortgage leaders with respective nicknames: Federal Home Loan Mortgage Corporation/Freddie Mac, and the Federal National Mortgage Association/Fannie Mae.
Both the companies are privately owned, operated by shareholders, and had the special privilege----protected financially, received federal government subsidies and exemption from income-tax. Theirs was the decisive role, in charge of more than 70% of the mortgage market, saddled on an overall monopolistic status. The dual purpose design of the companies gave rise to a logger head situation; the fulfillment of political motives in return of financial support was in conflict with the private business aim to maximize value of the share holders.
In September 2008 the federal authorities took over both the companies who were under 'severe condition,' for which they themselves were responsible, Ahmad Q.K 2009. The US Federal Reserve slashed federal fund rate to very low, 1.0 per cent for three-month Treasury bill making way for the mortgage bubble. According to Andrew 2008, keeping the interest rate lower than the inflation rate, created the housing bubble. And banks in general were convinced of possible bail out by the government.
In the US the housing bubble took years to build and to cope with the problem that many banks built with other mortgage structure. The lowering of interest rates by the Federal Reserve from 8.15 per cent to 4.56 per cent allowed people to buy more homes. 'The total value of real estate owned by households in US is $20 trillion.' This amount is much bigger than the stock market.
Yale economist Robert Shiller began a running dialogue over the last few years about the drawbacks of unchecked free markets. Shiller dissects the phenomenon of bubble behaviour by examining the structural and cultural factors behind market bubbles, such as hype-mongering news media, and psychological impact on economic behavior, such as herd like behavior.
Shiller explanation is: 'One of the mysteries of human society is how we interact with each other," he said. "We are an empathic species. When you have emotions, I see it in your face and I feel the same emotions. That means we kind of move as herds. And so when other people are getting excited and they are talking about the real estate market, it gets me excited too. You can't stay above it. If you are human, you get drawn in. But then when the emotions start changing, you get drawn into that too. And the emotion does seem to be changing. It looks like we're at the beginning of a change in psychology.'
In the first edition of the book, Irrational Exuberance Shiller begins with quantitative data around the late 1990s stock-market run-up. In the second edition he adds data on real-estate price trends in the early 2000s, and points out the striking parallels between the earlier stock-market boom and bust, and current trends with housing prices in the United States. 'Shiller actually believes the two phenomena are related; as investors lost confidence in the stock market and moved their money into real estate, one asset class fell while the other rose. According to Shiller's analysis, the pattern is destined to repeat itself.'
The book ends with a set of policy proposals on revamping the U.S. social security system, a new system of house-price insurance for homeowners, and risk reduction through portfolio diversification and is 'a counterweight to the plethora of get-rich-quick investment guides'.
So what are the implications of this global crisis for Bangladesh?
At the beginning of 2009, chief of the Centre for Policy Dialogue said that the global crisis would certainly hit Bangladesh as the country is exposed to global economies. Bangladesh economy is worth $ 84 billion, import bill is $21 billion and export 14 billion. The isolation the country presently enjoys from the global crisis will not offer comfort for long. The country is exposed to international markets. At a seminar on Global Financial Crisis: Are We Ready, the chairman, Finance Department Dhaka University noted that in 2008 Bangladesh fetched $ 700 million as FDI. The same year, Vietnam attracted $20 billion.
East West University, Bangladesh study on: Global Financial Crisis and Recession Experiences from the past and lessons for Bangladesh, made conclusions that since 1990 the policies of successive government aimed at trade liberalisation and opening up the economy. The close connection of Bangladesh economy to global economy gives certain benefits and exposure to crisis as well. The country achieved significant level of export growth adding a momentum to development activities. Adversely, inflationary pressure due to rising oil price, rising commodity price in international market set in recession. The recommendation is to explore, expand exports, investment and growth through connectivity and trade with regional countries.
Attitudinal Survey June-July 2009 by Department of Economics Dhaka University and CPD Dhaka, generated opinion data on the current economic situation. The interviewees' opinion was sought on the greater interaction between Bangladesh and the rest of the world. Next, what would be the difficulties for Bangladesh to meet the growth target in near future? How important it was to boost industrial growth particularly by providing credits to SMEs? What was the importance of steady flow of export earning and remittance to meet turbulent economic period? Are Bangladeshi products more expensive to foreigners? Would this then have adverse effect on export? Internally, how important is the proper execution of the Annual Development Plan? Opinion was sought on the importance of gearing up food security in the country and to curb inflation.
The author is a sociologist/ freelance writer. She can be reached at e-mail : farida_s9@optimaxbd.net
This was exactly two weeks after 9/11, September 24, 2001, when US President George W. Bush announced from the White House: 'This war on terrorism will be fought on a variety of fronts… the front lines will look different from the wars of the past… It is a war that will require the United States to use our influence in a variety of areas in order to win it. And one area is financial'.
The story of international finance after 9/11 is succinctly captured by John Taylor: Global Financial Warriors 2007, which has a 'gripping look at how politics, national security and global finances overlap and intersects,' said Alan Greenspan former chairman of the Federal Reserve Board. The same is described as a fascinating read '…for anyone who would understand the complexities and the challenges of the global economy in the era after 9/11,' by David M.Kennedy winning author of 'Freedom from Fear.'
The story continues to affirm that '…the war on terror is being fought not only in the streets of Afghanistan and Iraq but also in the corridors of international banking institutions… the imaginative ways in which the tools of global finances were brought to bear in the wake of 9/11,' said Dinesh D'Souza author of What so great about America?
