Why Bank Century Bailout was the Right Decision

HIGH-STAKE DISCUSSION. Finance Minister Sri Mulyani Indrawati and Vice-President Boediono are trapped in the middle of the Bank Century bailout fray, with House of Representatives inquiry team ceaselessly firing them using rifles loaded with political motives bullet.

Imagine yourself being an experienced doctor who acts as the head of a hospital which, because of one mistreatment or two that someone did in the past, is on the brink of a crisis and people don’t seem to put faith in your hospital as they were used to. Just last year you were addressed by the hospital’s directors about the importance of doing what is necessary to prevent the crisis from becoming any worse.

In this situation, you simply realize that another mistreatment or death of a patient will trigger a catastrophic crisis of confidence to the hospital. People around the city will lose faith in the hospital and will never come for treatment anymore. Your own patients can also move away to another hospital. Eventually, as the hospital loses profit and goes under, the worst thing that could possibly happen is your workplace will go bust and you will ended up derided by the hospital’s directors for your lack of competence in handling the hospital’s management.

You can only hope that you will not be tangled in such circumstances –yet what happens next doesn’t really align with that expectation of yours. One day a nurse runs all the way through the hospital alley to your office to bring you urgent news that a male patient is dying and you need to make a swift decision about his treatment. The nurse presents you all the options available as well as her advice:

1. You can cure him with a remedy. Unfortunately after diagnosing his symptoms, the price of the proposed remedy is astronomical since it is worth Rp. 6.6 trillion and, because of some hospital’s insurance policy, it is the hospital not the patient who has to pay for the whole treatment.
2. You can just let him dead. But the nurse reminds you that the whole hospital is overwhelmed with crisis of confidence at the moment and if you let him dead, there is a possibility that no one will come to your hospital anymore and patients inside the hospital are likely to move away to other hospital too. Choosing this option will save Rp. 6.7 trillion, but puts approximately Rp. 1,900 trillion of hospital money at risk.
3. You can reduce the impact of the crisis of confidence by applying blanket guarantee –a hospital policy which ensures the life of all patients inside the hospital–, and then let the patient dead. Unfortunately the nurse informs you that the vice-executive director of the hospital is renowned as a great opposition of a blanket guarantee policy. This option is simply not feasible since he will surely overrule the policy if it is to be implemented.

The doctor in this story, Sri Mulyani Indrawati, ended up choosing the first option among the three options available. And she, with the advice of the nurse (Boediono), eventually decided to inject a lavish remedy worth of Rp. 6.7 trillion in the form of bank bailout to the patient; Robert Tantular and his ailing Bank Century. One year afterwards, instead of thanking her of rescuing the hospital from collapsing, the hospital’s directors (the House of Representatives) furiously point their fingers on she and her partner Boediono as they think the costly remedy was not actually necessary.

Rather than recognized as heroes who secured Rp. 1,900 trillion of hospital money, both the doctor and the nurse is considered as the perpetrators who cost the hospital to suffer a great loss of Rp. 6.7 trillion. The hospital’s directors are also in the notion that the theory of deeming the patient’s death will generate greater loss to the hospital was completely baseless, while both the doctor and the nurse think otherwise.

Now who’s right and who’s wrong?

The lingering debate of the Bank Century bailout is always about whether the bank poses a systemic threat or not if it goes broke. Initially considered as a necessary policy to be implemented at the moment when financial crisis looms, the bailout later turns into one complex twist of controversy. Many people argue that both the doctor and the nurse, as depicted in the hospital analogy, should have taken the second option and let the patient dead instead of giving him such costly remedy.

The fact that even Sri Mulyani and Boediono could not present any solid proof whether the collapse of Bank Century will cause bank rush among Indonesian depositors –whose money in the financial system is accumulated in the level of Rp. 1,900 trillion– is unassailable. The calculation of the possibility of possible crash in Indonesia’s financial system, however, comes mostly from the intuition of both those technocrats themselves.

But, because people’s physiological level is difficult to measure (especially during crisis period as people become more volatile), there is also no solid proof that such panic and bank rush will not happen. In fact, the argument of saying that ‘Bank Century will not pose a systemic threat’ comes also from the intuition and somewhat one-dimensional analysis of the critics and oppositions of the Rp. 6.7 trillion bailout.

In economics, the expression of every argument has to be always supported with solid data –so do every argument in the debate to judge whether Bank Century bailout is necessary or not for Indonesia’s economy. So far, the only solid data which we have now is Indonesia, with various economic policies that Sri Mulyani and Boediono implemented during last year’s hard times (including their decision to give bailout to Bank Century), successfully managed to weather a financial crisis that see many countries’ economies slumping to their lowest level.

Thus, based on the data of our various bright macroeconomic indicators we have at the moment, we have absolutely no proof that the government’s decision to hand bailout to Bank Century was a wrong one.

And when you argue that something is wrong but you cannot prove it, you cannot really say that it is wrong.

As no one have the proof indicating what they did was wrong, Sri Mulyani and Boediono surely did not deserve what they were encountering few days ago. Besides, up to now they have always done things right: it is all because of their economic proficiency and decisive actions that our economy is still standing tall at the time when most of the economies in the world are engulfed in a calamitous recession. Instead of receiving blistering words from the House members and several universities’ so-called activists, in fact Indonesians should have given them credit and praise for all of their hard work.

