Surviving the Global Financial Crisis

An Interview with a Former Banker and Freelance Corporate Consultant

Sherman Kuek, SFO
Published in Catholic Asian News
(May 2009 Issue)

Tell us more about the economic dilemma confronting us today.

The global financial crisis, which was brewing for over two decades really started to show its effects in the middle of 2007 and into 2008. Around the world, stock markets have crashed, large financial institutions have either collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.

A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialised economies caused a ripple effect around the world. Further weaknesses in the global financial system have surfaced. Some financial products and instruments (special investment vehicles or SIV) have become so complex and twisted that as things start to unravel, trust in the whole system has started to fail.

What have been the effects of this economic and financial dilemma?

When people did eventually start to see these colossal problems, confidence fell quickly. Lending slowed, in some cases ceased. Now there is a crisis of confidence. Some investment banks were sitting on the riskiest loans that other investors did not want. Assets were plummeting in value so lenders wanted to have their money back. But some investment banks had little in deposits; with no retail or consumer deposits, so some collapsed quickly and dramatically.

The problem was so large even banks with large capital reserves ran out so they had to turn to governments for bail out. New capital was injected into banks, which, in effect, allowed them to lose more money without going bust. Confidence was further undermined. (It may take years for confidence to return.)

Shrinking banks suck money out of the economy as they try to build their capital and are nervous about lending. Meanwhile businesses and individuals that rely on credit find it harder to get.

A spiral of problems result and this global meltdown has affected the livelihoods of almost everyone in this ever interconnected world.

How has this situation specifically affected Malaysians?

Malaysia is not spared. Its economy contracted significantly during the second half of 2008 with major exports notably oil, electronics and primary commodities registering double digit declines. Malaysia’s Gross Domestic Product (GDP) for the fourth quarter of 2008 was barely above water at a dismal positive 0.1 percent. Fast deceleration of demand for our goods and services by the world’s major industrialised nations facing the worst recession for over 60 years will inevitably cause Malaysia’s GDP to dip below zero for the first and second quarters of 2009, which by technical definition will mean that our nation will fall into recession by then.

With banks and financial institutions drastically cutting credit lines to conserve and preserve their fast eroding capital, caused either by mounting losses of their investments in the myriad of US subprime mortgage-related vehicles or the envisaged jump in non-performing loans, corporate failures will become more rampant in the coming months. News of job cuts, retrenchment, factory shut-downs, down-sizing, pay-cuts, job-freeze are daily occurrences and have unfortunately become the main subject of our conversations at most social gatherings.

With job insecurity abounding, we begin 2009 with a dampened mood and muted enthusiasm. Our personal happiness is diluted, our peace is threatened and tension is on the rise, affecting families, communities, organisations and nations.

Is there hope for fast economic recovery?

Everyone is now desperate for a cure, a remedy or hoping someone can fire a silver bullet to help them recover their financial health. Do not expect any to come from the financial experts, as these financial wizards were the ones who created this systemic mess in the first place.

Likewise do not place too much hope for a fast and sharp V-shaped recovery. This “bubble-economy” of greed and conceit (creating mountains of wealth from sophisticated SIVs with no real hard work) was created since 1982 and after enjoying the so-called “irrational exuberance” of 2007, has finally tipped over the cliff and plummeted precipitously in mid 2008.

For those who are still holding on to their jobs, they will have to work harder to get lesser, resulting in little or no time for the family. The social structure of the family will come under increase stress with frequent quarrels emanating over money matters.

At times, hard choices may have to be made between “having food on the table” or “servicing debts” (credit-cards, mortgage, car-loans, etc). Those driven to extreme desperation may resort to crime and frauds while some may turn to either chemical and drug addiction for escapism.

What should we do about it?

For the interest of our beloved “man in the street”, take note and better prepare for a prolonged recession. Fortify your mindset. Be ready to see widespread poverty, as making ends meet will be even more difficult than the 1997 Asian Crisis.

With the foregoing scenario in mind, it may be wise to activate your austerity action-plan if you have not already done so. Do not wait until your cash runs out. Cash, like toilet-roll, runs out quickly when it comes to the end.

Cultivate the good habit of budgeting and consistently “under-spend your income” and “stretch-your-ringgit” by changing your life-style. Car-pool, plan your trip, refrain from buying imported goods, go after locally made equivalents. For non perishable goods, buy in bulk from wholesalers and for perishable goods, take a weekly trip to the pasar borong. You would be pleasantly surprised by the amount of savings you garner from such habits.

Where land is available in your backyard, plant your own vegetables. Besides developing green fingers, you will be amazed by what joy you can receive by being close to nature. Sweat pores open automatically without the need to spend a cent.

For those retrenched and fresh graduates who are unable to get into the job market, avoid hiding behind the computer screen. Instead, build up your networking and strengthen your personal branding. Use your skill-sets to offer solution to problem situations. You will soon land yourself a job when your reputation as a problem solver spreads as plenty of employers are on the constant lookout even during times of slowdown as more solution providers are needed in their respective organisations.

For those already in debts, go back to basics. Forgo luxuries to enable you to free up some cash-flows to repay your debts. Keep in touch with your banker or creditor to pre-empt them from taking legal action. Where possible, work out and term out your debts.

For other categories not mentioned above, I will take the liberty to ask you to join Warren Buffet’s invitation to tap into the financial wisdom of our forefathers and become financially wiser:

Warren Buffet’s advice for 2009

• Hard work: All hard work brings a profit but mere talk leads only to poverty.
  
• Laziness: A sleeping lobster is carried away by the water current.
  
• Earnings: Never depend on a single source of income.
  
• Spending: If you buy things you don’t need, you’ll soon sell things you need.
  
• Savings: Don’t save what is left after spending; spend what is left after saving.
  
• Borrowings: The borrower becomes the lender’s slave.
  
• Accounting: It’s no use carrying an umbrella if your shoes are leaking.
  
• Auditing. Beware of little expenses. A small leak can sink a ship.
  
• Risk-taking: Never test the depth of the river with both feet. (Have an alternate plan ready.)
  
• Investment: Don’t put all eggs in one basket.
  

Those who are already practising these principles should remain financially healthy. Those who resolve to start practising these principles will surely regain their financial health.

Let us become wiser and lead a happy, healthy, prosperous and peaceful life.

Finally be guided by Proverbs 8:1-21.