Protect Our Finance Minister, Mr. President

photo: Dwianto Wibowo for Tempo Magazine

It could look a little bit déjà vu if this three-week drama of cabinet reshuffle concludes with the dismissal of Indonesia’s tough Finance Minister Agus Martowardojo from President Yudhoyono’s administration.

Previously, Yudhoyono had let go another stellar Finance Minister, Sri Mulyani Indrawati, due to pressure from his mischievous coalition partners that were spearheaded by the Golkar party last year.

There is a possibility that last year’s drama could repeat itself this year with the same protagonist, same villain, and same ending: The villain bullies the protagonist, the protagonist is afraid and bows to the villain’s demand, and the ending wraps up with the protagonist ends up as the losing side.

The protagonist is of course President Yudhoyono, who decided to let go Mulyani last year even though she was arguably the best minister he ever had in years.

Yudhoyono clearly did not learn from his past mistake as Agus Martowardjojo, the current Finance Minister, is currently on the hot seat again. Just like last year, Yudhoyono did not give Agus enough protection to shield the Finance Minister from politicians’ perpetual harassments, leaving Agus standing alone in his battle to defend the state’s interest.

On the other side of the ring, the villain in is still the same as well: Golkar chairman Aburizal Bakrie who, impressively, managed to dictate many important decisions in Yudhoyono’s presidency and made the president himself very much like a controlled puppet.

After succesfully expelled Mulyani last year, the ousting of Agus from the Finance Minister post this year would reflect both Aburizal’s massive clout in the administration and Yudhoyono’s lame leadership. By driving Agus out, the message delivered by Aburizal was clear: You can mess with Yudhoyono, but don’t ever try to mess with me or my party.

Like Mulyani, Agus maintained a tough stance towards the Golkar party politicians and their power-hungry peers at the House. Agus was especially known for his clash with Golkar politicians over the government’s plan to purchase Newmont shares –a plan that Agus strongly believed would benefit Indonesia.

Lawmakers were against this plan and slammed Agus’s proposal. They furiously insisted the shares must be acquired by West Nusa Tenggara’s local administration, which is supported by a joint venture of a business unit that is owned by Golkar’s Aburizal.

The Finance Minister vs. House lawmakers battle repeated again last week over debates on the fuel subsidy quota, in which Golkar lawmaker Melchias Markus Mekeng lambasted Agus and described him as ‘does not have the authority to dictate the House’.

The fact that many Golkar politicians dislike persons with integrity such as Agus Martowardojo, Sri Mulyani, or even Trade Minister Mari Elka Pangestu (a Golkar lawmaker once uttered a racist statement and baseless accusation against her) is very much incomprehensible. For neutral political observers, it could only show that the party’s ideology is more about power and money, not the advancement of Indonesia to become a better nation.

Besides, if Golkar’s politicians and President Yudhoyono really care about Indonesia, they should understand that the timing of Agus’s exit could not be worse than now.

On Thursday last week, President Yudhoyono stated that he “would focus the next cabinet reshuffle to harness global economic challenges”. In truth, his decision to eject Agus from the Finance Minister chair would prove otherwise.

It is no exaggeration to say that if the current situation remains unchanged, we could bump into one of the world’s biggest economic crises next year. The European and American politicians are particularly responsible for the mess: Eurozone leaders are yet to reach agreement on what to do with their problematical currency, while the Republicans and Democrats legislators in United States are busy scuffling for their respective interests for the 2012 elections rather than controlling the country’s soaring fiscal burden.

Consequently, investors were scared off by recent developments in the West and symptoms of worldwide-scale economic crisis started to surface In Indonesia in the last few months. The once-strong rupiah –which once touched the level of 8,650 against the US dollar on August– has been under heavy pressure lately, while the Indonesian Stock Exchange index has plunged from the psychological level of 4,000 to 3,200 in a very short period.

By the time the crisis turns from symptoms into veracity next year, there is no doubt that the leadership of Agus –a former top dog CEO who successfully transformed Bank Mandiri to become one of Indonesia’s largest banks during the global financial fiasco– would be sorely missed.

There are signs that President Yudhoyono would try to minimize the issue by not ousting Agus at the upcoming reshuffle, but merely moved him to other ministerial post, such as the Investment Coordinator Board to replace Gita Wirjawan.

But this strategy makes little sense for two reasons. The first is the fact that the Finance Minister post is very vital, and there is no doubt that our current Finance Minister, who is a highly respected figure among investors and the global economic community, is among the few persons –if not only– capable for the job

The second is moving Agus Martowardojo to other ministerial posts is the same analogy with a football manager who plays his tough centre-back as forward.

In other words, Mr. President: It's like you have the best defender in disposal, yet you still leave a huge loophole in your defensive line as you give the crucial centre-back position to a less capable player.

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It's the Global Economy, Stupid

PUBLIC ENEMY. Barack Obama might not be popular during the G-20 summit following the decision of The Federal Reserve to pump US$ 600 billion to the US economy; a policy which will weaken the US dollar and propel more hot money inflows, inflation, and asset bubbles to the developing world.

As the United States President, Mr. Barack Obama surely has too many thoughts in his mind, doesn’t he?

The major overhaul in US healthcare system reflected Obama’s responsiveness in domestic policies and fulfilled his campaign promise, while the way he handled the British Petroleum fiasco in Gulf of Mexico indeed had satisfied the environmentalists.

In foreign policy matters there’s an urgent need to embrace the Muslim world after George W. Bush responded the 9/11 attack with waging wars here and there. The relationship has never been bitter: In Iraq, the US enraged many Muslim communities by demolishing the country because of the Weapon of Mass Destruction that never exists. In Afghanistan people still cry for more American troops to be deployed, arguing it is the US’s responsibility to fix the chaos that Bush once initiated.

