Interbank Credit Crisis
Oct 15th, 2008, in Business & Economy, by Guest Writer
The credit crisis, focusing on the Lehman Brothers bailout and the interbank credit crunch.
Lehman’s Legacy
The last 4 weeks has been an unprecedented time for financial markets. The slow burning credit crisis in the United States was whipped into a wildfire that threatened to engulf the world financial system. The catalyst for this cataclysm was the decision by the US Treasury to allow Lehman Brothers to collapse into bankruptcy. After the political heat they received from conservatives for the bailout and shotgun weddings of Bear Sterns and Merrill Lynch they decided to placate their critics and play hardball with Lehman.
The ensuing firestorm threatened like falling dominos to bring the world’s financial system to collapse. Some of the repercussions of that ill fated decision included:
- “Breaking the Buck” in Money Market Funds. Money market funds had never before fallen below $1 in face value. The bankruptcy of Lehman forced some fund to fall to 97 cents which precipitated huge withdrawals of funds. Money markets allow companies to borrow short term money at preferable rates and is a major source of corporate funding. Having them fail threatened to bring the US economy into collapse which forced the U.S. Federal Reserve Bank to guarantee the $3.4 trillion dollars in money market funds.
- The collapse of Lehman also eroded what little faith was left in a lot of other major financial institutions. Not only was the market worried about institutions holdings of Lehman’s debt but also about what exposure the may have to Credit Default Swaps on that debt. Credit Default Swaps are a form of insurance on bonds. If you had purchased Lehman Bonds you could also purchase Credit Default Swaps on that debt. That way if Lehman defaulted on their bonds the seller of the Credit Default Swap would have to make up the difference on between what you where able to collect on the bonds and their face value. This led the US Government to take over AIG and inject $85 Billion into it mainly due to its credit default swap exposure.
- This forced the US Government to launch a $700 billion bailout of their banks by agreeing to purchase financial assets for which any market had long ago dried up.
- Europe was caught up in this turmoil by its exposure to Lehman’s debt and Credit Default Swaps. The casualty list is long and extensive. Fortis, Dexia, Hypo Real Estate as well as all the banks in Iceland and the UK barring HSBC have had their governments intervene.
- Libor (London Interbank Offered) rates where trading at a 6% premium to their underlying central banks rates and interbank lending had ground to a halt because no one trusted anyone else’s ability to repay the loans.
- Asia has not escaped unscathed. We have had a Bank run on Bank of East Asia in Hong Kong as well as the collapse of the Japanese Insurer Yamato Life. From Seoul to Mumbai real estate prices have been in freefall as well as collapsing stock markets as people realize that this recession is likely to be global, long and deep.
The fall has been arrested by unprecedented co ordination and intervention by the governments of the major economies. These interventions include:
- Part or complete nationalization of a number of banks including Fortis, Dexia, RBS, HBOS and Lloyds TSB.
- A coordinated effort to unfreeze interbank lending by an agreement to underwrite and guarantee interbank loans
- Cuts in interest rates including 1% by Australia and a 50 basis point cut by the US, ECB, UK, Canada and Sweden.
- A number of countries to guarantee the safety of all bank deposits.
The message is that governments are prepared to intervene to protect depositors and interbank lending. It seems that we have dodged the bullet, for now. We will probably need further interventions as the Lehman defaults cascade through the system. We have yet to see how much of Lehman’s debt will be recoverable by creditors and how much will have to be made up by underwriters of Credit Default Swaps.
The danger is that no one really knows how much in Credit Default Swaps are out there. Since Credit Default Swaps are unregulated you did not actually have to have Lehman debt to buy them. So no one knows if there are less swaps than the Bonds or if there are multiples of Lehman’s debt. Whichever way it turns out things don’t look good for the underwriters. At a recent auction of Lehman Credit Default Swaps the market midpoint was 91.375 cents on the dollar. This indicates a belief that only 8.625 cents on the dollar will be recoverable on assets for Lehman’s bond holders.
45 Comments on “Interbank Credit Crisis”
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sputjam says:
The Java-Sumatera Briudge was actually designed and envisaged to be built by a Japanese consortium in the early 1980’s. It was deemed economically unviable.
Maybe its time to start using that thinking cap again for the new millineum. Maybe to begin with, a two way(lane) bridge, and building another two way bridge when demands increased. Is Denmark and sweden( an economy indonesia surpasses) can build one, why cant the Indoesians?
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dragonwall says:
You forever ranting proves yourself a GD Man many times over with second hand news and speculated comments. But I will take you Q one after another.
Chinese Indonesians are the source of the problem.
Before Indonesia prosper had they complained that they Chinese are the source of problem?
