Speech by Anwar Ibrahim delivered at the CLSA Investor Forum in Hong Kong on Friday, 26 September 2008
What do you do when a financial behemoth implodes?
What can you say about free market capitalism when the world’s leading liberal democracy dumps nearly a trillion dollars in private debt onto taxpayers? Are Freddie Mac and Fannie May along with Lehman Brothers, Merrill Lynch, and AIG totally unforeseen victims of systemic once in a lifetime financial meltdowns or are they not really victims of their own greed? When you allow the “mushrooming of weapons of financial mass destruction,” to borrow a phrase from Warren Buffet then isn’t it written that you shall reap what you sow?
The question is who should pay the price of Wall Street’s excesses. I learned in Economics 101 that those who live by the market must also die by the market. But with this gargantuan bailout it looks like the only thing that is dead is raw capitalism. Not that I’m complaining or that I ever subscribed to this thing called a totally free market. Some will recall that in my address in Bangkok last year I repeated my mantra that the free market is well and good but Adam Smith’s invisible hand may sometimes continue to be invisible if not altogether paralysed when the time for action draws nigh. Sometimes as it is in times like these, Uncle Sam’s hand may prove to be far quicker on the draw. Otherwise spontaneous order may well turn out to be spontaneous chaos.
Hayek, if I may say so, is history.
Speaking of history, it would appear that the powers that be have learned some lessons. We know what happened in the 1930s when, adhering strictly to free market principles, the Federal Reserve folded its arms and did absolutely nothing even as the financial system was cracking under the weight of massive defaults that eventually caused the collapse of the American economy and the contagion spread to Europe. There would have been lessons learned too from the October 87 crash, and the savings and loans scandal. Then of course, there was the 1997 Asian financial crisis.
As for the latter, Asian countries having experienced the pains of the financial meltdown which saw their currencies plunging to the depths, are now having generally stronger balance sheets. Regardless whether or not they swallowed the bitter pill of IMF prescriptions, they now have better current accounts than they had ten years ago. But what exactly were the lessons learnt? Is it that we can snicker at the U.S. and tell ourselves that we don’t need to listen to you, because we are far better off now? Is it that we don’t need market economy and the related principles?
Why talk about the sanctity of free markets and the importance of non-interference by governments when the bastion of free market itself is now engaged in the biggest bail out exercise?
Some leaders are now gloating over their so called successes in resorting to bailouts even much earlier and retrospectively sanitising their remedies of capital controls and the policy of currency. This is a false premise. Bailouts cannot be used as a veneer for crony capitalism. It appears rather foolhardy for certain leaders in the region to start thumping their chests over their relatively wealthier positions and that they have strong fundamentals.
