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Wednesday, March 25, 2009

Economics Association of Fiji Seminar - 24 Mar 09

Reasons for the global financial crisis

Dr. Jerry Jordan, president of the Pacific Academy of Advanced Studies in Los Angeles, told participants at a seminar organized by the Economics Association of Fiji on the global financial crisis which was held at the Holiday Inn on Tuesday night, that in his view the housing bubble in the US was due to two major reasons. The first was the monetary policies of the US Government in 2001. This was a time of uncertainty for the US economy especially with the attacks on the World Trade Center and the bursting of the dot-com bubble. To generate economic activity, the US Federal Reserve reduced interest rates and the ultimate effect was that more of lenders money were directed towards the housing industry. The second reason was the politicization of the housing industry, whereby some of the major lenders were pressured by policy makers to have a major part of their mortgage portfolios invested with low income earners.

The situation was made even worse by the following factors:
  • Americans penchant for consumption spending – in fact many mortgage holders took out second mortgages (mortgage equity withdrawal) not to consolidate debt but to buy cars and go for holidays.
  • Failure of the corporate governance of many financial institutions. Dr. Jordan highlighted the importance of having a competent board who understood its role well and understood the core business of the entity. Dr. Jordan suggested that directors who were lacking in these areas should either hire consultants to help them understand their responsibilities or step down. In addition, he said that internal audit should be owned by the entity, totally independent of management and robust. Of course, now days entities are outsourcing this crucial function because it is a lot cheaper.
  • Failure of supervision by oversight agencies/ authorities.
  • Failure of rating agencies – securities that came into prominence (e.g. collateralized debt obligation) from this housing boom were given very good ratings even when financial conditions demanded that these ratings be reviewed. Investors who bought these securities based on their good ratings were caught off guard when within a short time frame their investments were worth nothing.

Impact of global financial crisis on Fiji

Dr. Jordan said that the impact will not be as dramatic as what is happening in the US, with business closures and high unemployment but it is coming nonetheless via our trading partners New Zealand and Australia.

On how Fiji can grow its economy given the current global financial situation, Dr. Jordan suggested increasing foreign investment. Again, how this can be achieved, especially with developed countries and many international corporations still licking their wounds from this global financial crisis, may prove a very challenging proposition. The Fiji Trade and Investment Board is tasked with this enormous responsibility and as such should be supported. Dr. Jordan hinted at four countries to look out for as things normalize, namely China, India,Mexico and Brazil. Perhaps FTIB may have some of its work done already.

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