Plan & Action

Plan & Action

Normally, I will not comment on anything outside my field of research but I am truly shocked at the amount of opposition there is. In Malaysia, during the 1998 Asian Financial Crisis, both the ruling parties and the opposition parties were worried and shit scared that the Malaysian economy would be demolished. During that time of crisis there was very little or no opposition. People came together to work out polices and the Government of Malaysia could expedite and implement policies that promoted recovery and growth.

I look at what is happening and I am alarmed at the rhetoric, the dissent and the side shows. If the economy falters and fails would any of these naysayers stand up and admit it was their fault? It appears that some democracies operate on a ‘free for all basis’ and others are more dictatorial. In a more dictatorial democracy it is much easier to implement policies than in ‘free for all’ democracies. In fact I wonder if anything can be done or will get done in a ‘free for all’ democracy.

Let’s look at the situation. The economy is not doing as well as it we would like it to be, as in normal times, at least it has not reached an exuberance level.

So where do we begin. Let us go back to economic basics and start from there.

Let’s redefine the problems, let us try looking at them from a different angle.

1) Not enough jobs.
Let’s not phrase it as ‘many have lost their jobs’ even though it is true, as we will hang on to the past and not look to the future. Furthermore, it helps us focus our attention on how do we create or build jobs opportunities. And many answers need to be worked out. Where do we do this? What incentives do we provide to those who are willing to hire? Who is willing to hire more? Is there not enough incentives for business to hire? If that’s the case, what are their concerns? Is it that businesses dare not hire? Is it that there is not enough business activity in the area?

It is always the businesses that create job openings and hire people. How about creating more businesses? There is one or two options that are worth looking at and there may be others. Something that comes to mind is .... what shall we call it ... micro-venture capital. Micro-credit is for established small businesses and is a good idea especially if it will help the small companies hire staff. On the other hand there are many people who have left full time employment but have the necessary skills or talent to start small businesses. They may need some training on how to run a small business. In Malaysia, my guess would be an investment of around RM25,000/- (USD$7,000) to RM100,000/- (USD$30,000) to start a very small business, inclusive of one year rental of premises. I do not know what would be the equivalent in the West. It might be worth considering, especially the larger amounts as such larger small businesses would definitely require to hire staff. This option cannot be done through the banking system as they, most likely, will not release the funds for the simple reason that they treat it as if you are borrowing a million dollars. The banks are holding the Real Economy to ransom by not ramping up loans. Hence, bigger companies and corporations can carry out these activities and the local labour departments, job agencies and the local chamber of commerce or business associations can bring people together and suggest potential businesses, that is not currently present in their area. Throw in a few angels (financial not heavenly) for good measure - there is always an alternative system.

Another option would be to re-examine those good proposals that the venture capitalist had turned down. Just maybe, these applicants approached the wrong venture capitalist at the wrong time. Could the Venture Capitalist swap proposals?

We could consider restarting, with loans or venture capital, those larger companies that closed during the recession, due to the lack for working capital. They can rehire many if not all their staff.

2) Can the economic measures be improved upon?
Jobs are created when the economy is growing. We know that the economy is finally recovering hence can we get it to grow? How do we grow the economy? We have many policies that tried to cushion the crash. We have many policies that tried to promote recovery. During the crash and the early phase of the recovery we had people friendly policies and now I think we should be moving towards business friendly polices. Can we implement policies that can grow businesses and the economy? Businesses need to grow. I am not thinking of fiscal or monetary policies here. What do the businesses need to grow? If we ask them we will get a clearer picture of their needs. Do ask them what they don't want.

We are just coming out of a difficult period hence many company coffers will be almost empty. Where is the loan growth to make businesses operational. Either the banking system does not understand this or they are too deeply in debt to ensure economic recovery & growth. Where is the working capital coming from if the banking system does not provide it, for businesses to be the engine of economic growth? Please get the loans out to the businesses and to the consumers that create demand! Do we need to start up new banks because many banks failed and left a vacuum? It just sickens me to think that people are worried about inflation when we have high unemployment. It's a different story when you have low unemployment. I think worrying about inflation is the wrong approach at least for this year, 2010, while unemployment is high.

