READINGS – ANIMAL SPIRITS

I would like to start in my blog a new set of discourse, titled “Readings” – which I intend to share with readers a sort of book review of whatever book that I have finished reading. The purpose is to encourage more people to spend their time reading books that are of quality as well increase our overall understandings of many things happening in the world today. I hope you all can share your thoughts as well as recommendations on any books that you have read, and your comments on the books that I mentioned. Hopefully, we all can continue to enlighten ourselves with more food for thoughts.

In this article, I would like to share a book by George A. Akerlof and Robert J. Shiller, aptly titled “Animal Spirits” – which terms they have borrowed from the great economist of the last century, John Maynard Keynes. Troubled by all the elegant economic theories, Keynes raised an element which to him, was a source of discomfort and many times makes economic predictions to miss their major points – which is the human behaviour that transcends the “rationality” and “market efficiency” that economist by default assumed to be true. This is the core argument of the Book.

Both Akerlof and Shiller are the founders of a “new school” of behavioural economics, which ascribed to the fact that markets are “not that efficient” and “not that rational” as commonly thought or assumed. Akerlof himself is among the pioneer of economics of information asymmetry, with his first seminal article, titled “Markets for Lemons” – for which he was awarded with the Nobel Prize for Economics in 2001 (together with Joseph Stiglitz – on the same subject). Shiller on the other hand is the earlier proponent of “behavioural economics” and has since published numerous books such as “Irrational Exuberance” and others. Both are in fact very established and renowned economist of today.

While written as an economic text, the book is quite easy and simple in the sense that they avoided any rigorous proof of their hypothesis using the “Greeks” that economist usually employ in their writings. The book started with the key elements of “animal spirits” in the markets, namely on the question of “market confidence”, and how a feedback system works. Then they address the question of how “fairness” is ultra important in the market scene, and how “corruption and bad faith” erodes market efficiency. Furthermore, they also brought along a very “old” debate between Paul A. Samuelson (Akerlof’s teacher) and Milton Friedman (of the Chicago School) about “money illusion” – which to the authors, is still alive and kicking in the current economic environment.

Then the authors go on to explain how these “animal spirits” help us to understand eight major questions that the economists have failed to answer with satisfaction. Among others the questions are about “business cycle” and “economic depressions”. “Why central bankers have a role over the economy” and “why do we see so much fluctuations in asset prices (such as stock markets)”, and so on.

The way the arguments were laid out is quite elegant and easy to understand, even for those with little economic theoretical background. Furthermore, the authors also relates their arguments with the recent economic crisis and “scandals” in the US and Global economy. And finally, at the end of their argument – which is quite interesting, that they still believe that capitalism is the only economic system that is applicable to mankind. But unfettered capitalism as being practiced is prone to error because of “animal spirits”.
Therefore, capitalism by itself is not the best solution, but rather a second best solution.

This argument somewhat match my own personal view that capitalism provides us with many tools that otherwise we might not have; but by itself, is mired with errors. This is exactly what Imam Al Ghazally has preached (in my earlier article: “Deliverance from error”) that we must realize whatever that we have (found or believe) are still prone to errors – therefore we must always be on the path of improvement and on guard against our own weakness; and never at ease with our own findings of the “truth”.

The book is available in most bookstores. I have bought mine at Kinokuniya KLCC, in hardback, 230 pages, for a price of RM99.63 – under economics section. Have a happy reading.

THE STATE OF THE GLOBAL ECONOMY – UPDATE

If any comforts that the daily news can provide us today, it is that the so-called economic storms which ravaged through the Global economies has pretty much abated. Signs of liquidity among the banking systems have emerged; the global drain has been stopped, and now the repair works has to begin. I have to admit that the speed of the Western Governments and their Central Bankers in tackling the problems heads on with the tenacity and ingenuity, bold and timely moves should be credited with what have happened. It is quite interesting that the solutions that were brought in are in many ways mirror the problems that created the crisis to begin with. However, words of caution should still remain, as it is by no means that the Global Economy is out of trouble yet; except that it has averted an everlasting disaster of total Global meltdown.

The basis of the solutions is off course back to a very “old” economic theory of “Keynesian economics” with a lot of dosage of modern day tools. What Keynes argued for that under the circumstances, monetary policies are useless (and in fact can be hazardous) to tackle a seriously slumping economy (and banking crisis of large magnitude). What are needed are “stop gap” measures to stem the haemorrhaging financial institutions; which will restore confidence and to get the banks back into its lending business, so that businesses and consumers are back in their feet. This is to maintain the monetary base to be stable.

However, that is only half of the story, because to fill in the slack that has been created by the crisis (which causes high level of unemployment and slacking demands), the Government has to crank up its fiscal engine: by increasing the government’s spending. While the above recipe seems pretty standard in economic arguments, the magnitude of the exercise was so large, that in total, we are talking more than US10 trillion in its total sums. This what makes the “experiment” unique and unprecedented in our human history.

