Bali - A Travelogue

Bali Island, an island famed for her culture and nature, has mesmerized generation of travelers (as early as 1900s) with mystery and scenery.

I finally made the first visit not long ago with my wife and the elder son.

At Ubud Alila, we are housed at a villa built in the mid-air nestling on top of the Ayung river valley. The valley is deep enough to be blocked by the thick growth of plants and trees that the river is not visible from our balcony. We can only overhear the sound of river flowing without seeing it.

My son watches the squirrels climbing from trees to trees. As a spider was weaving its web, he sung the Incy Wincy Spider. Within the reach by a stretch of hand from the balcony, I introduced my son to a ripe jackfruit overhanging from the tree standing imposingly on the slope.

Moving inside the villa, a resident frog was seen hopping next to the bath tub encircled by a rectangular indoor pond with a short elevated pavement above it connecting the bedroom to the changing room. The pond is the home to some resident goldfishes.

At night it is the sound of insect accompanied by the starry night. When the sun rise, it is the turn of the roosters performing the orchestra of cock-a-doodle-doo in a foggy morning.

I grew up in a small town. All of these were free and not novel to me. Yet it is now a paid (from daddy's pocket) Discovery Channel goes live to the two and a half year old.

*************************************************

The terraced paddy field, the volcano (Mount Batur), the beaches have all made it to the postcard depicting an idyllic and peaceful destination to relieve us temporarily from our trapping in an ever-flatter world.

Here in Bali, the farmer are still slogging, as the buffalos are still ploughing, the paddy field. The scarecrow is sprouted everywhere to deter the suspicious bird. The Balinese ducks are quacking away in herd.

The Balinese folks dress in their ritual gear are always busy attending the temple ceremony. Colorfully decorated temples with the distinctively Balinese Meru (pagoda) made of palm leaves dotted the skyline.

The most awesome of all temples is the Pura Bersakih, the so-called Mother Temple of Bali. Stood above the temples complex, one could enjoy the panoramic view of a distant skyline, as far as the sea, highlighted by the solemn Balinese Meru.

One can sense the religious seriousness and ritual purity among the Balinese Hindu still make up more than 80% of population. The fruits and flowers are carefully and conically arranged into an offering basket. The women walking gracefully to the temple ceremony had the offering carried on on their heads. The men mostly dressed in white are biking their way carrying the older folks if not their younger one.

Time has not changed.

*************************************************

The beneficiary of a localized form of Hinduism in an archipelago that have largely converted to Islam, Bali always fascinate travelers like me who regards vacation not just as an escapade but also of learning.

It shocks and puzzles me when I read of the act of "puputan" by the Balinese rulers and subjects launching suicidal charges against the deadly fire of the merciless Dutch troop.

What left was a massacre.

It still shock and puzzles me when I read of the jumping off the cliff by the Balinese dress in their ritual plain white during the anti-Communist purge in 1965-66.

What left was a bloodbath.

Have these spirits rested? Maybe not and maybe never ever.


*************************************************


I just read of a traveler story on a spiritual tax that one holiday home builder has to pay to the village head to build a villa house in Bali. The plot of land is encumbered to the existing right of the spiritual residents. The construction of of infinity pool will have to be scrapped and relocate elsewhere for it might violate the spiritual occupants. This makes an interesting topic on land law.

At our friend's wedding at a palatial resort at Uluwatu hanging on top of a magnificent cliff with an awesome view of Indian ocean, a village elder dressed in the ritual white was introduced to me as the rain stopper. He had earlier prayed and made offering to keep the rain away from spoiling the wedding party.

Unscientific he maybe, there was no rain that evening.

******************************************

Traveling on the small roads criss-crossing the island, one cannot fail to notice the flags of political parties displayed from the villages to towns. There are always hung by a tall bamboo pole.

If the number of flags flown is the poll for the election next year, Bali favors the red flag of the PDI (of ex President Magawati) over the blue flag of DP (SBY, abbreviation of a mouthful of President Susilo Bambang Yodhoyono) and then the yellow flag of Golkar.

Being a tourist paradise for many Westeners and supposedly an infidel island, Islamic terrorists have unkindly planted two bombs in 2002 and 2005 that have taken several hundred lives and crippled the tourism industry.

Recovery in tourism takes as much as time as the memory takes to fade, according to my taxi driver, Chalik.