3) Is it the debt overhang in the Real Economy?
The classic case is that of those who were supposed to be helped with their mortgages. I do not know how severe the problem is. What went wrong here? What is the truth here? Was it badly or wrongly administered by the banks or did the banks block this opportunity for the home owners so that they could earn more money? Or was it the banks were so desperate to recapitalize they would not promote something that lowered their revenues? The debt overhang is still in their system. How do we remove it, even temporarily? Are the banks saying that they cannot unravel their debts? Free the system of the debts? If that is the case then there is no way the economy can recover. If the outstanding debts were sub primes repackaged as securities to investors than tell each of these investors to take possession of their properties. I am dead serious about this. Tell each of them “This, this and that are your houses” and the debt is cleared, the mortgage owner is cleared of debt and can rent the property from the new owner or move to somewhere else. I suspect, from the Internet articles, many people will surrender their houses. If the investors are unhappy, too bad as they are in the business of taking risks. Taking risk means that sometimes you will lose. Anyway, in the long term properties prices will always appreciate. From my experience as a real estate agent in Malaysia, up market properties dropped as much as or more than 30% during the 1998 crisis but prices recovered completely later. Ten years on, prices have climbed beyond expectation and now, even though there is excess property on the market, property prices are quite stable. The alternative to this debt overhang is to write off the debts and tell the investors “thank you very much”.

Let me put it another way, a way many Americans can understand. “Where is the Capital?” Much of my research points to one thing only and that is without working capital businesses will fail. I don't think that the proponents of Capitalism did understand Capitalism, otherwise they would have ensured that there is sufficient availability of Capital at all times. I think they failed miserably as Capital has become a scarce commodity. ….Show me the money.

I have seen, on the Internet, people complaining that government is getting too big but there is no other option. The government has to be Lender of Last Resort, the Final Supplier of Capital. When the Financial Industry has no money, no capital, no working capital, please ask these people to show me the money. Tell them “Cheap talk gets you know where very fast, show me the money”.

4) The Capital Markets
I mean stock markets and the like. I personally, think people are reading too much into market movements which may be erroneous or just a waste of time and energy. The financial traders and market movers love to show how genuinely important the financial industry is to the economy. I say, if they are that important “Show me the money.” Use their funds to start up Venture Capital companies, issue loans and inject real money into the Real Economy. Can they? Do they have the guts to do this? I believe they don’t have the guts to work in the Real Economy as it is truly tough when compared to sitting in front of a screen and watching numbers bopping up and down. It involves Man to Man interactions and real commitments. Furthermore, let’s shut down the entire Real Economy and see what financial trading they will do. They will have nothing to do. It happened in Malaysia. During the Asian Financial Crisis of 1998 when the Real Economy was shutting down, the financial traders had nothing to do and many quit their jobs to look for other sources of income as they did not have enough working capital to run their own households. In fact many countries do not have a stock exchange and they can do very well thank you. The financial markets are a secondary system which is dependent upon and should be subservient to the primary system which is the Real Economy.

Just maybe, we should have a separate currency, for the stock/ financial markets but this is not easy to implement if paper money is issued. Do not issue it as paper money because paper money can get into circulation within a Real Economy. This is to protect the Real Economy. If the Financial Markets crash we can devalue its currency and bail out the culprits, at a much lower cost and with minimal impact to the Real Economy. Do not have two currencies in the Real Economy as that is very dangerous.

There can be real benefits by having a Financial Trading Currency.

i) The amount of money moving into the financial markets can be monitored.

ii) This means we can gauge more accurately, the money in circulation in the Real Economy. When the financial markets become, let me borrow Mr. Alan Greenspan’s words, irrationally exuberant, money is taken out of circulation from the Real Economy and transferred into the Financial Markets. This, I suspect, is one of the primary underlying mechanisms that can cause economic slowdowns and recessions because sales and economic activity in the Real Economy slows as consumers shift their preference to purchasing stocks and shares instead of goods and services of the Real Economy.

I could not show this as one of underlying causes of recessions as M1, M2 ,… figures show a collective amount and does not separate money in circulation in the Real Economy, Money held as savings…, and Money moving in the Financial Markets. But I did observe some of this type of behaviour in people before the 1998 Asian Financial Crisis.

iii) The Financial Trading Currency could possibly act as a firewall between the Financial Markets and the Real Economy.

iv) Bail out cost are much lower as when the financial markets are crashing the currency traders will sell their Financial Trading Currency to get hold of US dollars to save themselves thereby causing the Financial Trading Currency to devalue.