The next thing that matters is how we go about in repairing all the damages that has been caused by the crisis. Probably, this would be a bigger and trickier subject than the one described above. It is clear to me that there will be many “losers” than “winners” that emerges out of the exercise. One obvious group that will be “net losers” are the public. Many people have lost their savings and money by way of asset value depreciations – such as housing prices and share prices. While on the other hand, a stabilized commodity prices (such as oil price), may help the public in the long term as well. One thing that bode quite well was, nobody among the public lost their money due to bank runs and closures, compared to what happened in 1929. Quite a good number do lost their jobs, but if the recovery can pick up quite fast, then the pain will not be a prolonged one. Actually, the biggest losers are the Governments, because the eventual costs of the exercise can be quite massive and will only be known years later (and paid later).

In any case, we have to thank God that the disaster was quite brief (at least for now) and it seems that the way out is becoming much clearer. However, it must be cautioned that we are only at the beginning of a new phase – which has yet to be certain how the eventuality will appear. There are so many loopholes and potholes to be avoided as well as we must understand that should any new crisis started again, the economy are in so weak state that it might not be able to ward off another trouble.

This is probably more so for countries like Malaysia; with its political leadership and directions in a total limbo – might itself be the biggest recipe for failure. Failure is not measured in how have we “avoided the global meltdown”, but should be on whether we have enough planning and contingencies for “probable” events of the future. I have to admit that I am not of the same school of thought as Matthias Chang, whose outright rejection of the system, left you with no option except to scorn everything that you see; neither am I, an outright defender of capitalism, such that it claims to have solutions to all economic ailments that happened. We lived in a world where our control of events are extremely limited, save for what little thing that we do for our own selves. Therefore, first and foremost we have to look upon our self what we can do to safe guard us in the future.

My recipes (which I apply for myself) are as follows: (a) Save as much money as possible, since the days ahead are murkier and riskier by any measures. (b) Find any form of steady cash generators as possible, since your income might not even suffice to append your future cash flow needs. (c) Pay as little taxes to the government as possible, since they are the worst form of “savings and contributions” in their current state of affairs. (d) Invest whatever extra that you have not in the form of papers, but in tangible assets such landed properties or land itself. (e) Be global as much as you can, since a single country is so vulnerable to swings that are unpredictable. (f) Perform charity as much as you can afford, since that is the way you must give back to the poor and needy (i.e. the society). (g) Do your duty as a citizen by being a registered voter, and do vote when the times comes, because it is the least that you can do to overthrow any bad governments. (g) Read as much as possible, because being knowledgeable and aware is the most basic requirements of any modern day man.

LAWS ARE INVISIBLE THING – further comments

As I have commented before, borrowing captioned from YBM Tengku Razaliegh Hamzah, that Laws are Invisble Thing, perfectly summarized the Perak Saga. By the day, it is becoming absolutely obvious that whattever both sides going to do, there won’t be a decisive ruling from the courts that can break the impasse. As we have known, the High Court judge, ruled in favor of Nizar and PR in a more than seventy pages written rulings, and yet it was stayed at the Appeal Court on hush-hush decisions without any written judgement accompanied. And now, the whole matter is in the Courts of Appeal.

Regardless of whatever the outome and decisions by the Appeal Court, one thing is certain, it will set precedents that in the long haul will ONLY add more potential problems in the future. Should the Appeal Court decided in favor of Zambry, then it will open a whole pandoras box which in fact can also be used by PR should ever any attempts by BN to unwrest power from them (say in Selangor). In another word, whatever the outcome is, it is a double edge sword that cuts both ways and will only increase any similar challenges in the future.

The public on the other end, will only be further divided based on their inclinations and political leanings. If they are with Nizar, they would say that legally they are right; and off course the same goes for BN and Zambry. As I have commented, the laws are open and wide for so many interpretations and given the influence by “invisible hands”, the already Invisble laws, became more invisible to most.

In case of the US court, they do have a jury system – whereby the Jury will be the decider on cases presented. Even though we in Malaysia have scrapped our Jury systems long time ago, we forgot that in actuality the Jury are still out there – especially in political cases, namely the Public. Why not try everyone in the public jury system – that is by calling for dissolution of the state assembly and then have a state general election. In this case then we put to the matter to test in the real court – that is the court of the public opinion by way of their votes.

In this case we avoid the invisiblity and settle the scores once for all.

OBSERVATIONS

Off late, I have not been able to write anything to my blog; it is not because I am too busy or do not have anything to write about. In fact, to the contrary I have written a few article that are almost ready to be posted. But I felt so disheartened by whats going on in the country, so much so that I have no mood to post anything at all.

The situation if any words can describe it, is in full shamble, and at times sending an eerie and chilling sense to the bone. UMNO and BN in a rush to take back the state of Perak, have underestimated many things and execute a strategy in a rush – that creates more troubles at any cost. Whoever their advisers are, I can only summarize them in one word: careless. PR on the other hand was pushed to the corner and have to fight with all the might of BN, have to take it to the people – which in another way create a problem: further divide the people in general, and the Malays in particular. At the end we have a massive shambles at one end, and a divided society at the other end. Neither is good for the country.