But it seems Obama’s mind is being crammed with too many foreign issues that the US has to deal with –and the economy is not being put as his major precedence. Perhaps we could recall one of the most famous remarks in the history of United States politics, which was coined by Bill Clinton during the 1992 presidential campaign against George H. W. Bush.

That phase of Clinton’s emphasized the need to put economic issues as the most important priority among others. As Bush at that time gained fame among his voters because of his foreign policy developments, Bill Clinton, impressively, become the eventual winner the election thanks to his audacious –and effectual– campaign slogan: It’s the economy, stupid.

That’s what Obama should know, because the dreadful economy at present is definitely the reason why his Democratic party conceded a defeat against the Republican recently. Obama’s report card in the economy is a complete mess: In US currently unemployment rate soars higher than ever, and the multi-trillion dollar bailout is not actually effective to fix the situation or jumpstart the domestic economy either.

Also, Americans are not too interested with the revamp on regulations of Wall Street, as they urge Obama to put more attention to the jobless people who desperately look for dollars to feed their family on Main Street.

While Obama is not popular home, The Federal Reserve’s decision to boost the US economy by purchasing treasury bonds worth of US$ 600 billion and keep the interest rates at a historically low level may make him a more unpopular figure overseas.

Yes, Obama may be welcomed with ecstasy by Indonesians as he gave his speech in fully-packed hall of University of Indonesia’s. But surely unhappy leaders of G20 economies would not be that kind to shake his hand with such warmth as the Indonesians did –and they surely greeted him with sinister smiles on their faces knowing what the US had done to the global economy.

The US is the major perpetrator behind the recent currency wars, depreciating its dollar in order to make its exported goods more competitive abroad, as well as continually keeping its interest rates low to boost its economy. As if the historically low interest rates are not enough to cultivate hot money inflow and prompt headache among developing countries, now The Fed is looking to print US$ 600 billion more to the economy –a move that will surely increase the US dollar supply in the market, press the US dollar to depreciate further, and ultimately bring the new chapter of currency wars.

The United States is playing dangerous game here in implementing such self-centered policies like those because the consequences of the policy are likely to put the stability of global economy at bay. Depreciation in US dollar currently leads to a considerable corrosion in many countries trade balances, while a near-zero interest rate already stimulates a significant surge in capital inflow among developing countries.

And regarding the US$ 600 billion injection to the US economy: Is this a trade protectionism in disguise? Weaker dollar will eventually make US goods more competitive abroad; stabbing many US trade partners in the process. Countries around the world would not be so happy with this. “You blame me as the global economy’s hitman and now look what you’ve done,” says China.

Does Obama really need to come to G20 meeting anyway? While the global economy is still recovering from an economic mess which the US started, the G20 economy members are supposed to implement integrated and joint efforts to fix the global economy together, not the other way around.

Yes, the G20 group should work in cooperation; and that’s why it was formed at the first place. But now such commitment is in question because currently the group’s de-facto leader seems to be more interested in pursuing egotistic policies to save the his economy alone, not the world.

South Korea and the G-20 Summit

IT'S OUR TIME. The economic renaissance of South Korea is in the hideout compared to the rise of China and India, so this is the time for Lee Myung-bak to stop being so humble and play a more important role in shaping the world's agenda at the G-20 economic forum.

As the host, South Koreans have a story to share ahead of the G20 summit which will be held on their soil on November 11.

Now a member of the 20 world’s largest economies, South Korea’s imposing economic transformation, which is well-known as “The Miracle of the Han River”, could become an example for every citizen of developing country who envisages writing the same history as theirs.

In my university, I still remembered when my economics lecturer presented me South Korean economy case-in-studies on several occasions. During that time, my economics lecturer –who is also a prominent economist in Indonesia– always underlined the importance for us the Indonesian students, as the future economists and policymakers, to learn from Korea of how their brawny industries and massive exports tally fuel their faster-than-ever economic growth.

It's simply breathtaking seeing Korean companies such as LG and Samsung could compete with Japanese heavyweight like Sony, or when Hyundai and KIA Motors racing neck to neck with US' General Motors. In Indonesia, a nation whose export number holds only a small percentage in our economic lifeblood and for so long has become our Achilles’ heel, South Korea’s success story on its export and industry has become a benchmark for us to succeed.

It is, without doubt, a remarkable achievement for a nation whose economy once damaged badly because of the Korean War, and has few resources in disposal to repair the situation at hand.

With little natural resources and diminutive domestic market, South Koreans could be forgiven for being timid back then. Compared to their northern brother, they were very much overlooked in the global stage: at that time, their economic size was even smaller North Korea and in fact was also ranked among the poorest countries the world.

It was not until Park Chung-hee –recognized as the South Korea’s version of Deng Xiaoping– came to turn the fate of the South Koreans upside down. He helped to unleash the immense potential of South Korea’s industry by laying the foundation of an export-oriented economy, and promote an economic reform which is perceived as the highly-successful gambit that bolsters its rapid economic growth today.

By the time Park Chung-hee became president in 1961, the income per capita of South Korea was merely US$ 72. South Korea’s economy was very small back then –so small that in one of his addresses, Barack Obama mentioned to the young African leaders forum that by the time he was born –that was, the year of 1961– South Korea’s economy stood at the same par as Kenya, even less wealthier.

But thanks to its highly-successful industrialization and massive export numbers, today is a completely different story. The data from World Bank in 2009 shows that South Korea’s gross domestic product (GDP) per capita stood at the level of US$ 17,078, outpacing African developing countries –including Kenya– whose GDP per capita today are still less than US$ 1,000.

Indeed, this rags-to-riches story should be put as lesson for leaders from developing countries who fancy their citizens to have a more affluent future, including Indonesia.

For many developing countries, one of the criticisms pointed to G20 economies’ leaders these days is their ignorance towards less-developed countries, as the forum is mostly dominated by heated debates discussing the interests of developed countries rather than the less-developed ones’.