They are the ones who have been banned from speculative currency trading- the “Slipi Soros” and the “Bekasi Buffett’s”- some Chinese Indonesian trading firms are over 1000% leveraged- source Bisnis Indonesia.
Can you prove Chinese Indonesian currency trading firms by leverage of 1000%? Which leverage? Brokerage of Margin? And which firm is that if it is from Bisnis Indonesia?
And to prove you wrong about the Indonesian economy- I quote something you clearly are not.Standard and Poors are holding Indonesian credit ratings stable and its credit rating may even be raised.
How did they fare in the US and world economy?
Singapore could slip into recession Indonesia will not
We will see who will slip into recession.
It has fixed foreign investment of $57.6 billion and holds $9 billion of investment in other countries.
But mostly from borrowed money? Are they clean and clear? None..Zero..
The World Bank has set aside a $2 billion standby loan for 2009 only to be triggered if growth falls below 5.8%.
I thought you were moaning and sighing at IMF’s attitude and yet you would still consider there to be a 2 billion in loan waiting for you guys to grab? My ass.
Indonesian banks are strong with adequate reserves, low non performing loans and almost no exposure to sub prime losses.
Not publicize doesn’t mean there is a low non performing loans or in nice words no exposure to sub prime losses. Check it out with those in the field. How many of those Ambons, Bataks were set free into the market to strong arm and collect bad debts.
The Indonesian inflation rate is declining from a high of 12% to maybe 9% by January with reductions planned to between 9% and 7% for the rest of 2009.
Can you tell us what is the cost of gas for cooking, petrol, rice, food staples from between 1998 to 2008? Especially the last two years 2006, 2007 and 2008. After making those comparison then you tell me about inflation rate not before that.
The bank rate is being stabilized at 9.5% after 6 months of consecutive rises. It will be held for a while and then reduced to 7.5% in 2009.
It will reduce? Well let’s see.
Indonesia is already in the top 20 economies of the world.
Indonesia is currently overtaking Belgium and Sweden. It will soon overtake Turkey, the Netherlands and Austria as it enormous size, resources and population come into play. It is a strong candidate to join the top ten economies in the world within two decades.Well I suppose Indonesia had overtook many of those African countries, don’t they! And place Indonesia in the top 20 economies? Yeah perhaps top econo Indomie.
Singapore? Shrinking- the native-born Singaporean will be a minority in his tiny little island by 2015.
What population or size? I think it is the currency you are referring. Only a handful going out and some coming in will shrink the native born? Yeah, right! I almost forgot that the GD Man has an idea in his m ind and he will lead the Engineers from ABRI in the front line and build bridge across into Singapore and overrun her.
Singapore new telcom products? Q What do they have? Nothing new. Just licensed third party product. We have the REAL majors here- Hutchison Telecom, 3, Motorola etc- all here- SingTel has nothing- exactly like all Chinese businesses- it overpromised and never delivered.
Hutchison..huh. Are they British? Like Hutchison-Whampoa of Hongkong I suppose? If you do not understand about satelite and communications..Don’t. Find out more then you tell me, ok.
And Also- to prove you’re an absolute idiotic buffon- Indonesia economy is thought to be predicted to GROW by 5.5% according to the IMFYou forgot recently SBY announce that they will not adopt anything set down by IMF? So what does that indicate when IMF siad this and said that? IDIOT.
They will start to lower the rate in January, not in December because the rupiah has been under pressure lately. A rate cut in December is too soon,’ said economist Aldian Taloputra of Mandiri Sekuritas.
If they are that good and smart Indonesia will not be in this dilemna to be honest. Paint a nice picture, say some nice words. That will almost pacify Indonesians especially with moronic buffons like you.
A Reuters poll conducted before the GDP data release had forecast 2008 growth of 6.15 percent against 6.32 percent last year, which was the highest pace in over a decade.
You you are very happy papmered by such remarks? LET THEM PROVE IT TO MAKE YOU HAPPY, Until then..nothing.
You didn’t know that no one is listening to all your bulshits paranoid and obsolete bar none crap? And you said
Sputjam- you really have no idea do you?
Have you ever actually set foot in Indonesia?I suppose he had earlier mentioned that he is an enterpreneur in Asia business, so what makes you think he had not set foot in Indonesia although he perhaps maybe a Malaysian.
The Java-Sumatera Briudge was actually designed and envisaged to be built by a Japanese consortium in the early 1980’s. It was deemed economically unviable. The Dutch also tinkered with the idea of a trans Java-Sumatera tunnel- but seismic conditions of the Sunda Strait meant it would be near impossible to cost-effectively engineer (ie cost/benefit analyses). There were unsurprising very serious concerns about quality of construction and quality of construction materials-
We knew these long before you set foot into the IM Blogs. Like I said you are all about second hand news, copy and paste links etc. What else do you have?
