Written by Askmelah 06 May 2011
I mean it when I say I truly admire the wisdom of Minister Tharman. Other than he has prudently managed the national finance over the last few years, he had correctly predicted the the financial tsunami when the world was enjoying a boom like it will never end and hitting its peak around early 2008. Remember this speech was given in Jun 2007, almost 21 months before the Lehman’s Brother collapse which triggered chians of events that almost brought down the entire world financial system.
The relevant question is: why no one in the Temasek Holding and GIC listened to his warning? Instead of pilling more money into toxic assets (not once but a few rounds) such as UBS, Citibank and Merrill Lynch before the crisis broke on hindsight, they should liquidate and unwind their positions knowing most assets in their portfolios are over-priced like any good investment banker will do? This question will remain unanswered for many years to come. This is one instance where the lack of transparency is hurting Singapore, remember PM Lee famously said “Our funds are accountable to the government. I would not believe that transparency is everything.” Singaporeans could have been much better off with the money made from the wise investment to fund the many social programmes or deficit budget (drawing down S$4billion from the reserve) instead of the “paper loss” of few 10s of billions (it is still not clear to the public how GIC and TH are doing today with the full recovery of the economy, all we were told that they have largely recovered the loss) had GIC and TH heeded the advice of Tharman. [updated 21 jun 2011: Temasek’s portfolio rose 43 per cent year-on-year to S$186 billion at the end of March 2010, surpassing the S$185 billion just before the financial crisis that drove its value to S$130 billion. Updated: 8 Jul 2011: Temasek Holdings doubled its net profit to S$13 billion and saw its portfolio value hit a record S$193 billion in the financial year ended March 31 2011, as compared to the previous year. So is it S$186 or 193 billion?]
[Updated 26 Sep 12] The other man that had accurately predicted the housing bubble is Economic Professor Vernon L Smith. Prof Vernon had predicted the bubble would be formed in several years when he was interviewed in 2005 due to very low interest rate and the change in capital gains tax law which fuelled a major movement in the real estate market. Source: “Show Me The Money Vol 4 by Teh Hooi Ling, pg 124
[Updated 25 Jul 2011 and 2 Sep2011]: Tharman has predicted (Jul 17 2011 The Straits Times) that there will be mini-shocks and a sluggish economy in the coming months but unlikely a financial disaster of the like of Lehman’s Brother collapse and the ensuing events. We shall review this statement in 2-3 years time. Tharman also spoke at the World Bank Infrastructure summit in Singapore that he agreed with World Bank President Robert Zoellick’s view that “the world economy has entered a dangerous new phase and that the possibility of global recession now was more likely than not. “Incidentally, The Rich Dad Poor Dad author Robert Kiyosaki has predicted a major financial disaster by 2016 due to the over-printing of US dollars by Uncle Sam. The two events are related but the timelines differ.
[Updated 18Oct2012]: “Nearly every segment of Asia’s financial industry is set to grow by significant multiples over the next 10 to 15 years, Deputy Prime Minister and Minister for Finance Tharman Shanmugaratnam said yesterday.” [Source: Financial industry set for big gains: Tharman]
Risks are piling up for the global economy: Tharman
Source: The Straits Times June 25, 2007
Asia must be on the alert not for the usual risks, but for a ‘vicious unknown unknown’
THE risks are piling up in the global financial markets and Asia needs to brace itself for a likely shock to the global economy, Minister for Education Tharman Shanmugaratnam said yesterday.
‘It’s precisely because everyone is feeling good that we know something is coming,’ he said in a stern warning that the liquidity-fuelled global party cannot continue indefinitely.
What the world needs to watch out for are not the usual risks of an economic slowdown and faltering American consumer spending, he told participants at the World Economic Forum on East Asia.
These are what he termed ‘known unknowns’.
Instead, it is a ‘vicious unknown unknown’ of an unwinding of imbalances in the world economy which can have a substantial impact on global financial markets, said Mr Tharman, who is also Second Minister for Finance.
‘Seasoned observers know that a shock is very likely to come at some point,’ he added. ‘There’s a feeling that when it comes, it will have a pretty large impact and it will be difficult to manage.’
Mr Tharman’s warning adds to a growing chorus of economic experts who say that low interest rates and easy credit are fuelling asset bubbles in many parts of the world.
In fact, a long period of low interest rates and low volatility has led to a high degree of complacency, Mr Tharman said.
In particular, bubbles are developing in stock markets, real estate, commodity markets and private equity, he warned.
‘There’s a search for higher yields. Emerging markets are a significant recipient of global liquidity searching for higher yields,’ he said.
Capital flows to Asian emerging markets are also now 6 to 7 per cent of gross domestic product, or back to the levels they were before the Asian financial crisis 10 years ago.
The good news is that this time, most of these flows are not short-term lending but portfolio investment and foreign direct investment.
‘But we still have to watch this very carefully because the risks of an unwinding in global financial markets, arising from an increase in interest rates, in particular, is going to have many unpredictable effects,’ Mr Tharman said.
All the major shocks of the last 20 years – from the 1987 stock market crash to the Russian financial crisis and the Asian financial crisis – caught everyone by surprise, he noted.
Emerging markets need to brace themselves for possible shocks and put in place ‘shock absorbers’, Mr Tharman said.
The ‘managed floats’ of currencies in Asia – where exchange rates are largely determined by market forces – is the ‘most intelligent way to go’.
But regional exchange rates may be ‘a little too fixed’, resulting in capital inflows and massive domestic liquidity, he added. ‘This is what is fuelling asset bubbles,’ Mr Tharman said.
But beyond bracing itself for the shocks, Asia also needs to examine its role in helping to unwind global imbalances, said Thailand’s Minister for Finance Chalongphob Sussangkarn.
Currently, there is ‘not enough effort’ put in dealing with the dangers of global imbalances, he said.
‘Maybe there’s too much apathy or a sense of helplessness. But eventually I think it’s an issue, particularly in East Asia which holds most of the world’s foreign reserves, that we need to discuss how we can help to unwind this imbalance,’ he said.
But Asia is also in a much better position than it was 10 years ago to deal with any shock, said Asian Development Bank managing director-general Rajat Nag.
‘The rules and regulations that probably didn’t exist are now there. I’m a bit less pessimistic on the ‘vicious unknown unknowns’. I think one needs to be prepared but I will take a more sanguine view of the ability of the systems to handle it,’ he said.