As a former poor and under-developed country that has gone through one of the most inspiring economic revolutions the world has ever witnessed, citizens from developing world in many parts of Asia and Africa –whose countries are not so fortunate enough to be included in G20 economies– will put profound expectations in the shoulders of South Korean representatives in the upcoming G20 summit.

They will very much hope that the South Korea can help in setting leadership and directing integrated economic policies which will represent and assist developing countries as a whole.

In an era where Asian countries and “new kids on the block” in the economy like China and India start to play a more pivotal role in shaping the world’s agenda, South Korea could host the next G20 forum with brimming confidence.

Yes, it is understandable if South Korea’s achievement in economy is very often underrated and superseded, as China’s and India’s inexorable economic engines are turning too many heads already these days.

But compared to its counterparts in the G20 economies, this is the nation which started the race way far behind its compatriots, yet still managed to stand at the same level with them eventually. This is one of the Asia’s economic tigers which very much depends on export in its economy, yet still weathered the recession relatively successful compared to its other export-oriented peers.

For all its economic accomplishments, in the next G20 economic forum South Korea has more than what it takes to play a more important role in shaping the world’s economy.

G20 economies must not forget the developing world, and on the upcoming G20 summit all the developing countries’ citizens will hope the host can act as their envoy, so that in the future another “Miracle of the Han River” can be engendered.

China: The New King in the Wings?

Yes, China’s ear-deafening economic engine is now pulling heads–but does it have the capacity to stay at such pace?

Whether China will be able to sustain its rapid economic growth and surpass United States as the world's largest economy remains anyone's guess. Just like China, in the past export-oriented powerhouses such as Japan and Germany were once tipped to accomplish the mission, but none of them is successful until present.

Amidst the storm from the recent financial crisis, which has seen most economies in the world to decelerate, little seems to be taking effect on China as its economy accelerates as fast as ever. Its economy grows to 11.9% in the first quarter this year, a staggering number which is far way ahead from its compatriots in the developing world could produce.

It is hard to deny the fact that China’s road to sustain its economic growth and become a future economic superpower is beset with thorny challenges ahead. Of all the upbeat forecasts of China, the sustainability of its economic growth in the long run is still in question, concerning the forthcoming predicaments.

First and foremost, China is dealing with serious problem on its ageing population. Because of the one-child policy, in the future Chinese working population will decline in number –and as the consequence, tomorrow labor in China would not be as cheap as they are today. As labor price rises and China’s industry becoming less competitive, investors will likely relocate their factories in other labor-intensive countries like Indonesia or Vietnam. With low-cost industry as the backbone that is responsible for the largest share of its economic growth, analysts predicted that China’s export-led growth model will be seriously disrupted by this demographic challenge.

Then, what else can be worse for a country than being blamed as the world’s enemy number one? That is what’s happening on China right now in terms of environmental issues, and this inconvenient situation can stand in the way of China’s ambition to keep its high economic growth long-lasting. Amidst global effort to reduce carbon emission, China now becomes the main perpetrator of the world by piling up pollution: in 2007, the country overtook United States as the world’s largest emitter and has seen a significant increase in carbon emission number since.

Environmentalists all over the world slam China as they deem the country is buying current economic growth at the expense of world’s future. And as time unfolds and its pollution grows, China will surely see more and more condemnations, which will put more pressure for Beijing to implement the green technology and apply strict measures to its dirty factories. These are costly and can reduce industry’s efficiency, and may possibly be the brake that hampers China’s economy from revving full throttle in the long run.

Also, China’s 10 percent-plus recent economic growth is mainly fueled by economic stimulus projects –a short term economic policy which the government implemented to prevent the economy from decelerating during the last financial crisis. And while the economic stimulus project is responsible for the significant swell of bank lending number and growth in credit these days –which instigates fears of the emergence of inflation and China’s property prices bubble–, the growth that it generates is indeed unsustainable in the long run.

Cool it the China way

Concerns regarding the matter have not fallen on deaf ears; with recent developments showing that Chinese officials and policymakers actually understand the threats that country faces no worse than the external observers.

If the main issue is short-term threat of economic overheating, some of the economic policies China’s policymakers implemented show their intention to put their economy in a safer, more sustainable level. In 2010, the Chinese central bankers are not so lenient in giving banks too much freedom. The amount of bank lending may have reached its peak last year, but this year reserve requirements have been repeatedly raised to prevent the market to be inundated with too much liquidity.

In the first quarter this year, China saw its housing prices to surge 10.7% –its highest since the last two years–, which instigated anxiety if the economy of China is experiencing an identical housing bubble problem as United States’. But China’s government has also started to implement restrictive policies on the housing market to cool its most overheated sector.

China’s recent decision to slightly loosen the currency’s peg to the dollar may be seen as the successful outcome of continuous pressure from various world leaders, but the truth is the implementation came cleverly just at the time when China desperately needs to cool its economy to prevent it from overheating.

Indeed, stronger renminbi may lead to less competitive Chinese goods in the global market (which is why this decision is strongly deplored by Chinese exporters). But during post-crisis period like this, loosening renminbi’s peg seems inevitable: at the time when other countries struggle to bounce back from global recession, you definitely do not want to be labeled as “global villain” whose undervalued currency and oversized export numbers continue to deteriorate other countries’ trade balances.

Another effort to encumber its too-fast economic growth can also be heard in the statement of Wen Jiabao, China’s Minister of Industry and Technology, who recently vowed to shut at least 2,000 highly-polluting factories that have not met environmental standards.

The statement is a fresh tonic for environmentalists; but what’s actually behind this? Because for some who remember how China’s representatives wrecked the Copenhagen deal by vetoing the deal of 50% global emission cut by 2050 to be taken out from the accord, how they suddenly change their mind may seem puzzling.