He is still haunted by the 2002 bombing incident. He was chartered by a Middle Eastern honeymoon couple on Oct .12, the day when the bomb went off in Kuta. The couple had wanted to go to the famous Kuta strip that night but he turned it down as he had had a long day chauffeuring them.

Being a Hindu, he thanked his lucky star for surviving unscratched. Predictably he chose to stay home and didn't go to work on the recent Oct 12.

******************************************

Staying three nights at Oberoi in the comfort of modern trapping and connectivity, I had the privy to the CNN news which was denied to me at Ubud.

Where is the escape after all, you may ask?

As the CNN brings more breaking news, I contrast that with the story from the epics of Mahabharata and Ramayana and wonder what have we changed in the millenniums in between that have passed?

Isn't the same obsession for power, for control?

Isn't the same innermost inclination for peace, and for love?

Strong Rebounce from Hang Seng

Hang Seng Index, after 13% drop yesterday, rebounded 1,580 or 14.35% to 12,596, with a volume of HKD 66 billion.

This is the largest single day rise since Oct 29, 1997. The index's super heavyweight HSBC jumped 20%.

The rebounce offers a short term relief after days of bloodbath in the stock market. It is still too early to say if the fall yesterday has touched the bottom.

Hang Seng Plunged to 11,015

Black Monday in Hong Kong.

The Hang Seng index plunge 1,602 to 11, 015.

The index has lost 65.5% from its previously peak on Oct 30, 2007. It has surpassed all records except that in 1973 where Hang Seng lost more than 90%.

The index's No.1 heaveyweight HSBC, dropped almost 15% to just HKD75. The price earning ratio in Hang Seng Index is now in single digit.

In stock market, fundamental just reign and it is the emotion that rule.

Dow Jone closed at 8,378 last Friday and likely to open lower given that there was no good news over the weekend.

Sit very tight.

The Tsang Administration Ate Banana Pie

The Tsang's administration ate the humble pie (or more aptly the banana pie).

The latest is prompted by Donald Tsang's policy speech in the context of the old age allowance (popularly known as fruits allowance in Cantonese). He proposed to raise the elderly's allowance from 705 dollars to 1000 dollars subject to a means test.

The allowance started way back in 1973 as a token of respect for elderly reaching the age of 65 and not intended as a welfare handout. The reality is that many elderly are depending on the allowance for living. The escalated cost of living and health care are two underlying reason for the increase in the allowance.

The legislators from both sides of the aisles criticize Tsang for demeaning the elderly on the introduction of means test. Tsang himself had a banana thrown at him at the Legco by a sensationist legislator from the League of Social Democrat. The opinion poll was against the imposition of a means test.

Facing popular backlash, the Tsang's administration withdrew the mean test today conceding to populism, one may say.

This maybe a reason of his lacking the popular mandate via a universal franchise.

The graver problem with Tsang's handling is one on policy execution lacking careful strategic thinking and political spinning.

The introduction of means test for what is actually a token of respect to elderly smacks of elitism and patronage. Means test is understandable and politically acceptable to reduce the likehood of abuse and to better distribute the welfare resources as the society is aging and the burden of the welfare spending is growing over times.

What Tsang should have done is to demarcate the fruit allowance without means test from other form of welfare allowance supporting the elderly.

Any elderly who satisfy the means test should be rightfully given more welfare allowance for living, however you name it as long as it is not called 'the fruit allowance'.

Further the imposition of means test is simply too costly for administering considering the high cost of civil service in Hong Kong. One proposal which should have been considered is to streamline and simplify various welfare scheme for more convenient and speedy application especially for elderly who maybe infirm, illiterate and without dependent.

The increase on welfare for elderly is popular. Yet, Tsang let the opponents win the kudos and ended up with the banana pie.

The 27 Million Peoples' Question

Malaysians, from the King to the Umnoputras, from lawyers to rakyat (peoples), are now talking about the social contract.

There is no reference to the social contract in the Constutition of the Malaysia Federation. Not even any mention in the preamble. Sorry, there is no preamble in the Constitution.

What is a social contract?

According to the political scientist, it is an unwritten consensus at the time of the nation founding. It is thus a piece of virtual agreement exists only in the mind of those believing that it exists.

In Malaysia's context, it means different things to different peoples. It really depend whether you talk to Ali, Bala or Chan.

