Prof. Mohd Nazari Ismail
Faculty of Business and Accounting
University of Malaya
FINANCIAL CRISES: CAN THEY
BE PREVENTED?
Prof. Paul Krugman , Princeton U.
Winner of 2008 Nobel Prize for Economics
Alan Greenspan
Chairman of US Federal Reserve Board,
1987-2006
Prof. Jeffrey Sachs
Director Earth Institute, Columbia
University
Plenty of brains… still cannot
solve problem? So how?
Massachusetts Institute of Technology
Hmmm….. How are we gonna solve
this problem?
I don’t have a clue too…
Presentation Outline
 Reasons for concern
 Different types of financial crises
 History of finance industry
 Central argument
 Conclusion
….financial crises at their core are
outcomes of over-lending and overborrowing and are thus integral to the
industry itself.
CENTRAL ARGUMENT
Asian Financial Crisis –
Worse Economic Damage…
…compared to the Asian
Tsunami !
US Sub-prime crisis…
… impact in all corners of
the world
We are victims of
the Jews ….
Honest, it wasn’t me…
Financial Crisis
“a disturbance to financial markets,
associated typically with falling asset
prices and insolvency among debtors
and intermediaries, which spreads
through the financial system, disrupting
the market’s capacity to allocate
capital”
B. Eichengreen, 1986
Economics
Crisis
Financial
crisis
Other Causes of Economics
Crises
 Wars
 Earthquakes
 Floods
 Draughts
 Plagues
Types of Financial
Crises
 Currency crisis
 Banking crisis
 Market crashes
Asian Financial Crisis
Overinvestment in Real Estate
Asian Financial Crisis
Inflow of foreign funds
prior to crisis
Bank Run
Source: Worldbank
Argentina
 Fiscal indiscipline
 Public debt:
 1983 USD46 billion
 1989 USD65 billion
 1999 USD130 billion
 Trade deficit
 Bank run
Argentina riots…
Sorry, you cannot withdraw any
money today…
Open up the bank! We want our money back….
Argentina Foreign Debt in 2007:
USD127 BILLION!
Market Crash
Bubble…
Examples of Market Crash
 Japanese property crash (1990)
 Dot.Com crash (2000)
 Sup-prime mortgage crash (2007)
Japanese Crash – A Puzzle?
 Successful exporter
 Trade surplus
 High savings rate
 Hardworking and skilled workforce
Japanese problem
 banks
 over-borrowing
 debt
 speculation
Savings/funds
deposited into banks
Banks increased lendings
Asset prices skyrocketed
?
land surrounding the Imperial Palace
in Tokyo estimated to be worth more
than whole of California…
….created a massive bubble…
… which soon burst!
Effect of Bubble Burst
 Trillions of yens wiped out in markets
 Spending slowed down
 Economy sputtered to a halt
Japanese Poorest and Weakest
A side of Japan
that is not often
seen…
Sub-prime Mortgage Crisis
Low interest
rates, excess
liquidity
in 1990s
Banks lent
to
Sub-prime
borrowers
Housing
boom
CDOs act
as booster
Sub-prime Mortgage Crisis
(cont.)
Housing
prices
skyrocketed
Interest
rates
rose
CRASH!
Borrowers
go bust
Total UK and US debt to GDP
ratio of 300 %
… 20% of total economic
output used to pay interest
Sub-prime Mortgage Crisis
(cont.)
Housing
prices
skyrocketed
Interest
rates
rose
CRASH!
Borrowers
go bust
Sub-prime Mortgage Crisis
(cont.)
Lenders
go bust
Credit
Crunch
Global
Recession?
All in Serious Trouble…
How serious is current
crisis?
 USD16.3 trillion wiped out
 deep and prolonged recession
 Major economies slowing down
US$700 billion bail-out plan
US FEDERAL GOVERNMENT’S
TOTAL ACCUMULATED DEBT IS
NOW MORE THAN USD10
TRILLION
JAPAN’S PUBLIC DEBT MORE
THAN 195.5% OF ITS GDP
If bailout plan does not work…

Global Recession…
starvations, homelessness, chaos…
Financial crises… how and
when did they all start?