Applying strict environmental measures to Chinese manufacturers may decrease Chinese industries’ output, while loosening renminbi’s peg may possibly weaken China’s exports. But today China’s economy is very prone to overheating, and China’s ignorance towards environmental issues and its egoistic policy to maintain their currency undervalued start taking the headlines. At times like this, implementing policies which can cool down your economy and please the world’s citizens at the same time is indeed a very smart gambit.

Even though it’s still too early to call all these policies a success, reports show that economic growth in China has fallen to 10.3% in the second quarter, with both housing prices and bank lending amount also plummet. The sustainability of China’s economic growth is still in question, but the latest data on China’s economy should calm the world that Chinese policymakers are not unaware of their too strong economic growth and the downside risks that follow.

Crouching Eagle, Hidden Dragon

China’s recent achievement in overtaking Japan as the world’s second-largest economy is putting China in the spotlight as well as drawing attentions from many countries around the world –especially United States, the current frontrunner at the race that is checking his rearview mirror fretfully now because of the boisterous economic engine which Hu Jintao possess behind his car’s hood.

With Hu Jintao in the driver’s seat, previously China has successfully surpassed the economy of Britain and France in 2005, Germany in 2007, and Japan in 2010. Prophecies from oracles like PriceWaterhouseCoopers and Goldman Sachs, meanwhile, have predicted that between 2020 until 2030 the red car will overtake the star-spangled frontrunner as the world’s largest economy.

Yet sometimes to become number one “how” is a more crucial word to be addressed rather than “when”. It does not really matter when China will overtake United States as the world’s largest economy (in 10 years time in 2020 or 20 years from now in 2030). Actually what’s more crucial is how China can sustain its current growth and shunning their economy away from the looming threat of economic overheating, so they can ultimately sit at the top of the world.

One thing for certain is that China now is very different compared to 30 years ago, where its economy was still isolated from the world, as it currently stands right in the heart of the global economy. Now China plays an indispensable role in international trade: the number of goods they export around the world is staggering, and the gigantic demand from its 1.3 billion population became energizer to some recession-plagued countries which have been struggling to find buyer for their tradable items during the last financial crisis.

That’s precisely why China’s economic sustainability matters for the rest of the world: because if the car in red gathers steams and runs off the track, it will take the whole world with it. The commentators and racing pundits can utter everything they want to warn China against such upcoming threats, but so far it seems that the dragon and its rider understand and know exactly what they are doing.

Or are we seeing nothing yet and there’s actually more to come from China? Some of China’s immense potential, however, remain hidden and underestimated. The fact is; there’s a possibility that China’s engine will rev even louder in the future -political reform and information freedom are yet to be fully implemented, with China’s renminbi also waiting in the wings to be used as global currency.

With such menacing power possessed by the red dragon by now, the bald eagle has all the reasons to be worried.

Indonesia's Capital Inflow and the Downside Risks that Follow

WARNING SIGNS. Soaring stock prices and rising Rupiah are outwitting you now; in fact an economic bubble is stealthy lurking behind the shadows because of the overcrowding capital inflows which have flooded Indonesia in recent weeks.

You are simply not a savvy foreign investor if, given current global economic situation, you overlook Indonesia as a place to invest your money.

Back then you used to have well-developed and industrialized countries in the table as your priority to invest because they, in reality, tended to be more secure compared to developing countries.

But while United States economic recovery is still beset with various obscurities, and European’s economic stability is disrupted by the debt-troubled PIGS economies (Portugal, Ireland / Italy, Greece, Spain), currently you may want to wait a little longer before you can be finally sure to invest your money there again.

This is the moment when you should start to notice that in the east, several Asian emerging economies can be considered as less risky places to invest as they are trouble-free and actually withstand the global financial crisis better than developed economies.

Indonesia is one of those economies, recording an impressive 4.5% economic growth during the crisis and has seen significant upgrading in its investment grade rating because of its imposing economic performance.

Besides, its economy is bolstered with political stability, violence-free democracy, and huge domestic market. In the midst of the financial storm which has left most economic frameworks in the world shattered, what Indonesia’s economy boasts in its disposal would surely make you and your fellow investor friends to turn heads.

Indeed, money is flowing in. The rise of demand for one country’s investments theoretically would lead to a higher demand for the currency of the country itself, and the unusually strong Rupiah these days, which surges to 30-month-high level to almost Rp. 9,000 per US Dollar, is a clear reflection of the rising number of foreign investors who have crammed the Indonesia’s market.

The problem is: when someone has too much money in his hands, sometimes it will engender more convoluted quandaries than he previously expects.

While many will perceive the improvement of Indonesia’s image in the eyes of the foreign investors is a good thing for Indonesia, actually policymakers should be wary about the long-run corollaries that can possibly occur when Indonesia is inundated with too much capital inflows.

The most important thing to bear in mind is that the stronger-than-ever Rupiah at the moment, unfortunately, may not make all Indonesians better-off.

For instance, just ask Indonesian exporters who surely have been monitoring the rapid rise of Rupiah in recent weeks with deep anxiety.

In fact, the too-strong Rupiah –whose rate moves in an unpredictable fashion, appreciating swiftly in such a short-period like what we have seen in recent weeks– will be a huge blow for them as Indonesian goods will be more expensive overseas and could eventually damage Indonesia’s exports as a whole.

Yet because of the excess amount of capital outflows, another problem like inflationary pressure is also lurking behind the shadow.

Too much capital inflow can stimulate a considerable rise in money supply and, eventually, inflation. The government could welcome capital inflow to the country, but if inflation’s presence on the economy goes unnoticed and largely ignored, inflation could nibble our economic growth and disrupt our economic development.

If it is already too little and too late and the inflation has soared, Paul Volcker, the former Federal Reserve chair, can be asked about how hard and costly it was he tried to trim down the inflation rate during his tenure.