Some say it is an agreement between Tunku, Tan Cheng Lock and Sambathan seeking independence against the colonialism and Communism (where are the Sarawakian and Sabahan represented?). Too bad, all the three distinguished Malaysians are no longer with us today to answer the 27 millions peoples' question.

Some say it is a social contract wherein the Malays conceding to Chinese and Indian the Malayan citizenship in exchange of their concession for Malay Ketuanan aka Malay Supremacy.

Some say it is the Malay rulers constitutional position as a protector of Malay and Islam (with some also noted the legitimate right of other communties).

Some says it doesn't exist. They pointed out that the first reference to the social contract was in 1980s by the UMNO politicians. It took well over 20 years for any Malaysian to remember that there was a social contract in the first place.

Some says it should not be questioned and reviewed.

Some say it should be taugh in school while some opposes.

Yet no one can give a definite definition of what the social contract is.

The question of "apa itu" (what it is?) should be judiciously preceded by the question of "mananya" (where is it?)

In the absense of compelling evidence, whether written or oral, by the founding fathers, including the often overlooked the 1956 Constitutional Conference in London and the five members Reid Commission charged with the drafting of the Malayan Constitution, no one should be allowed to construct and impute the existence of such a solemn consensus on national formation.

The difference between an afterthought and an aforethought is that the former is an excuse and the latter is a justification.

Thinking Malaysian, please take note!

Currency Crisis soon or now?

After the thaw of credit crunch, are we heading to a currency crisis soon, or now?

Thanks to Alan Greenspan who confessed he made mistakes. That sends a powerful chill down the spine everywhere.

The Asian stock markets reacted very nervously to the Greenspan's admission. The Tokyo Nikkei Index drops by 9.6% to7,649.

The Hang Seng Index sunk by 1,142 point to 12,618, a hefty drop of more than 8% in a single day, representing 60.5% fall from its previous peak of 31,958 on Oct 30, 2007.

This fall is close to the last record held in 1998 following the Asia's financial crisis. The Index reached 16,820 on August 7, 1997 and sunk to 6,545 on August 13, 1998, a 61.1 drop in about a year.

Does the market hits the bottom? Maybe not yet.

If Greenspan is right, this is going to be worse than 1929 crash. We can expect more bad news.

Sit tight....

Cabinet to Cabinet; Bed to Bed

The Chinese Malaysian politics is now arguing over whether it is ethical to appoint Dr Chua Soi Lek as a minister.

Dr. Chua was caught having sex with a woman but not his wife by a hidden camera earlier this year. Within days, he held a press conference and courageously admitted to his indiscretion and resigned from his ministerial position and went into political wilderness.

Last week, he fought back to political limelight after beating the establishment candidate for deputy Presidential office of the MCA ( the Malaysian Chinese Association), the second largest political party in the BN (the National Front), the ruling coalliation government.

As a matter of political convention, the MCA is allocated with four full ministerial positions and the MCA deputy President can legitimately, by virtue of the second most senior position in the party, ask for one of the four slots.

The debate launched by the Dr. Chua's opponent (the so-called Camp A including the sitting party President Ong Tee Keat and the losing Deputy Presidential candidate, Ong Ka Chuan, brother to former President Ong Ka Ting), has argued that someone with moral indiscretion is not fit to be elected, earlier, to the party office and now, made a minister.

The debate is coded in the classic Confucianist language, 才德, competence and ethics.

Failing to thwart Dr. Chua election to the party post, the opponent seeks to thwart Dr Chua appointment to the cabinet. Paradoxically, the anti-Dr. Chua protagonist do not renounce those who set up the hidden camera recording and who distributed them which are both despicable and illegal.

The tenet of their argument is basically that Dr. Chua's appointment, by reason of his extra-marital affair (or rather the fact that it was recorded on video), will lower the estimation of the MCA and the Chinese in the eye of the coalliation partner and the Malaysian public with a large Muslim majority .

It is poignant to recall 德才兼备 (possessing both ethics and competency) as a qualification to be a public officer in the Confucianism. Dr. Chua is portyared as wanting of ethics.

Set against this background, the question is whether there is a difference between 公德 public ethics (in this sense we may well call it the political ethics) and 私德 private morality.

All the attack on Dr.Chua is his hotel room exploit and not his competence and also his public/political ethic.

Based on the party election result, Dr. Chua's violation of private morality, the much ballyhood issue during the campaign, has not stopped him from his political comeback. The delegates have largely absolved him of his private moral indiscretion.

