2008 Presentation Financial Crisis Global Melt Down17112009SDN

8/9/2019 2008 Presentation Financial Crisis Global Melt Down17112009SDN

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Presented in the Class of

International Trade and Finance

IEF TRISAKTI JAKARTA

November 2009


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The Current Global Financial Crisis Bankers who rolled-up the debts into securities.

Rating agencies that stamped them AAA

Central bankers who having lowered rates pumping up the credit bubble.

Cheap credit, low standards and high greed.

A worker paying nothing-down and nothing-to-pay-for-two-years. Buy properties worth fifty times his annual salary.

The mortgage brokers, bond bundlers, rating agencies, bond sellers and

homeowners all working on the principle that when the payments come due

no choice but to default.

Investment banks and hedge funds were leveraging themselves at very high

level, paying exorbitant salaries and bonuses and to sustain commission fees. The continued decrease in US housing prices rising defaults on housing

mortgage payments and the securities and derivatives on which they were

based.

Financial institutions losses and drop in their share prices.

The sub-prime mortgage crisis culminated into financial crisis.

Has its roots in fraud, greed, abuses, lack of transparency and accountability.

Saebani Hardjono Apr-10


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Crisis is dampening for Asia exportsAsias heavily export-driven economies have been hit hardCountry Export

South Korea Exports Fell a year-on-year 34 percent in January

Japan Exports Fell a year-on-year 46 percent

Taiwan Exports Fell a year-on-year 44 percent

Philipines Exports Fell a year-on-year 40 percent

Singapore Exports Fell a year-on-year 38 percent

Indonesia Exports Fell a year-on-year 20 percent

Thailand Exports Fell a year-on-year 16 percent

Malaysia Exports Fell a year-on-year 15 percent

Vietnam Exports Fell a year-on-year 5 percent

China Exports Fell a year-on-year 18 percent

Asian economies have to rethink the old model of Asia make it, Americans

buy it and start promoting more domestic consumption.Saebani Hardjono Apr-10


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The Effects of the Financial MeltdownWoul slow own t e Asi P cifics r oss omestic roduct (GDP)Country GDP 2008 GDP 2009

Malaysia 5% 3.5%

Indonesia 6% 4.5%

Vietnam 6.8% 6%

Singapore 1.2% 1.2%

US NA 5.5%

Saudi Arabia 6.8% 6%

India 5.3% 5%

The unemployment rate is also increasing; the US is 7.6%; India at 7.2%;

The industrial output was severely hampered. Total wealth loss is in the range of $1.2T.

The ow Jones has fallen to below 7000 points for the first time sinceApril 1997



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Three Tools

To Mitigate Economic Meltdowns

Monetary FiscalExchange

rateinstruments



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The central bank reduces interest rate

Relaxes statutory reserves requirements

The treasury reduces taxes

Increase public expenditure at the risk of budgetdeficits

Depreciate their currency to render exports competitive

Divert domestic consumption away from expensiveimports to local goods.

Monetary

Fiscal

Exchange

rate

Three Too

lsToMitigate Economic Meltdowns



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The Stimulus Packages (Bail-outs)Hundreds of billions of dollars to support economic

growth.Country US $

US 937 billion

UK 29 billion

Germany 103 billion

China 586 billion

India 4 billion

Japan 51 billion

Malaysia RM $ 7 billion

Indonesia 6.15 billion

Singapore 13.7 billion

Thailand 3.28 billion

Saudi Arabia 400 billion



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The Stimulus Packages are to Increase

Infrastructure SpendingConstruction of roads

Constructions of bridges and public housing

Spend on Education

Human capital retraining programs

Revamping the healthcare system

Rebates for corporations

Individual and home owners

Bonus for individual to buy a new car

The stimulus package is also used to buy bad loans, corporate debts, stock, commercial

papers and derivative products and other financial assets from banks and institutions.



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Islamic Global Financial SystemT e Isl mic financial system is strongand as not een ulledalong to collapse

The Islamic financial systemis much more rational, just

and ethical

The Islamic financial systemis structured in a more

trans arent and tangi le

The Islamic financial system

is not ased on interest ratesut the value of assets.

The fundamental principle of no risk no reward which is a huge departure from the

conventional finance where considerable gains could be made on zero risk.Saebani Hardjono Apr-10


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Would only widen further the disparity in wealthdistribution. Individual and businesses will find itdifficult to bear more debt.