Chinese being infamous for skimping wherever possible to obtain greatest possible profit margin. Case in point- San Lun milk using melanine to bulk up whey powder.
Didn’t someone just told you off that you were one of those that likes to pick and choose in order to complete something and usually it is of no relevance. Didn’t someone just call you a pussy?
The Japanese are world leaders all things technical- light years ahead of the Chinese and world leaders in bridge design and construction- with the world’s longest bridge to prove it- furthermore they have far more experience in similar seismic/geotechnical conditions as Indonesia.
No one is denying the fact, are you? Or are you beginning to tell us that you have been compromised?
A pig is always a pig. Dogs born in a barn don’t make a horse.
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so what’s the soluton to minimise damage to this crisis? The money in stocks and other assets could not have just evaporated? Profits were mde by short selling.
I believe, indonesia/Malaysia and Thailand will not suffer as much due to weak fundamentals before the crisis, so their related assets did not balloon like say, singapore, and therefore, will not suffer a steep decline. The currency of these three countries was under attack even befoe the criss due to increase in energy imports, especailly the thai baht and rupiah(import plus subsidy).
For a country facing the brunt of the crisis, the USD went upwards.So did the yen. Commodities downwards.
Now that energy prices has gone down, burden of subsidies and imports will subside and could be removed altogehter.
I feel that whatever we do, the true winners are the big boys in wall street. They call the shots and were the first to be bailed out when mistakes are done. Doesn’t seems like the financial rules will be regulated anytime soon. -
Sputjam, you asked
so what’s the soluton to minimise damage to this crisis?
Indonesia needs to better developed their promise to her people and to the world.
To her people will thus be : What ever that is wrongly abolished in the legal system should be corrected. What they promise her people must be honored. Stemmed out those moronic stereotype ultra factions. Replace those necessary thought and have been implicated to have betrayed their duties by putting in new more efficient and proficient professionals. Honor what ever the government approved to improve the already tarnish image and integrity of the country.If a corporate with regardless that had flouted, immediate actions to be taken with no more collusion. Like Sri Mulyani said of Bakrie it is better for Bakrie to fall rather than others to suffer.
Regroup all the banks into a mass merger to less complicate the international and local banking system. System recheck on the health of all shares that were publicly listed to see if the company is really what they are worth.
Ensure that all shares when sold must have a buyer.
BI should not cut rates but to increase lending and deposit.
Deposit = you will attract more foreigners buying rupiahs with their foreign currencies.
Lending = if they can’t afford to pay the interest then the bank will reduce the risk of bad debts. What happened to US is that they have low lending rates causing developers to build more houses at low interest and selling properties at high profits. On top of that private lenders exerted higher interest on borrowers from loans they obtained from bank with low rates. That is what we see on the fall one after another, developer, banks, homeowners and many more corporate.Aburizal Bakrie needs to be removed from office immediately and replace with someone who knows about social welfare.
The government should immediately issued a decree to ensure the mark up on staples to be a fixed percentage and price of staples are hammered to the lowest. There is no way to control because the biggest culprit originates from Bulog. Get those bastards from Bulog who manipulate with businessman on the price.
The cost of energy has been always high because of corruption and manipulation in Pertamina. Waste and Loss control to be set in to ensure savings in the oil industry to maximise profits.
Taxation department should have people to regulate them to stem out rampant manipulation on tax collusion with business corporate.
Corrective measure to be taken on all collectible department to maximise income to the state coffer.
Reducing collateral damage by improving reserve.
Security should be the priority. If you take a look at those parasites at the SHIA you know what I mean. No on international airport has that much people preying on people with regardless locals or foreigns coming into Jakarta
Government then could issue statement to attract foreigners from investing into Indonesia. Without the fundamentals laid out, no one will invest in Indonesia. If I remember someone from Standard Chartered Bank said any rate cuts will induce capital flights. Even Faisal Basri said that no one will invest into Indonesia.
The true winners is not the big boys in wall street because yesterday saw some very disappointing drops in 5 years. And after all it has nothing to do with Indonesia. Indonesia today is a far cry from the prosperous yesteryears.
Especially of late Darmin Nasution had reiterated that they will implement together with BI to impose a mandatory NPWP for people who buys foreign currencies.
Is there any country in the world that does this? Never before. I suppose everyday there is some new development in Indonesia, don’t they. But what will they think of next.
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Increase interest rates will cause money to be borrowed from foriign countries like japan and deposited into local banks, causing inflation, No?
Plus industries will not borrow on high interest rates and therefore, not likely to expand and create new jobs.
surely the regime should concentrate on reducing interest rates and increase local invesments and industries plus focus on improving human caoital resource.
