ArticleThere's a high potential for a second wave of the financial crisis
--- Jaspal Bindra, CEO-Asia of Standard Chartered Bank
While the G20 leaders pledged to do whatever is necessary to restore confidence and growth, the prospects still look dire for the near future, with a shrinking trade market and rising job losses.
Fan Gang (Director of the National Institute of Economic Research)
I think the close down, the bankruptcy, the lay-off, all these things are still happening and more seriously happening. So I don’t think it’s bottomed. We will see something worse.
Dominique Strauss Kahn, the head of the International Monetary Fund worries there is the likelihood of a second wave of financial trouble knocking on the IMF’s door. Is it headed this way? To what extent will the crisis shake the laissez-faire capitalism? What opportunities will China face amidst financial struggles?
Guest intro
Jaspal Bindra joined Standard Chartered Bank in 1998. He is currently it’s Asian CEO. Bindra began his career with Bank of America in 1984 and then worked for UBS Investment Banking.
A second wave of financial crisis?
A: Right now, there are 2 schools of thought out there, one is the economy should start turning around towards the end of 2009 and another says that maybe we are headed for a second wave of economic crisis, what are your thoughts?
J: I think it’s quite difficult for anyone to make a prediction as to when things will turn around. Because I think the first signal we have to get is that things are bottoming out. If you go through the history of this current crisis, it all started with the subprime and then it moved on to the liquidity, challenge for the financial institutions, which then lead to capital shortages, and then it created unemployment because the real economy wasn’t getting credit and now there’s a potential threat of credit bubble, maybe even a government bubble in some cases. But the real issue is that we haven’t seen the bottom out of the first problem, the subprime, neither have we seen the bottoming out of the liquidity, dollar liquidity still a bit constraint around the world. And then we obviously haven’t seen the end of capital gaps. So I suspect we don’t see a bottoming on one or two of those issues. We are not going to be in a good position to predict when the turnaround will be.
A: Is there anything we can look for to see when we hit that turning point specifically?
J: I think clearly there will be a change in the behavior and I think the main thing we can look for is the return of the confidence. Because there will have to be a time when people go back with some courage to doing businesses as they used to before. And so far you are not seeing that. And somebody sort of gave me a very good analogy of that confidence is like a coconut. You know, the tree takes a long time to grow, but when it drops it just drops. It’s going to take some time to regain confidence around the world.
A: Let’s talk a little more about the potential for a second wave. There are some schools of thoughts out there saying that the investment banks which are already hard hit, and the commercial banks are going to take even bigger hit if there’s a second wave. What are your thoughts?
J: I think there’re 2 points there. One is there’s high potential for a second wave, and secondly what it does to players. Clearly one can’t rule out that this is the end of what we’ve seen. Because like I said at the start, there’s still a huge threat of credit bubble, although we’ve seen no immediate signs in the wholesale corporate side. On the retail side, we can see some early signs of bubbling with the increasing unemployment, particularly in the US. If it touches 10% or more, it’s very likely default will increase in the credit card portfolios of many banks. So that could be a bigger hit for commercial banks than it will be for investment banks because really most of retail exposure will be far more concentrated with the commercial banks and so. It’s probably like to assume that if the second wave is true, credit bubbles, than it’s clearly going to affect the commercial banks a lot more than it will do the investment banks.
A: What should people look for as a sign that we’re getting out, that it’s ok to start feeling a bit more comfortable with their money?
J: I think clearly the rise, if they can be sustained on commodities that would be one signal, because that’s a sure sign of activity around the world. I think if we get more stability, even though things stay down. But if you have less volatility, be it in exchange, be it in interest rate, be it in currency market, I think that would be a good sign, because I think people are very nervous right now and that’s why you see the volatility is a function of the nervousness rather than actual moves, because on most days, they sort of even out at the end of the day. I think those will be the 2 very early signs. And finally I think we have to be quite certain that governments and various economies don’t go into a protectionist mode, because there’s a high temptation due to political pressure, due to tax payers’concern, etc. for going that way. And even though we get the right speak at the highest levels in the US and the UK and many countries in Asia. When you see in practice, some of the behavior is already indicating a strong bias towards protectionism.
In February, Washington lawmakers passed a stimulus bill which included a provision banning the use of foreign iron and steel in infrastructure projects. This“Buy American”clause caused global concerns over the resurgence of protectionism abroad.
A: It seems interesting being from the US, when you hear about protectionism; it’s hard to image not buying something that’s from Asia. It’s everything you sell at the stores. So when you here it, it sounds unusual and almost impossible.
J: But, as you know, there’s a big call for buy American. So I think some of it is genuine. People who really lost a lot can’t explain why they wouldn’t be able to, if they can’t help themselves first, why they will be going out of the way to help some other parts of the world to recover. Because at the end, they will keep in place, the entire world economy going. They are not going to be unselfish about it.
A: It sounds like each one of the plans, from each and different countries, has some note of protectionism in there. Is that even feasible?
J: It’s not a good thing. It’s definitely not desirable. But on the other hand, you can understand the logic you know, when tax payers have their money all burnt up, and they have to pump in more to sustain things and that sort of benefits goes elsewhere, they can’t see that with the rational lens. So I think there is going to be a little bit of that in practice, which we are not going to be able to avoid.
A: Obviously, most people are going to say global cooperation is the best way to go. What can the governments do to kind of to enhance that thought in stay away from protectionism?
J: I think most governments actually have come to the conclusion that global cooperation eventually is the best route, but in the short term, may have temptations which they fall to, in terms of short-term protectionism. I think G20 as we said before, is probably a very good mechanism. Because, first of all, it’s inclusive enough, you know, it’s not the G5 or G8, it’s G20. Second, it’s good mix of east and west. I think that’s a good combination. And it’s also very good mix between the government, regulators and business.