Event with interest rates close to zero does not seemto stimulate the real economy.

The dollar being the dominant international currency.Will entail a massive transfer of global wealth to thoseUS financial institutions that benefit from the bailout.

The Bailouts

Over

indebtedness

US Dollar

The Negative Effect of US Bail-outs

Hence the bailouts will not only worsen the global recession but also cause

global disparity in wealth distributionSaebani Hardjono Apr-10


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The best numeraire are commodities that havecharacteristics of money, gold, silver, oil and grain.

e retton Woods II system ro osed by some illbring a lot more benefit and justice.

Such a system ould ractically render a fixed-exchange-rate regime ould eradicate volatility,mani ulation and s eculation.

Numeraire

New Bretton

Woods II

Fixed

Exchange-rate

Todays money and finance system is unfair, ecologically destructive and economically

inefficient. The money-must-must-grow imperative drives productions (and thus

consumption) to higher than necessary levels.

The need a system based on real moneyA real-money system is one that is backed to a numeraire measure such as gold.



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The over dependency on a certain currency cause USdollar to become very powerful. It will then expose aparticular country to the dangers of exploitation andmanipulation.

By keeping reserves in US dollars, it will only benefitthe US.

Dinar is more stable and has intrinsic value compared to USdollars which is money backed by nothing. It has zerointrinsic value and its rate fluctuates with the changing ofthe power of demand and supply, unstable, easily exposedto inflation, facing the risk of staggering value and rates.

US dollar

Very

Powerful

US Gets

The Benefit

Dinar

vs

US Dollar

The Domination of the US Dollar in Global Trade and

International TransactionA real-money system is one that is backed to a numeraire measure such as gold.

The reason that the US dollar remained as the prevailing currency system is due to

the peoples belief in the currency itself.Saebani Hardjono Apr-10


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What the Mosle ountries Shoul o

Implement Islamic Financial System :Superior Medium Exchange, Fair, Ethical, Just

Cooperate, build up trust and alliances to create some economic balance

ctive participation in the field of economy

Not adopting blindly the system and norms of theWest

Fully utilize the natural resources

dhere the concept of ukhuwah Islamiyah and ummatan-wahidatan

void conflict among Moslem Countries

Moslem countries should avoid giving opportunity for Western countries to rule

over the economic system ofMoslem countries.

The Moslem World Has a Better System



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US Financial Syste is the E icenter of the risisTwo alternative explanations of the crisis have emerged : a conventional and an alternative

The first relies heavily ondeviations from the efficient

capital market hypotesis-excesive risk taking

emergence of bubbles andinformation problems toexplain the causes of the

crisis.

The alternative explanationsuggests that crises are inherent

in financial capitalism because ofthe structure of the supporting

financial system. Such a structurein inherently fragile and theexistence and confluence ofcertain conditions converts

fragility into instability

Islamic financial system represents a financial structure substantially different from this dominant

paradigm. It is supported by the network of institutional elements whoose existence creates

a strong barrier to emergence of instability



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Islamic Finance Requires as matter of urgencyA regulatory-supervisory framework much stronger than exist in the dominant system.

A framework has to be

unified, uniform, andmultinational coveringall economies in which,in one form or another,

Islamic finance hasbeen adopted.

A framework has to becomprehensive,

legislatively based, andinclude all facets of the

financial system

Such a regulatory-supervisory system is far more important to the Islamic Financial

system in its present stage of evolution than the dominant system.



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The Crisis and Explanation of its CausesIt was believed that the growing sophistication of the financial system as well as deeper and greater

macroeconomic stability in developed, industrial market economies had mitigated the risk of emergence of crises.

All of this created an incentive structure that encouraged excessive risk-taking in search of higher yields. This

provided the primary motivation for the emergence of the subprime market. The subprime borrowers composed

a riskier class.

The recent crisis began in thesubprime mortgage market of the

U.S. financial system. Subprimerefers to a segment of the marketin which mortgages were issuedand credit extended to buyers

with low credit score, brief or nocredit history, little or no assets,

and poor income earning

prospects (Ninja loans).

Interest rates were low, liquidity

was high and growing, financialinnovations were proceeding at a

rapid pace (especially insecuritization and structure

finance), complacency in face ofgrowing risk was deepening andregulation as well as supervision

receding and weakening.


2008 Presentation Financial Crisis Global Melt Down17112009SDN

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