In addition to the spat over the unusually strong Rupiah and the looming threat of inflation, it is also worth noting that the increasing demand for Indonesia’s investment has lead to yet another problem: the current swell of the price for Indonesian shares and assets to such abnormally level, which emerges concern whether an economic bubble is just around the corner.

For many economists, the most feared weapon that an economic bubble possesses inside its arsenal is its ability to swell and burst almost any time and in such an impulsive way –and very often when it truly bursts, it generates a devastating repercussion. The burst of the housing bubble in the mid-2008 in the United States, in fact, was deemed by many as the key trigger to the worst financial crisis that Americans have ever seen in almost a century.

And economists hate to deal with economic bubble very much: knowing the fact that the term that economists keen to pay heed the most is always ‘stability’; economic bubble, in contrast, has always been notorious for its ‘volatility’.

Economic bubble can possibly emerge because of the fact that the largest share of Indonesia’s massive capital inflow these days, unfortunately, is dominated by short-term investment or hot money.

It is an ‘easy-come, easy-go’ investment: when those investors with their hot-money find more attractive countries to invest, they will simply cash in their chips, pulling their investments out from Indonesia which will cause the once-soaring price of investments and assets to freefall all of a sudden.

With such ominous threat from the burst of the investments and assets bubble, economists’ fear about Indonesia’s excessive number of capital inflows is indeed understandable.

Some may rejoice current news about the massive number of new investors which deluge the country, the insurgence of Rupiah, or the soaring stocks prices in recent weeks; but when we look through the other side of the prism, they actually also leave economists and policymakers in conundrum.

This is basically because failing to solve this excessive capital inflows problem in the short-run may likely lead to bigger problems in the economy, which will require a higher sterilization costs in the future and impede the long-term plan of Indonesia’s economic expansion.

What seems to be a good thing, in actual fact, can also mean exactly the opposite –just like the dilemma faced by Indonesia because of its excessive amount of capital inflows which is seemingly good for Indonesia’s economy, but in actual fact hides perilous threats underneath.

This article was published in The Jakarta Post on Tuesday, April 27 2010

Bank Century Bailout: a Necessity or Not?

PUT THE MONEY IN. Feared by the likelihood of a systemic failure caused by Bank Century's bankruptcy, the government sparked controversy by injecting a massive amount of US$ 670 million bailout money into the bank to thwart it from collapsing.

When US Congress passed Hank Paulson‘s US$ 800 billion bailout bill in October 2008 to prevent the economy from slumping any further, several US citizens’ initial response was very much the treasury chief had expected, “Are you nuts? We’re the taxpayers and that’s the money we’ve been paying to you for years. Now you just hand over that massive amount to those Wall Street financial institutions?”

But as US treasury chief, surely Mr. Paulson was smarter than the average US taxpayers and knew that the money was put in good use. Shaded with the trauma of the Great Depression of 1929, where many banks in United States went bust that lead to the severest economic downturn the world has ever witnessed, he did numerous efforts to prevent the history from repeating itself –and as an economist, he definitely knows that the bailout plan was one of the most compulsory endeavors.

Yet he was not mistaken and now look at how his bailout plan swerved United States from encountering what they have had in 1929. It may be too soon to conclude that the bailout plan has succeed, but without doubt the US treasury under Paulson performed really well in handling the 2008 financial crisis and deserved a better score than their compatriots in 1929.

And thanks to the bailout now the dust has settled –while the US economy in the Great Depression took about 10 years to fully recover, the US economy (now headed by the new treasury secretary Tim Geithner) starts to show several encouraging signs of recovery at the moment and many economists believe it won’t take that long for the whole nation to finally convalesce.

Funny, here in Indonesia we are dealing with a similar situation. Many people are in disagreement regarding the $670 million Bank Century bailout and argue that it would be better if such amount of money is allocated in other sectors.

For many Keynesians economists, who are educated in throwing money during bad times through aggressive spending to prevent the economy from dreadful downward spiral, an insolvent bank’s bailout is among the list of where the money should be thrown.

There is no doubt that if we do not want to be bumped into another financial fiasco, we should be all Keynesians by now. And basically in Keynesian economics throwing bailout money in this kind of circumstance proved to be necessary –in other words, if government really wants to prevent a systemic failure, giving bailout for an insolvent bank whose collapse can severely damage the economy is never a question.

And this left people in Indonesia treasury in a tight spot; if they don’t lend Bank Century that huge amount of money and let the bank fold, the domino effect from the collapse will be immense and will bring other 23 banks into bankruptcy as well and trigger the crisis of confidence among the market–and eventually the impact for Indonesia’s economy will definitely be much bigger than only $670 million money which the treasury proposed to bail the bank out.

As our economy is performing really well at the moment and various economic indicators signify a brighter future for this country, we cannot allow the havoc to happen and surely we don’t want to return again to the gloom that we experienced during the 1998 financial crisis.

Here in economics we face trade-off; when things don’t work according to the original plan, sometimes you have to sacrifice something in order to achieve a more desired ending.

It is hard being government officials like Sri Mulyani and Hank Paulson these days; things don’t really work according to their plans as a catastrophe named global financial crisis has hit many countries really hard and put many treasury chiefs, including them, in the eye of the storm.

It never rains but it pours for our treasury chief; in her attempt to fix the situation, political dispute regarding the bailout proposal is rising. People question whether there is a political background behind the plan or not and do not believe that such massive amount of bailout is really necessary.

But instead of wrangling over the political dispute of the bailout ahead of the necessity of the bailout to the economy itself, we should realize that Sri Mulyani is the one who raised Indonesia as the unlikely winner in this global financial crisis as she helped Indonesia to record a positive 4% economic growth amid the current turmoil.

She has proven to us that she has the capacity to usher us through the storm, so by putting the $670 million Bank Century bailout proposal forward, certainly she is not that dumb to throw her entire hard work to waste and put Indonesia’s economy at stake by prioritizing few politicians’ self interest above the country’s.