How do those who cannot afford a home for cash, borrow on high interest rates? surely, this will widen the wealth gap, whereby the poor end up paying the rich.banking mergers does not always work. Malaysian experience was an example. lower ranks workers were laid off and more power were held by a very few, who are paid vastly more. Loan to small industries dried off and major corporations swallowed a huge bulk of the money.Previously, small provincial banks, with vast knowledge of local economy were very accomodative to local industries. With the bank mergER, ALL THESE ENDED.
It should be the reverse. anybody who acheive the minimum criteria has the right to set up a bank, with their choice of where they wish to set up their base i.e. say Medan or manado, with restrictions on expansion and strict conditions. Why restrict the banking sector from open competition?
Taxes on industrial investment and dividend obtained should be abolish. This will attract real investors instead of spculators into the indonesian scene. this will increse employment, subcontracting work opportunities and the trickling down effect will benefit many more.
And instead of forming another GIC, indonesia should merely invest any surplus to improve on their human capital. preschool classes for four year old should be introduce as it is beneficial to his later education (provided the preschool calsses do no introduce religion and silly tales like snow white etc) but focus on creative thingking. Money should not be wasted on building more universities becasue the amount of knowledge we require for normal jobs does not need a significant educational input, unless in research work and top adminitration/managerial work.
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Well if that suits you, do I have anything to be bothered with. But,
Increase interest rates will cause money to be borrowed from foriign countries like japan and deposited into local banks, causing inflation, No?
So who is borrowing, the Government, or the Banks or Private Financial Institution? You cannot carry the whole world on your shoulder. There are bound to have people borrowing from outside to capitalize on the interesting interest. That is what the whole criteria is all about. Attract money into the country. In order to fulfill the interest payments to depositors, financial institution needs to have more prudent professionals to work on the cash and re-direct all investments to earn money to pay the depositors.
Plus industries will not borrow on high interest rates and therefore, not likely to expand and create new jobs.
You are not a smart businessman neither are you any smart politician or academian.
Who is asking industries to borrow high. You are not getting the point. We a referring to those that needs to borrow and not those making loan instead of their own money for business. You want business who actually have the money they invested to run their industries. When does ajn industry or manufacturer needs to make a loan. Only on those where they receive a huge order to fulfill where they lack the funds. So the loan from banks are short term and offsetting the profits with the interest rate, don’t you think this to be more viable? Or rather you feel that a company should be relying on the bank to run their business.
surely the regime should concentrate on reducing interest rates and increase local invesments and industries plus focus on improving human caoital resource.
I did not get the relevance. If you reduce interest rate how can you increase local investments. Meaning that local business will borrow from the bank to do business. Is that what your financial minds is all about? Borroeing money for business!
Human resource is something that differs from that of interest rate.How do those who cannot afford a home for cash, borrow on high interest rates? surely, this will widen the wealth gap, whereby the poor end up paying the rich.
Tell us then do you buy things that you don’t need? And do you buy houses everyday? For investments? Or to live in! If you were to buy houses every day of course the demand will keep climbing the developers keep building coupled with high cost of materials the cost of housing gets higher and higher until such time of saturation the market drops back. So how does the poor ends up paying the rich does not provide any logic at all. You only invest when you have excess money. To a person whose life has been that of in the village they led a poor and simple life. Do you expect them to go to town and shop for houses? Not that they can’t if thay can afford why not! So is this the logic of you saying the poor ends up paying the rich. No is the rich that ends up paying the rich to be richer.
banking mergers does not always work. Malaysian experience was an example. lower ranks workers were laid off and more power were held by a very few, who are paid vastly more. Loan to small industries dried off and major corporations swallowed a huge bulk of the money.Previously, small provincial banks, with vast knowledge of local economy were very accomodative to local industries. With the bank mergER, ALL THESE ENDED.
How smart are they in merging and syndication I am not too sure. But one thing I can be for sure is that there is something very wrong like a power struggle!
Now you see Loan to small industries dried off and major corporations swallowed a huge bulk of the money.
The banks dried off loans to the small industries because of small return. Whereas it is siphoned into the huge corporation with higher returns and thinking they are safe. But once they collapse the damage is catastrophic, don’t you think so. Of course the bank would one to have one big loan rather than ten small loans. This is what had happened to corporations in the US. And that was what they tried to imitate but they failed to see the danger they possess.It should be the reverse. anybody who acheive the minimum criteria has the right to set up a bank, with their choice of where they wish to set up their base i.e. say Medan or manado, with restrictions on expansion and strict conditions. Why restrict the banking sector from open competition?
