Sabtu, 15 September 2012

Global economic downturn, BI, and domestic politics


Global economic downturn, BI, 
and domestic politics
Fachry Ali ;  One of the Founders of the Institute for
the Study and Advancement of Business Ethics (LSPEU Indonesia)
JAKARTA POST, 14 September 2012


Since the eruption of the global financial crisis in 2008, people have become creative in coining catchy phrases. Just consider the title of David Wessel’s 2009 work, In Fed We Trust. 

And when The Federal Reserve spent US$2.2 trillion to bail out giant American companies and banks as a direct response to the crisis, the Fed became, as presented in Wessel’s book, “the pawnbroker of last resort”.

Serving as a central bank in these financially turbulent times, the Fed indeed possesses incomparable monetary power. 

“The president of the United States,” Wessel writes, “can respond instantly to a missile attack with real bullets; he cannot respond instantly to financial panic with real money without the prior approval of Congress. But Bernanke could and did.”

In short, when military and political prowess are idle in attacking a financial crisis, the central bank emerges as the hero. 

It is this exact suggestion that was expressed by Rana Foroohar in her Times’ column (Aug. 13, 2012) where she declared: “Only central bankers can save us.”

Foroohar, to be sure, has reason to say this. Under Ben Bernanke, the Fed has become the center of world-scale attention in a very archeological manner. 

“Investors parse Federal Reserve meeting notes the way believers in Kabbalah parse ancient text. If Ben Bernanke says ‘might’ rather than ‘may’ regarding a particular policy action, markets react.” 

Like Wessels, Foroohar ignores the ability of other parties in this financial crisis. “Politicians can’t or won’t act to stimulate the economy,” she says.

In part, problems facing the US and some of the European sovereign-debt ridden states today are similar to those that troubled Asian states in the 1997-1999 financial crisis: The absence of the bank intermediacy. Operating within the uncertainties of the future economy, banks tend to park their money with the central banks instead of channeling it into the real sector.

However, on the other hand, the problems of the US and those European states are much more complex. While they are struggling with the paralysis of bank intermediacy, the government’s fiscal stimulus has stopped. 

And, if the Asian states affected by 1997-1999 crisis could harbor hopes that advanced industrial countries would lend their help, there is currently no single state today that has the prowess and the wealth to act as their savior.

Nor can they rely on the help of prominent emerging economies such as China, India and Brazil for these countries are suffering from the downturn economic growth, due to a drop in export demand from their Western trade partners. 

In fact, decoupling economics — which suggests a state of disconnected development between the advanced industrial countries and the rest — is a toothless theory.

And at the same time, while the post-crisis Asian states underwent internal political consolidation geared toward total reform, those in the US and European states are facing fierce competition in the next domestic general elections. 

The upshot is that the future of their economies is much darker than that of the post-crisis of the Asian states. It is in this sense that Foroohar’s argument on the crucial role of the central bank outlined above sounds reasonable.

This feature reminds us of the central role played by Indonesia’s central bank, Bank Indonesia (BI), during the 1997-1999 financial crisis. 

Regardless of whether the BI was trapped in the “too big to fail” category, it had the savoir faire to make rehabilitation of the national payment system its top priority. 

This was done through the liquidity assistance programs (BLBI and KLBI) targeted directly at the banking industry. 

This was a hemorrhage measure, to be sure, that even took a toll on its own officials.

However, in the hollow legitimacy of Indonesia’s political authorities at that time, BI’s rehabilitation of the national payment system was essentially a political measure. Why? 

Because it managed to shift public trust and, more importantly “hope”, from the already drastically reduced legitimacy of the political authorities to the reworking of the national payment system. 

BI’s tact, thus, stood as a substitute for an essential governing function as the “real” political authorities were suffering from low rates of public support both domestically and internationally.

This hemorrhage measure was a traumatic experience that, regardless of the political speculation, later drove BI to save Bank Century as the destructive impact of the 2008 global financial crisis touched Indonesia’s economy. 

As in the case with the measures taken in 1997-1999, BI’s “politically heroic action” in 2008 went without public appreciation. It could be stated, however, that the global crisis’ destructive impact had the potential to pose systemic risks to the national banking system.

Anyhow, the Asian financial crisis has become a collective trauma. Any doubt on the health of a bank would, therefore, spread and revive the previous trauma, eventually driving a rush on banks. 

As it has become the “iron law”, the drop in confidence in the banking system is identical to the loss of political legitimacy of a regime before the public.

Today, perhaps unconsciously, BI is being confronted with the same challenge. In his article “Preparing for the Global Economic Recession” (The Jakarta Post, Aug. 24, 2012), Anwar Nasution detected a potential attack on the national banking system. 

The prolonged world recession has reduced demand for Indonesian exports from its mining and commercial agricultural sectors. 

While deficits in the balance of trade and current account have been felt, its secondary impacts have also negatively affected the banking system.

Eloquently, Nasution pointed out the symmetric structure of the problems. In addition to capital outflows, the global recession has reduced demand for unskilled workers, which practically reduces workers’ remittances. 

And, the slowing of exports not only decreases government revenues from royalties and income taxes from mining and plantation firms, “but”, Nasution stresses, “also increase the number of non-performing loans (NPL) at banks exposed to mining and plantation businesses”.

This threatening feature is coupled with uncertainty in the financial market. “Although”, Nasution says, “SBI, SUN and securities issued by national companies offer higher returns than securities in advanced countries, investors are worried about the ability of the issuers to service their debt.” All of this adds to the complicated, recession-induced economic problems at the domestic level.

Not all of these problems fall within the scope of the BI’s responsibilities, surely. But, the latest list of problems inevitably demands monetary performance to stimulate the health of the domestic economy, in which BI should be on the frontlines. 

Can BI restage itself as a “political savior”, when domestic political actors are occupied with disunity on economic policy? Can Foroohar’s statement above now be addressed to BI: “Only central bankers can save us”?

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