Or if you were her, would you do that with the risk of losing all of your flawless credibility and previous achievements as treasury secretary?

If your answer is negative, then it should clean your mind regarding whether there is a political motive or not behind the bailout plan as well as unfolding the importance of the money for her to rescue the economy and keep it firmly on the right track.

Appointed as a treasury secretary, in economics undeniably Sri Mulyani is smarter than the average of us and comprehends the problem better than we do –and she will not bet that huge amount of money if she thinks it is not really necessary.

Hence let’s halt this hassle and simply put our faith in her like what the Americans did to Hank Paulson. Still have doubts about the money’s huge amount? Think in the long-run and consider it as a trade-off for saving more in the future.

This article was published in The Jakarta Post on Wednesday, September 9 2009

Life as an Entrepreneur

Life, future, is all about choices and trade-offs. And when you set your foot off the campus, you can single out one of these two choices; work to a business enterprise or make your own business. I’ll advise you a thing. The last option is the one you want to choose if you fancy your chance of having an exceptionally prosperous future

Success is defined differently in every man’s mind. On one hand, one says that success is when you have a decent job and good family in the future. The ambitious one, on the other hand, says success is being extremely rich and living a jet-set life. For them, success is nothing but having your names in the headlines; president, minister, CEO, economist, world-class athlete, actor. The question is: what headlines? Yes you are rich, but if you choose to live a salary life, you will never be rich enough to be the richest.

Entrepreneurs. Atypical and extraordinary, creating their own path rather than follow others. They are opportunistic, which means that they have a lot of savvy in seeing every opportunity and will waste no chance to make full benefit from it. They don’t fear risk; they see it as a challenge to hurdle instead of an obstacle. The fascinating part is, those shrewd and risk-taker guys, in reality, dominate the world richest person headlines.

You may say that footballer Cristiano Ronaldo is very rich for having a $ 200,000 salary every week in Manchester United. Let’s say with that salary, Ronaldo brings home $ 9, 6 million every year, and with the assumption that he’s playing football for 20 years, he will make approximately $ 200 million by the time he retires from football. Well he also makes money from advertisement and whatsoever, thus let’s also assume that he gets $ 50 million from those things. Total Ronaldo’s wealth: $ 250 million full of hard cash. If you were a successful entrepreneur, you will laugh off that amount.

In fact, his wealth is nothing even compared to Hary Tanoesoedibjo, entrepreneur and owner of Global MediaCom Group, whose wealth was summarized not less than $ 900 million by the end of 2008. By the way, Mr. Tanoesodibjo is ‘only’ listed as the 10^th richest person in Indonesia, still trailing behind the names like Aburizal Bakrie or Putera Sampoerna, both are entrepreneurs as well. The gap is even larger if Ronaldo’s wealth is compared to world’s prominent entrepreneurs like Roman Abramovich, owner of Chelsea FC whose total wealth and asset are said to be around $ 10 billion.

Yes, what makes entrepreneurs extremely rich is they don’t live a salary life –which is a high-risk choice with a high-return in hand aftermath.  In a company, employees are always distinguished about how they run their business –and that’s why they are salaried. Conversely, for entrepreneurs, it is not about how you play your business; it’s about how the business plays you. When their businesses title success, they are the ones who get the money at first. Manchester United got $ 70 million for becoming the winner of European Champions League last season and of course, most of the money will go to Malcolm Glazer’s wallet, an American entrepreneur and the club’s owner, rather than to Ronaldo’s. Ronaldo may do most of the hard work running in the football field, yet Malcolm Glazer is the one who benefits most from his effort.

 

Entrepreneurship issue in recent times

Unfortunately, there’s not much to say when we are talking about entrepreneurial issue to most of university graduates these days –it falls on deaf ears. Ask them about their dream jobs, and you’ll find answers like accountant, banker, lawyer, architect, IT technician, doctor. Ask them about their soon-to-be workplaces; Ernst and Young, Price Waterhouse Coopers, Microsoft, Citibank are the most likely answers. Well, you have to start thinking that when those places are congested, soon you’ll run out of options. The world will run out of jobs if all university graduates wield the same perspective about where they will work the time they graduate. That’s why at present we are waiting for new entrepreneurs in the wings. In the midst of high unemployment worldwide caused by this current global financial crisis, we desperately need someone who is able to make jobs instead of living the job itself.

Thus, imagine. What your future will likely be? Or, precisely, what do you want it to be? Accountant, lawyer, doctor, banker…yet amid all those common pathways, there’s one that is simply paved for the outliers. The path is unlikely, as unlikely as Bill Gates and Paul Allen’s decision to drop out from Harvard to build Microsoft. The path is chancy; your future still can be either sunny or gloomy, and no one can guarantee you to have the same fate as Bill Gates, Paul Allen, Mark Zuckerberg, Howard Schultz, Ciputra, or Sandiaga Uno’s. But at a time like this; with current global economic crisis has swelled the unemployment rate significantly, with job becomes something worth a hassle for all university graduates, and with your future seems hazy and you don’t even know where to go after you finish your study –being entrepreneur may be the path that you ought to walk.

Think again. By any chance, there must be an idea that has been gnawing you for long, “In the future, I wonder if I can make money from this thing.”

Bingo. It may be your getaway path from your once vaguely future, to an exceptionally prosperous one.

This article was published in AIESEC University of Indonesia's 2009 Newsletter

The Wall Street's Catastrophe

STRESSED UP. The crash of Wall Street mounts pressure on United States Treasury Secretary Hank Paulson, as he faces challange to get rid of what is dubbed as one of the greatest economic disasters ever happens in United States

The New York Wall Street, as is recognized as the most prominent stock market worldwide in which stock markets like NASDAQ and Dow Jones reside, is in turmoil. It is, in fact, the main pointer of all stock markets as well as financial systems all over the world. Now analyze this: September 30, 2008 Wall Street was hammered when the Dow industrial average index fell 778 points –a record for one-day decline. Then, the record was surpassed a week later, it fell 800 points, leaving investors, bankers, and economists conjecture, “How dire this crisis will turn out to be?”