Back to the days of Radius Prawiro 50 million rupiahs to set up a bank.. That was real competition then when Indonesia has the most banks in the world at that time and you are tryuing to recreate history? Every banks started to make loans from BI and ended up like what? A huge pile of shit. Big clean up. Corruption Big time..
But of course there will be another 10,000 Abu Rizal Bakrie the the clean up, pay back, court suits, auction of properties blah..blah..blah..it just ends up in a big circle again.I hope your dream comes true.
Taxes on industrial investment and dividend obtained should be abolish. This will attract real investors instead of spculators into the indonesian scene.
No good… taxes abolish? Dividends to be tax free? Hmmm..
Everyday there are speculators in abundance everywhere. Are there real investors everyday?
this will increse employment, subcontracting work opportunities and the trickling down effect will benefit many more.
What is this?
And instead of forming another GIC, indonesia should merely invest any surplus to improve on their human capital. preschool classes for four year old should be introduce as it is beneficial to his later education (provided the preschool calsses do no introduce religion and silly tales like snow white etc) but focus on creative thingking. Money should not be wasted on building more universities becasue the amount of knowledge we require for normal jobs does not need a significant educational input, unless in research work and top adminitration/managerial work.
So interest rates has to do with these?
Bimantara bought a satelite that had malfunctioned from the insurance company for a song. Had that repaired. Lease the air time to other countries and sat there on the billions of US dollars.
Do you want to see that happened? Why does Bimantara hires people like Peter Gontha and Rosano Barrack? Bambang’s wife. from a nobody to what someone with almost 900 million in her bank. All from what? From where?
Does Indonesia wnats to see these again?
Is these what you are looking for?
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So your remedy for the crisis is exactly opposue to those implemented in the western world and similar IMF concoction forced onto Indonesia/Thailand and Korea in 1998.
It is not true that all small banks are dismal. Some small banks in Malaysia were managed well but were forced into merger by mahathir/daim regime. Some larger banks seems to have similar problems too, Lehman/HBOS/ING/Citigroup and large insuracne company as well, AIG for example.
Why should established banks be sheltered from newly developed smaller banks with vast knowledge of the community it was set up in, say Manado or Medan? The way i see it, if small banks adhered to the regulatory conditons set up by authorities, then it should be ok.
Money should be use to introduce education at an earlier age and R & D on basic ills that affect indonesian people rather than forming another exotic sovereign funds like temasek. Investing does not create jobs. Just study the amount of money US spent on R & D and hence maxmise usage of expensive and highly trained graduates. Developing countries, on the other hand, waste the talent of graduate as there are no jobs for them in research and force them to sell life insurance for useless companies like AIG.
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You are saying
So your remedy for the crisis is exactly opposue to those implemented in the western world and similar IMF concoction forced onto Indonesia/Thailand and Korea in 1998
And I don’t really get what that means.
I her recently that few banks were liquidated and BNI is also rumored to be next.
The problem with small banks is that they will find difficulties in many way, like capital, competitions, non flexible aggressive but non progressive etc. Unlike Singapore. Which bank in Singapore is considered to be small? There is nothing comparing to that in Indonesia, right!
As for Malaysia, these two guys Mahatir/Daim, I was wondering what major achievement they have in the past? As for Mahatir who had UMNO by his back to put him as the Prime Minister, he is a nobody in politic as seen in the scenario of Anwar full of malices and deceptions. There are many who does not use their brains to do the talking but use their hands to do the walking.
By large in comparison, Indonesia is an entirely different facet in banking comparing to other Asian countries.
During the era of Radius Prawiro, it was then the real banking problems started. I will disclose something to you. Two days before Indonesia announce devaluation from 500 to 1000 rupiahs per US Dollar, everyone in HMP, BG n those who had ties with Soeharto had already receive news of the devaluation. Everyone on the executive level had make a wuick dash to the bank and borrowed heavily in Rupiahs and had them converted into US Dollars. One day after the devaluation they had they money changed from US Dollars into Rupiahs. Most of them ended up making 100% free money with nothing.
From there on Indonesia began to be bugged by loan and banking problems from the private sector and ultimately the liquidations of many banks.
We shall be seeing another wave of bank liquidations shortly. If the Indonesian Government really wants to see a better bank performance for Indonesia they will have to sacrifice the smaller banks and merge them together and will not hesitate to liquidate those that are unsound.
This is not some kind of concoction from IMF similart to that in 1998 but rather the banking system itselfs needs to introspect and understand the competitive world in global banking to stay alive. On the other hand it will also save them trouble or future trouble, the public and become a liability to the Government.