This in large part is a recognition that Dr. Chua has maintained a better image and widely perceived as a responsible politician taking the step to resign following the hidden camera recording. His resignation is commendable as he returns the mandate to the people to see if he will be forgiven and re-accepted.

First, he secured his spouse and his family's forgiveness.

Then, his son stood in for him, contested and won the March 8 parliamentaty election in a seat he previously held amidst what is now known as heavy nation-wide electoral losses to the MCA. This is as good as he won by proxy.

Finally, he won the tough party election last week. These three separate and related events vindicated and redeemed him personally and politically.

The result can be analysed as the MCA grassroot valuing competency and also public/political ethics as greater qualification to the party/public office. This result is also in line with the secular and meritocratic values of Chinese Malaysian.

The holier-than-thou altitude or peeping (or secretly recording) Tom behavior are not supported and I find these relieving and reassuring as a sign of political maturity in favor of competency and public/political ethis over private moral misbehaviour.

At all time, competency and public/political ethics should be held as more important requirement of holding a public office. Cronism, nepotism, corruption, abuse of power, dishonesty and racism in the Malaysia context are greater impediment to good governance.

Dr. Chua has won the party mandate to be appointed to, and the Prime Minister should exercise his prerogative to made him, a full minister.

Let me end by sharing a rarely known historical fact. One of my favorite but controversial historical figure, 曹操 Cao Cao, of the Romance of Three Kingdom's fame or notoriety, placed competency and public ethic above private morality in the selection of officers. No wonder he incurs the wrath of generation of Confucianist disciples and is portrayed in the negative light. By statictis, the peoples and the territory under the Cao's administration was superior in not just in output, living standard but also in culture and literacy. His succesors eventually united the divided China then.

Confucian endorses Barack Obama

It is so heartening to read that Barack Obama decided to visit his sicked grandmother in Hawaii at such a crucial stage of the campaign trail with the election day is barely two weeks away.

Barack has been talking about family value in his books and in his campaign trail. No one will dispute his message on family value, on tough love, that echo everywhere and relevant to everyone.

Barack walks his talk with the visit to his grandmother.

If elected the President (highly likely judging on the latest tally on poll, money and endorsement he garnered), he will be the best living exemplary for Americans to strengthen and rebuild itself from the very basic societal units - self and family.

The truth remains that no society, wherever it is, will do well if a society is filled with broken family, neglected elderly, abandoned child and selfish individual.Family is where the core of love begins and where the seed of education starts.

I like to imagine if Confucian is alive, will Barack receive his endorsement?

The tenet of Confucianism for political leadership is based on two components - ethics (德) and competence (才).

Confucian thus speak of 修身齐家, roughly the ethical component in the sense of individual's ethical conduct and familial responsiblity, and 治国平天下, roughly the competence component in the sense of competency for governance to deliver peace throughout the world.

On this tenet, there are adequate evidence of Barack fulfilling the criteria to be trusted with the American Presidential and the world leadership's responsibility.

He has ably run arguably the best Presidential campaign in history, in mobilising the largest number of volunteers and in raising the highest amount of political donation.

He has also articulated his policies much better than his opponent, with reasoned argument and compelling vision, on domestic issues from health care to education, on economic policies from alternative energy to rebuilding economy, on foreign policies from reforming the United Nation to Iraq and Afganistan.

I am confident and convinced that Confucian will give Barack the endorsement.Lastly, let's us all wish Madam Dunham well and her grandson sucessful securing the White House.

Happy Birthday Bro!

I wish you happy birthday and may you appreciate many moments of joy, love, enlightenment, well-being, courage, abundance, peace and progress each and every day in the year ahead!

HUI

The Agony of Beijing Taxi Drivers

The Beijing subway system with eight lines, 123 stations and a total of 200km coverage is quite an extensive subway system anywhere in the world major cities.

What is most impressive is that the fare is just at RMB 2 from one point to the other within the subway network (with the exception of the airport express line that charge only RMB 25). The service is affordable and mostly comfortable with the exception of the two older lines where the trains are slow and the stations are old.

I have traveled just a few occasions but I am pretty satisfied with the expanded subway service. It maybe crowded during the peak hours but the service is reliable and generally comfortable with the newer lines. Sometimes it is more convenient and time saving traveling on the subway than traveling on taxies which are again back to halting speed during the Beijing peak hours.