The latest controversy over 9/11, and after Michael Moor's theory bearing financial implication, has that George Bush junior earned his first million as an employee of Bin Laden family. The $9.0 trillion losses in economic collapse and thousand of human casualties of Iraq-Afghan war have set the Americans to question the root cause of 9/11 (HOLIDAY, 1 October 2010).
But then, what happened in 2007? The big financial institutions in US collapsed, the ripple effect led to bank failures in Europe as well. There was a sharp fall in the major stock indexes, which in turn resulted in low value of equities and commodities world wide. The process of deleveraging of financial institutions in US and Europe speeded up the liquidity crisis. Referred to as 10/10, crash of the world stock market, '… has dramatically changed for ever the global financial system.'
The most obvious reason for the financial collapse was the sub-prime loan market within the bigger US mortgage market; the less obvious reason was huge corruption -- walking along the corridors of big and small financial institutions.
Beginning 1990, households with weak credit worthiness was a major financial concern across US. Said to be politically motivated, the operational responsibility rested with two largest government sponsored enterprises, GSEs, since 1968. They were the mortgage leaders with respective nicknames: Federal Home Loan Mortgage Corporation/Freddie Mac, and the Federal National Mortgage Association/Fannie Mae.
Both the companies are privately owned, operated by shareholders, and had the special privilege----protected financially, received federal government subsidies and exemption from income-tax. Theirs was the decisive role, in charge of more than 70% of the mortgage market, saddled on an overall monopolistic status. The dual purpose design of the companies gave rise to a logger head situation; the fulfillment of political motives in return of financial support was in conflict with the private business aim to maximize value of the share holders.
In September 2008 the federal authorities took over both the companies who were under 'severe condition,' for which they themselves were responsible, Ahmad Q.K 2009. The US Federal Reserve slashed federal fund rate to very low, 1.0 per cent for three-month Treasury bill making way for the mortgage bubble. According to Andrew 2008, keeping the interest rate lower than the inflation rate, created the housing bubble. And banks in general were convinced of possible bail out by the government.
In the US the housing bubble took years to build and to cope with the problem that many banks built with other mortgage structure. The lowering of interest rates by the Federal Reserve from 8.15 per cent to 4.56 per cent allowed people to buy more homes. 'The total value of real estate owned by households in US is $20 trillion.' This amount is much bigger than the stock market.
Yale economist Robert Shiller began a running dialogue over the last few years about the drawbacks of unchecked free markets. Shiller dissects the phenomenon of bubble behaviour by examining the structural and cultural factors behind market bubbles, such as hype-mongering news media, and psychological impact on economic behavior, such as herd like behavior.
Shiller explanation is: 'One of the mysteries of human society is how we interact with each other," he said. "We are an empathic species. When you have emotions, I see it in your face and I feel the same emotions. That means we kind of move as herds. And so when other people are getting excited and they are talking about the real estate market, it gets me excited too. You can't stay above it. If you are human, you get drawn in. But then when the emotions start changing, you get drawn into that too. And the emotion does seem to be changing. It looks like we're at the beginning of a change in psychology.'
In the first edition of the book, Irrational Exuberance Shiller begins with quantitative data around the late 1990s stock-market run-up. In the second edition he adds data on real-estate price trends in the early 2000s, and points out the striking parallels between the earlier stock-market boom and bust, and current trends with housing prices in the United States. 'Shiller actually believes the two phenomena are related; as investors lost confidence in the stock market and moved their money into real estate, one asset class fell while the other rose. According to Shiller's analysis, the pattern is destined to repeat itself.'
The book ends with a set of policy proposals on revamping the U.S. social security system, a new system of house-price insurance for homeowners, and risk reduction through portfolio diversification and is 'a counterweight to the plethora of get-rich-quick investment guides'.
So what are the implications of this global crisis for Bangladesh?
At the beginning of 2009, chief of the Centre for Policy Dialogue said that the global crisis would certainly hit Bangladesh as the country is exposed to global economies. Bangladesh economy is worth $ 84 billion, import bill is $21 billion and export 14 billion. The isolation the country presently enjoys from the global crisis will not offer comfort for long. The country is exposed to international markets. At a seminar on Global Financial Crisis: Are We Ready, the chairman, Finance Department Dhaka University noted that in 2008 Bangladesh fetched $ 700 million as FDI. The same year, Vietnam attracted $20 billion.
East West University, Bangladesh study on: Global Financial Crisis and Recession Experiences from the past and lessons for Bangladesh, made conclusions that since 1990 the policies of successive government aimed at trade liberalisation and opening up the economy. The close connection of Bangladesh economy to global economy gives certain benefits and exposure to crisis as well. The country achieved significant level of export growth adding a momentum to development activities. Adversely, inflationary pressure due to rising oil price, rising commodity price in international market set in recession. The recommendation is to explore, expand exports, investment and growth through connectivity and trade with regional countries.
Attitudinal Survey June-July 2009 by Department of Economics Dhaka University and CPD Dhaka, generated opinion data on the current economic situation. The interviewees' opinion was sought on the greater interaction between Bangladesh and the rest of the world. Next, what would be the difficulties for Bangladesh to meet the growth target in near future? How important it was to boost industrial growth particularly by providing credits to SMEs? What was the importance of steady flow of export earning and remittance to meet turbulent economic period? Are Bangladeshi products more expensive to foreigners? Would this then have adverse effect on export? Internally, how important is the proper execution of the Annual Development Plan? Opinion was sought on the importance of gearing up food security in the country and to curb inflation.
The author is a sociologist/ freelance writer. She can be reached at e-mail : farida_s9@optimaxbd.net