Imagine asking ourself whether can a small grocery become competitive to the wholesalers? Of anything. This is what China learn that is all those state own companies that are small and not effective be merge into one huge corporation and be competitive towards global marketing and they have succeeded in that. Similar in Taiwan also did that to thei smaller banks.
So why must Indonesia keep adamant on hanging to loose strings?
There is nothing to lose in a merger, right! It is on a share and share alike depending on how much the equity is. The only problem with a merger is that there tend to be disagreement between who is going to lead.
If Indonesia wnats to stay alive and active surviving in this vicious world of shrewd and cunning business tech, one needs to be more than just prudent.
Indonesia also needs to get all banks to refrain from using strong arm tactic in handling financial matters because it will definitely ended up with people afraid of approaching the banks. You want to attract customers, don’t they? Strong arm tactic are long rumored to be part of the banking debt collection off the record department.
It harms the bank more than it does help.
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If big is beautiful, then how can you explain the success of Porsche, a rather small car manufacturer, compared to say, GM and Ford.
Porsche makes more money per car than anyone else. But at one time, it was about to go bust, due to the managers desire to maintain traditional engine layout and design. The shareholder sacked the managers and appointed a new one from BMW. The rest is history, as porsche now makes SUV’s and water cooled engines. In a defensive move, they have decided to own part of VW, No 6 builder of cars in the world, which threatened their livelihood as VW now makes ultra competitive sports cars cheaply. It is like David swallowing Goliath.What about the smaller canton banks in switzerland, which are pulling in deposits after the UBS debacle? UBS, as everyone knows, is a huge behemoth, and looked like a failure.
My personal opinion is that smaller well manged entity can be as profitable, or even more profitable than larger corporations. It all depends on the niche market that target.
LVMH/GUCCI/ Chanel makes huge chunks of money by limiting production and positioning their products at the higher end of the market.Similarly small banks can exist if it targets to serve its local community or by giving a higher service. As you have mentioned, it was political interference which destroyed the credibility of indonesian banks by exchange rates manipulation. If the bank owners can see that the political people just swindled them for mega bucks, they will, in their own way, hit back to get their money back. And who cares if the Joe public got hurt in the middle.
As we are talking, the ringgit/rupiah/baht etc are falling in value against the USD, which is printing money like widfire. And the sin$ has gone up too, which amazes me as their banks probably got hurt by the CDL notes.
Now that you mentioned BNI, why would they be in trouble?
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Well David swallowing Goliath is no news at all in nowaday business world.
But comparing Porsche to Ford and GM I think is two different thing comparing to a Rolex to a Seiko. One a high end market and the other of mass production.
So you compare them in this manner?
How you decide US is printing money like wildfire and yet cause rupiah, bahts and MR to slide is something you cannot justify. When a country prints more money that means what, their economy is weakened.
Many have thought the oil price dipped in the US to 1.90 per gallon is something very surprising. I see otherwise. It is a simple to understand logic.
The car and oil industry goes hand in hand and one cannot afford to lose the other. So the oil company had no choice except to reduce them and let the car industry survive otherwise no one will buy gas.
In banking it is the service. Not money. (Although it is the money that matters)
Will you approach a bank offering a higher interest and service fee which the smaller banks charge, or will you choose a bigger bank with lower interest rate and no fee.Lets say a small Tomato Bank own by a Hongki and Washington Mutual Bank (WAMU).
You should know better why there are some banks that is facing liquidation, but that was what has been rumored around.
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DW your high interst rate regime will lead to this :-
Until 1997, Asia attracted almost half of the total capital inflow from developing countries. The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region’s economies received a large inflow of money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, Singapore, and South Korea experienced high growth rates, 8-12% GDP, in the late 1980s and early 1990s. This achievement was widely acclaimed by financial institutions including the IMF and World Bank, and was known as part of the “Asian economic miracle”.
In 1994, noted economist Paul Krugman published an article attacking the idea of an “Asian economic miracle”.[4] He argued that East Asia’s economic growth had historically been the result of capital investment, leading to growth in productivity. However, total factor productivity had increased only marginally or not at all. Krugman argued that only growth in total factor productivity, and not capital investment, could lead to long-term prosperity. Krugman’s views would be seen by many as prescient after the financial crisis had become full-blown[neutrality disputed], though he himself stated that he had not predicted the crisis nor foreseen its depth.