If only Bank Century inquiry committee members –as well as university students who humiliated Sri Mulyani and Boediono by referring them as thieves– really understand what situation and trade-off that these policymakers were into at that time. Talk is cheap, but if they were the decision makers, would those university students and Bank Century inquiry committee members have the guts to salvage Rp. 6.7 trillion with the risk of putting Rp. 1,900 trillion in jeopardy and wrecking the entire of Indonesia’s economic framework?

And before they deliver their answer, it is better to remind them that when they make the decision, it’s the life of 200 million Indonesians which they put at stake.

This article was published in The Jakarta Post on Tuesday, January 19 2009

Talk Less, Do More is the Principle of Boedionomics

Mr. Fix-It. Don't get fooled by his soft-spoken words; this guy hides his light under a bushel. Accomplish first, talk later on–here in economics we speak with data, fellas.

(photo by Sinartus Sosrodjojo)

My friend Miranti sat nervously right beside me when we were waiting for the vice-president elect Boediono to give his lecture to around 300 students, lecturers, and other economics academicians inside the University of Indonesia’s Faculty of Economics auditorium last month on September 14.

“I think he’s definitely the right man for the job. You know, both of my parents are big fans of him and during the presidential election my father continuously told me about how humble he is and how his overwhelming economics knowledge can bolster up Indonesia’s economy in the future,” she said.

At that time, the excitement of hearing his lecture live and seeing the vice-president elect in person was extremely high among us the economics students–so high that the auditorium seats had been fully booked three days before the lecture itself.

But in the end, Miranti’s massive excitement, as well as other 300 University of Indonesia academicians’, turned out to be a massive disappointment.

During his 2-hour lecture, Boediono presented us a tedious show as he resembled a professor who was more concerned to his textbook rather than the mood of his pupils. Despite the fact that the person who was giving the lecture up front was actually a vice-president elect, he fell short to the expectation and actually his lecture made no difference compared to few of my lecturers’ classes in FEUI to which I played truant frequently because of their monotonous teaching-style.

But as the lecture ended and many of my friends walked out with dissatisfaction and regretted their decision to attend his lecture, I still walked out with bliss since his performance on the stage was very much I had anticipated even before he took the floor: that Boediono is a dyed-on-the-wool technocrat who is renowned neither from his inspiring words nor how he performed on his speeches –it’s his accomplishment in bringing Indonesia’s economy to the highest level which raised him to prominence.

Notable for his terrific achievement of fixing Indonesia’s macroeconomic framework in the 2001 dream-team cabinet with Prof. Dorodjatun Kuntjoro-Tjakti and nicknamed as ‘the man who get the job done’ while he is still working in the Indonesian treasury, as a technocrat Boediono learned that he was always judged by how he accomplish his job and not by his ability of gaining short recognition from his crowds with stirring words–where in politicians’ mind it is exactly the opposite.

“From a technocrat to a half-politician –it’s a completely unimaginable transformation for me,” he said at the beginning of his lecture.

In fact, technocrats were born to be working in the background and therefore they are accustomed in the habit of not talking too much. We can see that while today SBY’s cabinet is dominated with many politicians who fight over the ministerial seats for the interest of their own political party which they represent, Boediono’s fellow economics technocrats like Faisal Basri, Chatib Basri, and Raden Pardede are still waiting sedately in the wings to be appointed to the field of job where they are considered best.

One of the examples about the modesty of technocrats can also be seen when those technocrat friends of Boediono’s remain quiet even though deep inside their mind they are likely to laugh off SBY’s politicized decision to interview National Mandate Party’s (PAN) Hatta Radjasa as the coordinating minister for the economy –regardless by the fact that many people consider them to be more capable than Hatta as he possesses neither economic background nor any noteworthy experience previously in handling the economy.

In case of Boediono himself, I was very impressed when this 66-year old technocrat was always able to keep his head cool and still replying with his soft-speaking words when the likes of Prabowo Subianto and Wiranto violently criticized him in various issues during the vice-presidential debates in the previous election.

Let me tell you this Pak Prabowo and Pak Wiranto: In the next five years Indonesia’s future is yet to be defined; at this crucial moment we definitely don’t need smart alec people who are more competent in mouthing words but have no competence of implementing them into actions.

Pak Boed, despite your failure to live up to our expectations during the lecture, on behalf of the yellow jacket academicians I want to say thank you for your willingness to spare your busy time to lecture us and we all were grateful to experience such rare opportunity.

This is simply because we believe that actions speak louder than words: you may not be expert in doing speeches and inspiring people by your words, but getting tough tasks done and inspiring people by your hard-working attitude are the things that you are really excel at, aren’t they?

And yes we still support you wholeheartedly. As you are now officially elected as our vice-president and hold a more strategic role in the economy of Indonesia, we know that during the next five years of your term we can expect many great improvements in our economy to come from your economics aptitude–which we consider to be more important rather than just sweet niceties that were frequently uttered by your rivals during the last presidential election.

This article was published in The Jakarta Post on Thursday, October 22 2009