At the same times, the words that are being hurled left and right are getting more direct and “violent” – such as BABI (Brother Anwar Bin Ibrahim), “blood must be spilled”, “shoot him dead”, etc., are extremely dangerous and beyond civilized way of doing things. We must remember that May 13, 69 was not that long ago. It was “ignited” by events that may even be orchestrated by some parties – that eventually turned into a widespread mayhem, which gave birth to the NEP and many other policies that govern us for more than 30 years.

Even the people who were released from the ISA (for which I am glad that they were), lost their sense. Struggle is about sustainability and for the common good for all the people; not for only a sector of the society. Instead, they used as a cause for championing the Indian race or community. Has MIC serve them a lesson? Or for that matter, many small Indian based parties? A true hero is not an overnight game; and it is also not about popularity game. Would they humbled themselves down and learn from a truly great Indian “hero”, Mahatma Ghandi? Whose fight and struggle is for all Indian people regardless of relegion, caste or background.

Remember that Bosnia (former Yugoslavia) was in peace for more than 100 years, until suddenly it erupted into massive violence that killed hundred of thousands of innocent lives. Lebanon was in peace for over 300 years – and suddenly neighbors started to kill neighbors. Racial and social conflicts can remain dormant for ages and suddenly its ugly head can emerge out of nowhere and mayhem follows.

“Crisis or conflict” can further push people into extremism. As the heat getting hotter, more and more people will enter the fray, and without understanding the whole purpose and consequence, it will turn into a mob. Such was the history of humanity.

We need voice of reason to rise up quickly. It has to dominate the discussions and fill the airwaves urgently. Maybe I am a bit too “panicky” about it – but I can see a trend when it is developing to be so. Unless the trend is reversed at the source (just like an avalanche), then it may be too late to do anything when it reached its full height and capacity. At that time, nobody can do anything except to watch the devastation and destruction forces takes its full impact. I pray to God that it will never happen. Not in my beloved country of Malaysia. Amen.

Asean, oh Asean

The political news surrounding the ASEAN Nations are quite troubling. All the four major democratic countries of ASEAN, namely: Indonesia, Philippines, Thailand and Malaysia – are embroiled in a flux state of politics. Everywhere it seems that there are two opposing camps trying to wrestle the power from the other. All under the “new democracy” of ASEAN which has taken place since the last financial crisis of 1997/98.

It is a real test of democracy, and which country that will come out shining is still a lingering question that is hard to answer. Philippines was the one that underwent the turmoil earliest – and until today it is still under gridlock, whereby there are no clear winner, even though Arroyo remains as the President. What she has is a weak government that are mired in compromise with the military and coalitions that are fragile, coupled with a very weak economy and continous insurgencies.

Indonesia, while a bit better, in terms of the chance of democracy to work, still has a long way to go.The recent election of its Parliament, resulted in a spread that will test whether which coalitions will work. Nobody is a real winner, neither a real loser. Hence compromise becomes the main order of the day.

Thailand on the other hand, saw the fight between the Yellow (under Abishit) and the Reds (followers of Thaksin) fighting each other to the level of shooting and riots. However, the silver lining it seems comes more from the Yellows, which in my opionion has been handled pretty well by the well mannered and spoken PM. However, the challenge for them is quite tough as both sides are equally strong.

When comes to Malaysia, the transition seems to be prolonged for another three to four years, till the next General Election – which will show true colors of the future. In any case, the fact remains that there will be no true winner neither a total loser. Coalitions and groupings will determine which way the power will go. This is something that is yet to be seen.

In all cases above, one thing that is visibly missing: THE ECONOMY. All these countries, in light of the current Global economic crisis, are in fact in a dire state. All these political instabilities adds further to the economic predicament.If the price that we ASEANS have to pay for democracy (that is to suffer economically more, by prioritizing democratic process); we better have the right results, rather than suffering on both scores.

Therefore, it is pertinent that while all the politicking (as a part of democratic process, going on), all parties should  be clear that they should not compromise with the ideals of democracy and governance. That is to uphold the rule of law, fairness, and justice (regardless of who is in power). Abuse of power and the laws are the exact opposite of the process itself. In this regards, I have my admiration for Thailand and Indonesia. Both Abishit and SBY, are quite clear in their statements and actions – regardless of how hard it is – promised and practiced restraints and seems not to compromise with the agenda of change and reforms for the benefit of the people.

Malaysia on the other hand seems to regress more and more by the day; as the people in power are protecting their turfs and seems to be withdrawn deeper into undemocratic process.

It is rather sad, if Thailand and Indonesia can come out better than Malaysia; as both countries are more populous and complex in terms of their social arrangements and structure – compared to a more educated and better equiped Malaysians. If any, the attitude of those in power should be blamed first.