Saturday, April 19, 2014

Mahathir Flays US Theory of Asian Savings Glut

On May 5, 2010 at the Emirates Palace Hotel in Abu Dhabi, former Prime Minister of Malaysia His Excellency Tun Dr. Mahathir Mohamad gave an interview to Dr. Adil Rasheed of the Emirates Center for Strategic Studies and Research (ECSSR).

During the course of the interview, he criticized the US for advancing the theory of Asian saving glut (propounded by US Federal Reserve Chairman Ben Bernanke) as a cause for the current global financial crisis. In addition, the legendary Asian leader and maverick thinker openly aired his views on a host of controversial issues, and proposed his own set of recommendations for addressing the present global economic downturn. Given below is the transcript of the interview:

Q: Your Excellency, you have very correctly and presciently been issuing warnings about the systemic flaws in the global financial system for several years now, but currently we are seeing not just banks but countries going bust, with governments adding debt to service their existing debt and states  vying with each other to devalue their currencies. What solutions would Your Excellency like to propose to the world for overcoming this crisis?

A: First, we need to accept that the whole system has failed and failed very badly. When such a failure occurs and when you come to know the causes, you have to change the system or at least modify it. One of the worst things that happened in America was that the government believed the market can regulate itself, which is a load of nonsense. Therefore, whenever a new system is developed, it must have a role for the government. Next, governments would then have to be very strict in checking abuses of the system. We cannot have banks lending too much money—which they don’t have—to people who are unable to pay. In addition, we also have to address the problem caused by certain financial products, products which are designed by people with the idea of making quick money without thinking about the morality of it, even to the point of advising people to cheat. So, all these things need to be looked carefully into. To begin with, however, let’s not be in a state of denial.

Q: But, Your Excellency, it is said that many of these big banks—‘the too-big-to fail entities’—have become very difficult to regulate and that the whole structure has become so vulnerable that if you pursue matters aggressively, there is danger that the whole financial system might collapse?

A: But there is no choice. If you want to do something, you have to make a clean sweep. We must get rid of the idea of ‘too-big-to-fail’ because they have caused huge problems for the whole world. In fact, if they really are that big that they could cause this crisis, then there is every reason they should be reduced in size.

Q. Western governments and economists often blame Asian economies for artificially devaluing their currencies. They also moot the ‘savings glut’ theory that blames Asian economies for parking their export-driven savings in Western financial institutions that lead to creation of asset bubbles and subsequent crashes. Does Your Excellency think this is a fair assessment of the problem?

A: It is grossly unfair. It is the Americans who proposed this solution for people with a lot of money. In fact, the whole idea that countries must have reserves was mooted by them and they provide the means to hold your reserves through purchasing of their bonds. You see we should really buy gold, etc. But they offer their bonds as a way of saving. You have to have American dollars as your reserves, whereas they themselves do not have any reserves at all. You see this terrible case of double standard.

Q: There are proposals that the IMF and the World Bank should be strengthened further, they should have more funds, they should be regulating global economy. Do you think we need global financial institutions managing globalized world economy?

A: Where we have been wrong with the World Bank and the IMF is they are basically instruments of the US. You can have a World Bank and an IMF that is not controlled by anybody. Nobody should have any final say as to what they can do. The reason why these organizations fail is that they are not looking for solving problems, but are trying to figure out how the US and other rich countries can benefit from their advice.

Q. Your Excellency, you have been an advocate of an Islamic trading bloc and gold dinar currency for international trade as a replacement for the existing fiat paper currency. Do you think the idea is feasible and is it time to launch such an initiative?

A: Well, like all things we have to have a beginning and although it would appear not to be feasible, but as you go along you make corrections. I think eventually you would be able to do it but not in one sudden big chunk. It’s not that we are using this Islamic system to totally replace the present system, we have to bring it about slowly. Even if it is an arrangement between two countries, once you try it is possible others can come in. Even the big banking system we see today is the result of one money lender deciding to convert his money lending business into a bank, it was small but it has grown and today it encompasses the whole world.

Q: Your Excellency, do you believe the Muslim world and its leadership is presently ready to get its house in order and avail of the opportunities offered by changes in global political and economic order. If not, what ails our polity, societies, and economies and how can we overcome the challenges?

A: Far too many Muslims and Muslim leaders are beholden to Europe and America and think that people there are genius, and even if they get some other advice it has to be okayed by Europeans. They think that Europeans can do no wrong, despite the fact that they have been wrong so many times. Thus, they will not do anything in this period to find their own solutions. So, I do not think that Muslims are going to take this opportunity to promote themselves, to be well placed and not always to kowtow to Western countries

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