This financial meltdown comes out of the blue, unforeseen, and highly unexpected. When Alan Greenspan left his post as the Federal Reserve’s chairman in 2006, at that time no one would ever believe that what awaited his next successor is this huge economic mess, with great responsibility to fix it. During Greenspan’s period in office, for years United States experienced terrific times on its economy like a relatively low inflation rate, boosting house prices, escalating firms’ profit, and so forth. But suddenly, coming out from nowhere, here goes the downturn.

And so emerged his heir, Ben Bernanke, to whom many people throw these words at present, “Wrong time to be a governor of The Fed, Sir”, the words that may also resound in a similar way within the mind of Henry M. Paulson Jr., an ex Goldman Sachs’s CEO who took the chair of US Treasury Secretary in 2006. Both Bernanke and Paulson share the same task: they did not shatter the economic framework, but they have to mend it nevertheless.

The words that were delivered by Mark Gertler, a New York University economist, regarding current financial crisis in United States are absolutely terrifying: This is the worst financial crisis since the Great Depression, no doubt about it. As we recall the Great Depression of 1929, it is no exaggeration to say that those times are the nastiest of all economic breakdowns ever happened in any part of the world, where many banks in United States collapsed and then followed by the crash on the world’s stock markets. As a matter of fact, what we experience today look a lot like it. Currently we are witnessing the event that will be remembered by next generation’s economists and written in all economic textbooks; the story about how United States blew its economy up and failed to save its citizens from the outburst.

The derivations: what rocks Wall Street, and why it happens

The saga started with the bankruptcy of Bear Sterns, followed by Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae), then the story reached its climax; the collapse of Lehman Brothers. As is well-known, Bear Sterns is the fifth biggest investment bank in United States, Freddie Mac and Fannie Mae are huge financial companies working on mortgage-lending business, and Lehman Brothers is the foremost among them: the nation’s fourth-biggest financial institutions with over 25,000 employees and the sum of its assets calculated more than US$ 600 billion.

In the Wall Street, there are several renowned financial institutions that are considered as big players on the floor, whose stocks are traded at towering price because of their reputation and eminence. When we mention names like Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Sterns, we are talking about quality and excellence they have built through long-time affiliation with their clients. These financial institutions became a dream workplace for students in famous business school like Harvard or Wharton –before this disaster happens.

And there is this word: sub-prime mortgage, the nucleus of all of these problems. In reality, there are two types of mortgage. The first one is prime mortgage, credit given to large firms and institutions which usually use it as source of capital. A prime mortgage tends to have low risks; the lenders will likely be able to fulfill the obligation to return the money and the debt has small possibility of being unpaid. The second one –well, this word is getting famous nowadays–, is the sub-prime mortgage, the one that banks give to people in common or small businesses. It is defined easy, suppose you go to the bank to borrow some money, then the money that the bank gives you is the sub-prime. Of course, because we, as normal people, borrow money because we urgently need it, we will not do careful calculations and estimations –as large firms and institutions do when they borrow money– regarding can we really return the money we borrow. Even sometimes, because of pressing circumstances, we just borrow the money and speculate on our ability to return it. So if banks know that sub-prime mortgage tends to have high risk, then why give people sub-prime instead of prime mortgage? And how does this simple problem emerge chaos in one big financial system like United States’?

The Financial Accelerator Model is the answer of the question number one. This theory argues that financial condition and credit condition largely interrelated with economy, and both sides support each other. In fact, the condition of these three variables could be the main factors to generate economic booms, or conversely, economic failures. Economic booms cause firms and family units have higher income –and higher value of their assets as well. With higher value of assets, banks will likely be more generous to lending credits to them. Easy lending promotes easier lending requirements, therefore, produces more money to the market and accelerates economic growth, vice versa. However, the sub-prime mortgage controls the market for money lending, and most of the demand for credits given by the banks is usually on the type of sub-prime, very few is prime mortgage. That's why sub-prime mortgage holds an important role in the economy. It is, in fact, a fundamental variable in one country’s economy.

Laissez-Faire is the answer of the question number two. Yesterdays, there was too much freedom given to Americans who want to borrow money from banks. No collateral, no need to guarantee, and no further supervision to the borrower; it was even said that an American who borrow the money and had not returned it for years got no words of warning from the bank at all. As a result, Americans felt free to borrow money as the requirements from banks made borrowings seem easy. Also, United States is a liberal country which supports the invisible hand ideology; the less government intervenes, the better financial system and economy works. But, here is the correction. If truth be told, that lack of supervisions and regulations has actually worsened the situation. That Laissez-Faire thing has emerged greed among the market –financial institutions work as they please as there is no regulation to prevent them to do so.

Here is how greed is defined. Imagine yourself as Richard Fuld, a failed CEO of Lehman Brothers, a bank that works on mortgage and credit lending business. During period 2001-2005, United States experienced a bubble in housing market, where demand for houses largely increased that caused the price to accelerate. As we normal people assume that house price will continue to go up and up and never plunge, then there goes the bandwagon effect; investing money in house will become trend among American people and creates a larger boom in house demand. So as the demand for houses increased, so does the credit and the mortgage –people ran to the banks to get credit to buy houses. Therefore, the demand for credit –the subprime– also increased. The demand for credit boosted significantly, but unfortunately, Lehman Brothers do not have enough money to supply the credit’s demand. What would you do as a CEO?