600 YEARS AGO…
Human existence started 2
million years ago…
Human History of 2 million yrs
no
finance
industry
16th
century
DURING PREVIOUS 99.97% OF
HUMAN HISTORY THERE WAS NO
LEGITIMATE FINANCE
INDUSTRY!
USURY
In ancient India it was looked down
upon by both Buddhists and Hindus.
Ancient Philosophers against
Usury
Aristotle
Cato the Elder
"...THOSE WHO PLY SORDID TRADES,
PIMPS AND ALL SUCH PEOPLE, AND
THOSE WHO LEND SMALL SUMS AT HIGH
RATES. FOR ALL THESE TAKE MORE
THAN THEY OUGHT, AND FROM THE
WRONG SOURCES. WHAT IS COMMON TO
THEM IS EVIDENTLY A SORDID LOVE
OF GAIN...“
ARISTOTLE
“what do you think of
usury?" - "What do you think
of murder?
Cato the Elder
USURY
Judaism forbids it (if practiced
among fellow Jews)
“interest-charging same as
people who have shed blood…”
Ezekiel
USURY
The medieval Christian church
condemned it
“Now money, according to the Philosopher was
invented chiefly for the purpose of exchange:
and consequently the proper and principal use of
money is its consumption or alienation whereby
it is sunk in exchange. Hence it is by its very
nature unlawful to take payment for the use of
money lent, which payment is known as usury: and
just as a man is bound to restore other illgotten goods, so is he bound to restore the
money which he has taken in usury”
Thomas Aquinas
Old Testament’s descriptions
of usury practitioners
 shedder of blood
 the defiler of his neighbor's





wife
the oppressor of the poor
the spoiler by violence
the violator of the pledge
the idolater
extortionists
 Sabbath-breakers
 who vex the fatherless and







widows
dishonor parents
liar
the unrighteous
the backbiter
the slanderer and perjurer
the meanest and lowest of
men
the vilest of criminals
Islam condemns usury
USURY IN ISLAM
“Those who charge usury are in the same
position as those controlled by the devil's
influence. This is because they claim that
usury is the same as commerce. However,
God permits commerce, and prohibits
usury. Thus, whoever heeds this
commandment from his Lord, and refrains
from usury, he may keep his past earnings,
and his judgment rests with God. As for
those who persist in usury, they incur Hell,
wherein they abide forever”
(Quraan – 2:275)
USURY IN ISLAM
“God condemns usury, and blesses
charities. God dislikes every disbeliever,
guilty. O you who believe, you shall observe
God and refrain from all kinds of usury, if
you are believers. If you do not, then expect
a war from God and His messenger. But if
you repent, you may keep your capitals,
without inflicting injustice, or incurring
injustice. If the debtor is unable to pay, wait
for a better time. If you give up the loan as a
charity, it would be better for you, if you
only knew.”
(Quraan 2:276)
John Eck (1486-1543)
John Calvin (1509-1564)
Adam Smith (1723-1790)
Jeremy Bentham (1748-1832)
“The interest or the use of money…is the
compensation which the borrower pays to the
lender, for the profit which he has an
opportunity of making by the use of the money.
Part of that profit naturally belongs to the
borrower who runs the risk and takes the trouble
of employing it; and part to the lender, who
affords him the opportunity of making this
profit”
Adam Smith 1776
“…debt forgiveness is not in
our vocabulary. But we can help
them by giving them additional
loans.”
Senior executive, ADB
John Whipple
"If 5 English pennies ... had been ... at
5 per cent compound interest from the
beginning of the Christian era until the
present time, it would amount in gold of
standard fineness to 32,366,648,157
spheres of gold each eight thousand miles
in diameter, or as large as the earth."
John Whipple (1836) in “The Importance of
Usury laws”
Wow….
"…the purpose of money is to
facilitate exchange. It was never
intended as an article of trade, as an
article possessing an inherent value in
itself, (but) as a representative or test
of the value of all other articles. It
undoubtedly admits of private ownership
but of an ownership that is not absolute,
like the product of individual industry,
but qualified and limited by the special
use for which it was designed....“
John Whipple 1836
Crash!