The causes of the debacle are many and disputed. Thailand’s economy developed into a bubble fueled by “hot money”. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, although Malaysia had better political leadership[citation needed], and Indonesia, which had the added complication of what was called “crony capitalism”.[5] The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power.[6]
and this
icelandic currency crisis –
In 2001, banks were deregulated in Iceland.[94] This set the stage for banks to upload debts when foreign companies were accumulated.[94] The crisis unfolded when banks became unable to refinance their debts. It is estimated that the three major banks hold foreign debt in excess of €50 billion,[3] or about €160,000 per Icelandic resident, compared with Iceland’s gross domestic product of €8.5 billion.[4][95] As early as March 2008, the cost of private deposit insurance for deposits in Landsbanki and Kaupthing was already far higher (6–8½ percent of the sum deposited) than for other European banks.[96] The króna, which was ranked by The Economist in early 2007 as the most overvalued currency in the world (based on the Big Mac Index),[97] has further suffered from the effects of carry trading.[98]
Coming from a small domestic market, Iceland’s banks have financed their expansion with loans on the interbank lending market and, more recently, by deposits from outside Iceland (which are also a form of external debt). Icelanders also took on a large amount of consumer debt, equivalent to 213 percent of disposable income, which led to inflation.[99] This inflation was exacerbated by the practice of the Central Bank of Iceland issuing liquidity loans to banks on the basis of newly-issued, uncovered bonds[100] – effectively, printing money on demand.
In response to the rise in prices—14 percent in the twelve months to September 2008,[7] compared with a target of 2.5 percent—the Central Bank of Iceland has held interest rates high (15.5 percent).[8] Such high interest rates, compared with 5.5 percent in the United Kingdom or 4 percent in the eurozone for example, have encouraged overseas investors to hold deposits in Icelandic krónur, leading to monetary inflation: the Icelandic money supply (M3) grew 37.8 percent in the twelve months to August 2008, compared with 5.0 percent GDP growth.[7] The situation was effectively an economic bubble, with investors overestimating the true value of the króna.
Above shows that dramatic increase in interest rate is sure to fail.
Investment in human capital is a sure route to success. therefore more money should be poured into education, starting at the age of 4 until 16, whereby at that age, the average indonesian Joe should be able to obtain some degree of skill to enter the employment market.Rupiah should be pegged directly to singapore’s currency, like what brunei is currently doing. This will place singapore with the burden of fixing the foreign exchnage and interest rate and indonesia can focus on nation building and inviting “actual and not virtual investors” to build plants and factories for local and export markets. investors will get the currency stability and low cost environment that manufacturers require.
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You said
This achievement was widely acclaimed by financial institutions including the IMF and World Bank, and was known as part of the “Asian economic miracle”.
And you said
The causes of the debacle are many and disputed. Thailand’s economy developed into a bubble fueled by “hot money”. More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, although Malaysia had better political leadership
Thailand was too busy when everyone is wary of the political struggle and the stability of the country until Thaksin and then now what happened to Thailand. They had failed to overcome the economic situation.
and
Icelandic currency crisis – Icelanders also took on a large amount of consumer debt, equivalent to 213 percent of disposable income, which led to inflation.[99] This inflation was exacerbated by the practice of the Central Bank of Iceland issuing liquidity loans to banks on the basis of newly-issued, uncovered bonds[100] – effectively, printing money on demand.
Is this what is all economics all about? What has Iceland have to offer? What has Indonesia has to offer? They have nothing except fishing industries comparing to Indonesia with their vast resource.
You don’t simply print money on demand just to keep the interest payment going.
You need economic engineering.
You need to engineer the economy into such a way that the business, industries, export, import, workforce and banking needs to compliment one another to undermine the economy for overheating. This was what happened to Thailand comparing to Malaysia where they not only concentrated in their industries on top of that they had their MR pegged to the USD at 4 = 1 USD and beside that all money deposited into the country will be frozen for at least 2 years before they could be release. They could only utilize the money in Malaysia for investment and not for speculation. Despite the fact there were still peculators, therefore the growth of Malaysia was not that great.
Your theory of
Above shows that dramatic increase in interest rate is sure to fail.
Clearly shows the lack of indepth and flexibility in economic manipulation to motivate the wheels. To go more in detail will be so time consuming if you do not really know how to untie the knot.
SO you think
Rupiah should be pegged directly to singapore’s currency, like what brunei is currently doing. This will place singapore with the burden of fixing the foreign exchnage and interest rate and indonesia can focus on nation building and inviting “actual and not virtual investors” to build plants and factories for local and export markets. investors will get the currency stability and low cost environment that manufacturers require.
Brunei currency is not pegged to the Singapore dollar! It was in the case of Malaysia where they use their currency a Malaysia dollar to match that of Singapore. When they were left far trailing the development of Singapore their exchange rate fell below par.So do you think you want to peg the Indonesian Rupiah to the Singapore Dollar and when you start to falter again you Rupiah will slide even further? And since you said “This will place singapore with the burden of fixing the foreign exchange and interest rate” you think Singapore would want to place in such a predicament?
So where is the economic logic?