5) Energy Cost
Please do look at energy costs and savings. I am not in a position to do further research into this area at this moment but it does affect everyone and every business because it’s an operational cost.

6) Health and Insurance
I cannot say much about health. Here in Malaysia we have government hospitals and private hospitals. In government hospitals the patient's cost is very much lower than private hospitals. Here again it looks like a ‘Two Tier’ system, one that the ‘haves’ can ‘enjoy’ and another which the ‘have nots’ can afford. There will always be poor people in every country.

I think many modern insurance companies are just running scams. They wait until the Statute of Limits is just about to expire before making a ridiculous offering for your car accident repair bills. And then they complain their costs are going up. It happened to me.

Why is it that the consumer is the proposer of the policy but the insurance companies draft out the policies with tiny fine print? The insurance industry behaves as a monopoly because consumers do not have an alternative and in other instances insurance is mandatory.

Let us know the truth, giant insurance companies were bailed out, right? Many people lost their jobs during this recession, they lost their source of income, right?. What happened to their insurance policies? Did these people lapse payment on their monthly premium payments? And if so did the insurance companies cancel the policies or did they try to bailout their policy holders? Are those lapsed policies still active during this difficult period? Do these folks still enjoy full coverage under their policies? We have insured bank deposits but do we need to insure insurance policies?

Did you know that in Malaysia, you need to firstly sit for the insurance examinations and when you pass the examinations they will spend the time to train you for the examinations! That is risk management at its best! Too me at least, whenever I hear the term 'risk management' I think of scams. I used to be an insurance agent and that is the reason I know how bad this industry can be. Please don't get me wrong there are good people in this industry. Personally, whenever I see an insurance agent I run for my dear life.

7) Spending & the Deficit
With high unemployment did the government tax revenue drop? If this is true then more funds must be used to increase employment quickly. Otherwise in years to come the tax revenue will be much lower. This is the time to spend money and get economic activity going as quickly as possible. I believe that debts can be paid tomorrow if tomorrow there is sufficient tax revenue to pay for it. When business activity is not sustained tomorrow's tax revenue may disappear. I think we should fix todays problems today, tomorrow's problems can be dealt with tomorrow. The 'stock tax' seems to be todays answer to the deficit. In the Real Economy, businesses have a sales tax sometimes called as Service Tax and Value Added Tax at the point of sales, so why shouldn't the Financial Industry contribute too? The 'stock tax' is minuscule when compared to sale tax. I think the 'stock tax' should include not only stock markets but do include commodity markets and forex / currency markets and implemented in all countries. (I forgot to suggest that it should be done at the point of trading by the respective Exchanges ie just like an Exchange fee or broker's commissions so that it's independent of the outcome of the trade and the tax will be collect by the respective Exchanges at the point of trading and not at the point of accounting. This makes it independent of where you trade from. Every country should do this. The taxed amount could be adjusted year to year depending on the economy. Furthermore, future bailout funds can come from this tax. I find it amusing that people are against the idea as at 0.25% you pay 1 cent tax for $4 worth of trade but sales tax can be high as 20 to 60 cents on a $4 sale.- 1st Feb 2010). Unfortunately, the super rich are entitled to bailouts but lesser mortals cannot be helped.

8) Do we need an alternative to the current banking system?
During this period of economic difficulty the banks should be ramping up loans issued to businesses and to consumers, especially while interest rates are low. They should be going all out to help grow the economy. Unfortunately the banking system operates on basis that money is more important than anything else in life. They have an inability to look forward and see the consequences of their actions in the Real Economy. At the end of the day it boils down to whether we operate on the basis of book value or humane values that makes us a civilisation. Money is everything, isn't it? Not our families, not our friends, not our work, not even our Creator.

If you believe in your heart, in truth, that you can do good for your country please “Just do it”. Do not look left, do not look right, just do it, as there are many naysayers, many distractors and many detractors that will try to squander time and will not own up to their actions and their responsibilities. Many of these people have no fear of the Lord God Almighty. The truth about these people will eventually emerge.

Now is the time for action!

- Dr. Peter Achutha, 30th January 2009

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