Innocent victims
Another victim of financial
`accident’?
Tulips Mania Crisis 1637
London in 1720
South Sea…
Crisis….
Overend, Gurney & Co
City of Glasgow Bank
Financial crises in the
US, too
Bond Certificate
US Stock Market Crash 1929
The Great Depression
World War II expenditures moved the
US economy again
Stock market boom
ROARING 1980S
Leveraging!
Or `borrowing’
Merton Miller
Franco Modigliani
1980s
Leverage buyouts,
mergers, takeovers and
junk bonds
Crash! USD500 billion gone!
Savings and Loan
Scandal/Crisis
Savings and Loan
Scandal/Crisis
Other Financial Crises
 Long Term Capital Management 1998
 Russian currency crisis
 Mexican financial crises 1982; 1994-95
 Brazilian Financial crisis 1999
 European financial crisis 1992
 Iceland financial crisis 2008
 Etc., etc., etc….
DEREGULATION?
But still failed to prevent occurrences of crisis after crisis…
USA HAS THE BEST REGULATORY
FRAMEWORK
Repeal of 1933 GlassSteagall Act and Bank
Holding Act in 1999
Before: Heroes of
Deregulation & Growth
Robert Rubin – Former
Treasury Secretary
Sanford Weill - Citibank
Alan Greenspan –
Former Fed Chairman
After: Culprits of the
Crisis
Dr Zeti
DERIVATIVES?
CDOS? CDSS?
CDS (credit debt swap)
US$62 trillion at the end of
2007
DERIVATIVES IS OUTCOME OF
DYNAMIC AND DEVELOPED
FINANCIAL MARKETS!
Abandonment of Gold Standard?
Gold standard abandoned
completely in 1971
Nixon
Vietnam War
GROWTH OF FINANCIAL
INDUSTRY REQUIRE
ABANDONMENT OF GOLD
STANDARD
Gold Standard will constrain
growth of finance industry
Optimistic Risk-taker?
Buddies now…
“Perception of greed as being
responsible for the current
financial crisis is a misplaced
perception.”
Prof. Barry Eichengreen
U of California, Berkeley
Heroes now…..
Nazir Razak, CIMB
Amirsham, Ex-CEO of Maybank
If there is a crisis…..
greedy villains?
Before – “Admired”
John Meriwether, LTCM
Chuck Prince, Citigroup
Dick Fuld, Lehman Bros.
After – “Greedy”
Clear Cases of Greed
Nick Leeson – Baring Bank
Jeff Skilling - Enron
“It's so difficult to
pinpoint one person or two
people…It really was the
whole system”
Reena Aggarwal, Professor of Finance, Georgetown
University
Findings of Study by C.
Reinhart & K. Roggof
 asset prices
 real economic growth
 and public debt
Charles P. Kindleberger
Ford International Professor
of Economics at MIT
`OVER-TRADING’
`FINANCIAL DISTRESS’
`CONFIDENCE’
“Sometimes in the next five
years you may kick yourself
for not reading and rereading Kindleberger’s
Manias, Panics and Crashes.”
Paul Samuelson, Nobel Laureate and Professor
Emeritus at MIT
At their core, financial
crises are problems of overleveraging, over-lending and
over-borrowing
sadly, the problems are not
going to go away as long as
the financial industry is
legally part of our life.
"I've been around long enough to see that
we have these cycles. These guys get
their cigars and champagne. They have a
great time. The whole thing blows up. But
then they re-emerge years later. This one
is a really, really bad one. But I don't
think Wall Street is dead”
 Andy Serwer, the managing editor of
Fortune Magazine
In reality we are not solving
the problem but simply putting
off the reckoning to a later
date and to a later generation
of citizens.
THANK YOU
Financial Crises
 over-lending
 over-borrowing
 integral to the industry
itself
My Central Proposition:
Problems are not going
to go away…
…as long as financial
industry exists.
Asian financial crisis
worse than tsunami …

Asian Development Bank
Here we go again…
Popped!
WHEN LENDING (FOR PROFIT)
BECAME A LEGITIMATE
INDUSTRY