Indonesia needs to stabilize themselves. First they need to start with the security problem, then the legal problem, the workforce problem, the banking problem and simultaneously the plans for industries, export, taxation and most important the local problem that is inflation and wage. Nothing else matters right now to Indonesia.
Nothing will help.
The banking must work side by side with industries, whatever they are. The company must ensure workforce competency and product quality. The government must ensure industries get the benefit in taxation so is the workforce. Industries making loan will then be able to assure a competitive market and export and service the loan. Bank earning the interest for there will service the interest. If the banking system has too much money that it will overheat, then like I say they need to diversify and reinvest elsewhere to make more money.
You just can’t go around printing money like what the Americans did by printing IOU like T Bills and T Bonds to cover for deficit in exchange for instant cash. Problem will arise upon maturity like what is happening to America now. The whole financial system will simply collapse. Now to they are pumping 800 billions in bailout. The same problem repeated again and again to them. It is the time they are playing with in undermining the situation. The oil industries are doing heavy subsidy to compliment the car industries on the quiet.
The saying goes. Calm before a storm.
Indonesia cannot keep borrowing. They need to open up the whole country to foreign investment and not colluding with locals and doing own investment. It is the same as taking from left pocket and putting into the right pocket. This won’t work.
Same thing that had not work for Iceland, Malaysia just got lucky. Indonesia will not be. The longer it takes the worse it becomes. The problem gets deeper.
The Paul Klugman theory will work but what to work with? You need money coming into the country and that is why you need to give the country an economic shock treatment to create a miracle. It will all depends how policy is being implemented.
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Dylan Sumiskum says:
Sorry I came late :D!!!
Indonesia needs to stabilize themselves. First they need to start with the security problem, then the legal problem, the workforce problem, the banking problem and simultaneously the plans for industries, export, taxation and most important the local problem that is inflation and wage. Nothing else matters right now to Indonesia.
I do think this is appropiate,
In order of importance, Indonesia should focus to create a lean banking environment that can promote financing for small-and-medium enterprises. This is a risky measure however and that is why the government has been adjusting their economic policies towards structural adjustment, bringing in the flow of capital, information, and technology into the economy, does the benefits of globalization are being utilized efficiently by the goverment.
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In order of importance, Indonesia should focus to create a lean banking environment that can promote financing for small-and-medium enterprises.
Now when the government financing small and medium enterprises, you should be aware that the Indonesian VP had declared that 90% of the loans will go to pribumi businessmen.
What would you think of the end result for the Indonesian Government. It is quite similar to that guy Adi Sasono who had made small loan to small business pribumis that ended up with as much default as they made the loan to them.
So how are they able to recover the loan when made to them?
This is a risky measure however and that is why the government has been adjusting their economic policies towards structural adjustment, bringing in the flow of capital, information, and technology into the economy, does the benefits of globalization are being utilized efficiently by the goverment.
We have not seen any changes as yet until now except those lip service and very little action that could cause a good enough hike to sense any impact on the Indonesian economy.
What Indonesia needs now is the legal structure, ensure foreigners that security is at the top priority list and that the banking systems are safe for them to bring their money into the country.
Plans should be drafted to foreigners on what is available for investments and what kind of incentives they will get.
The list will just go on.But the government must give assurance that they will act on those left right center half and all kind of fanatic islamic factions who is always opposing to this and that and that gives people the uneasiness to invest.
Without all these, there is nothing they could do amidst all parties are concentrating on their 09 election. Decision makers won’t budge because any wrong move will cause them to lose their job with the next government.
My analogy is that there will not be any kind of a move from now right up to the election. When the next election is over, it will be another new ball game.
Who knows who will be elected as president.
Comment on “Interbank Credit Crisis”.
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Indonesian government has better use of its money than creating another Government Investment Corporation.
GIC’s in Singapore, such as Singapore airlines can easily out-compete any local private start ups for flights out of singapore.
Indonesian rupiah have been experiencing capital flight for as long as I can remember. There is simply no confidence within the business community in the nation. Best solution is to form a three nation currency board, Malaysia/Indonesia and Thailand to be introduce, whereby the currency of these three nations are pegged to one another, with conditions attached for stability, with some kind of FTA within these economies. Malaysia proved to be a hindrance to the ASEAN FTA previously under Mahathir, but hopefully, the coming leader may be eager for this set up.
The currency bard suggestion above will not be the first within ASEAN. Singapore and brunei already have one.
Next on line will be an alliance of JSE/BSE/and KLSE, with brokers free to buy and sell stock and share within the three exchanges from any of the three countries. This will be easy once the currency is pegged to one another.
And the final part, the formation of a common commodities exchange, trading in rubber/palm oil/ rice/crude oil/tin/copper etc.