In actual fact, Richard Fuld is a very ambitious person. What he did as Lehman’s CEO was he tried to match the credit’s demand by piling up debt; he continued to borrow and borrow money and made sure that Lehman was still able to supply the money into the market. Well, huge investment? Wrong. It was one hell of a risky business. Soon as the housing bubble burst and house price fall, Lehman Brothers took a punishment because of its greediness: it went broke. Lehman could not recover most of its assets because many borrowers found that their houses were worth far less than their mortgages, thus, they could not afford to reimburse the credit.

The illustration for the derivations of this financial crisis can also be described in a more simple way. It began with the housing bubble. Second, the housing bubble led to a massive increase in credit –the sub-prime mortgage– demand. Then due to the increase in sub-prime mortgage demand, financial institutions burdened themselves; they piled up their debts by borrowing before lending it again for the sub-prime borrowers who used the credit to buy houses. When the housing bubble burst, the house price fell, and many borrowers were not able to pay back the money, those financial institutions took the upshot: they got busted. And that’s the way it is done.

The present time: daunted by the domino

The fall of Lehman Brothers is not the last part of the story and it is important to study its collapse to analyze the roots of the crisis, as well as the forthcoming effects in the future. In fact, the repercussion of Lehman’s fall is still there and even broadens; many financial institutions also went bust, and it encompasses names like American International Group (AIG) and Merrill Lynch. Those names are recognized as giant financial institutions in United States whose stocks conquer Wall Street, and the tumbling of the giants, which previously seems impossible, gives signal to the world that United States’ economy is in a real hazard.

In extraordinary circumstances, a central bank can act as the lender of the last resort, which is lending money -a bailout- to insolvent banks or financial institutions, if it thinks such action is necessary. That is what United States’ central bank, the Federal Reserve, did to Bear Sterns, Freddie Mac, and Fannie Mae; the Fed lend them some money so they can avoid bankruptcy. Unfortunate for Lehman Brothers, it is a different story since the Fed has made an absolutely clear statement: there will be no bailout this time.

Why no bailout? “Too many bailouts”, said the Fed. After the bailouts on Bear Sterns, Freddie Mac, and Fannie Mae, the fed thinks that giving bailouts over and over again will affect the morale of financial institutions in United States. If it gives bailout so easily, concerns are mounting regarding the morale hazard effect; other big financial institutions will go bankrupt effortlessly knowing the Fed will give them bailouts if they go bust. The Fed also forecasted that the effect of the Lehman’s bankruptcy would not be noteworthy for United States, since most of the Lehman’s creditors come from Asia and comprise only a small number of American creditors.

It seems mistaken, yet the Fed changes its mind. After Lehman Brothers had failed, the debacle went to the next level; an insurance giant named American International Group (AIG) followed Lehman Brothers and went broke. Worried by the huge impact of the collapse of AIG, the Fed saved AIG and decided to give bailout once more to repress greater damage to the economy. End of the story? Far from it, then there is Merrill Lynch which went broke and had to be sold to Bank of America –thanks to Merrill’s CEO John Thain who succeeded the deal right before it were about to tumble. The collapse of AIG and Merrill Lynch may not be the last to bring the crisis to an end, as United States’ preeminent banks like Goldman Sachs and Morgan Stanley wait in the line to be the next cadavers.

What will the future be without Lehman? Lehman’s fall, undoubtedly, has established the crisis of confidence in the economy. Confidence is the engine of the financial system; investors and banks work together since they trust each other –they believe the cooperation will offer symbiosis that benefits both of them. Meanwhile, Lehman Brothers is a huge investment bank with 158 years of history, an impossible-to-fail bank; even the Great Depression of 1929 could not take it down. Letting Lehman Brothers to fail is a bold gamble by US Secretary Treasury Hank Paulson, risky bet as well, because the domino effect of the collapse of Lehman Brothers –that crisis of confidence– is so high that they affect financial sector not only in the United States, but also many countries all over the world.

The fall of a huge bank like Lehman Brothers makes people believe that “the economy is in crisis”. Therefore, it establishes huge concerns among investors and bankers; causing market’s confidence to fade and people to lost trust to the economy. People pull their money out from banks’ vaults and banks all over the world hold themselves to give credits. As a result, it impedes capital flow in the market; forcing many central banks like Bank of England and European Central Bank to inject short-term liquidity funds. Keep in mind, credit is the grease of the economy on which businesses and firms rely as their source of capital. A contraction of credit leads to a lack of capital in the market, a lack of capital causes a slowdown in economic growth, and finally, an economic slowdown guides the economy towards a recession. Also, due to the volatility of the global economy caused by the collapse of one huge bank like Lehman Brothers, investors are on a hostile and risky environment to invest their money or run business. Concerning that situation, many investors decide to withdraw or delay their investments. Things like these are the domino effects of the fall of Lehman and, regrettably, have caused more upset in the global economy.

The worse is yet to appear. For Americans, the situation is getting really dreadful currently as the domino effect enlarges and has taken financial institutions like Merrill Lynch, AIG, Washington Mutual, and Wachovia into the same part as Lehman’s. People, however, have sunk deeply in this crisis of confidence. Yet despite the US government has tried to tranquilize this situation by delivering a US$ 700 billion rescue package into the financial system, doubts still arise whether the bailout will succeed or not. Yes, it seems that Americans’ confidence has plunged to the lowest level –and that is not an easy problem to crack.

One question remains left unanswered. So, how dire this crisis will turn out to be? Truthfully, it is still unknown how deep the global economy will sink. Let’s be optimistic: people there at the Fed and Treasury, who are nothing but smart, are doing whatever they can to prevent the US economy –and the global economy as well– from plummeting any further. Instead, the right thing to ask now is, what can be learned from this crisis? Here in economics, we do study the history; we analyze cases like the post-world war hyperinflation in Germany, the great depression of 1929 in United States, the Asia’s financial crisis in 1998, and so on. Indeed, this financial crisis turns a new page in the history of economy, and presents a lesson to be learned.