Having said that, I typically find myself traveling in the comfort of taxi which allows me to learn a bit of gossip and sometimes to educate the taxi drivers with my uncensored information.

I always enjoy to enlighten the taxi drivers who are nostalgic of Mao.

To mainland Chinese, it is the three years of natural calamities as opposed to the Mao's policy of the Great Leap Forward.

The massive starvation is officially attributed to climate and sometimes the withdrawal of Soviet's support. This is when I jumped in to bash Mao and assert my supposedly more objective information.

Having shared my insight, their perspective is not lost however.

It may not be scientific but many Chinese (from the taxi drivers I surveyed) are yearning for the equality of yesteryear.

The disparity of wealth has led many Chinese to be nostalgic of Mao's era even if everything then were scarce, the few things that existed were more secured. Everything now though seems to be more abundant, nothing is assured.

This is contradictory and this is the irony.

The reality (or the perception) was that during the Mao's years, the jobs were secured never mind that they didn't exist or the income was meager. The housing were allocated, the health care service and the education were provided never mind that they were rudimentary.

Under the current Chinese capitalism, the jobs, though more abundant by statistic, are less secured. The vast majority are concerned if they could keep their jobs, afford the housing, the healthcare, the education and living as a going concern.

There are greater sense of insecurity now than ever.

It is not that they are unwilling to work. Their fear is that even if they work, they might not be able to keep the job; they might not make enough money for treatment when they or their family are sick; they might not be able to afford the children's school fees.

All these happens despite the fact that they recognize they have enjoyed greater creature comforts from refrigerator to mobile phone.

Added to this sense of insecurity is that the current system appears to be unfair and exploitative of their labor.

A common complaint I heard is that the taxi drivers, on top of having to pay the police fine for violating the traffic offences, are contractually imposed a penalty to pay a further fine doubling the amount of the original fine, to the taxi company that they work for. Supposedly, the penalty is imposed to ensure better compliance with traffic regulation but the police fine itself is already punitive. Naturally, this is viewed as exploitative.

I see this as a double jeopardy and what make me uncomfortable is that this is one
among the many more grieving complaints I have heard.

Will the drivers sue against the unfair contract? All of them said they would not. The reason is that there are many more peoples lining up to take their jobs.

Such is the agony of Beijing taxi drivers and, by extension, their fellow Chinese.

Being Children - Filial Piety

My filial sentiment grows stronger especially after I become a father myself.

This is not suggesting that we are not filial or we cannot be filial without being parent ourselves.

Rather, it is much easier to identify with our parents after we live through our own parenthood experience.

********************************************************************************

Last week, my younger child was admitted to the hospital for three days and my wife stayed with him throughout that three days.

I know she was tired because she didn't sleep well that three nights.

She could have chosen to ask the domestic helper to step in. She didn't. It is her motherhood obligation. She couldn't delegate to anyone else, husband included.

I know she was worried because the virus strain my boy caught led to two casualties earlier.

She could have dismissed the chance of such possibility because the virus strain are well known and well contained if detected earlier. She couldn't. Every risk however slim is a risk to her son.

I know she was at pain as she was still nursing her wrist.

She didn't complain. The sick boy needed the motherly comfort. She lifted him up and hugged him despite the pain.

*******************************************************************************

I record this not because she is my wife or she is the mother of my children.

It is because she is a mother.

That she is our mothers.

******************************************************************************
Did you ever ask your parents how you were nursed and taken care of when you were sick as a baby or a young child?

You could have been told that you had fever for weeks; you had cough for month; you didn't sleep at nights; you cried non-stop; you might even have been admited to hospital (a very big deal in the past).

Reading in between the lines, you ought to learn the love and sacrifice they rendered to us unconditionally.

********************************************************************************
October 7 was 重阳, the double nineth festival, a day we visit the graves of our ancestors to pay our respects (not a popular practice in SEA) and also a day for us to care for and appreciate the elderly (in Taiwan especially).

This year, I lost my paternal grandmother and maternal grandfather. They were ordinary persons and definitely had their own shortcoming. Yet as grandparents, they were superb to the grandchildren, especially me, the eldest.

It is fitting to recall 祭之丰不如养之薄, better to care for our loved one with however little means we have than offering abundant sacrifice after they passed away.

I cited this quote in my primary five's essay and I hope I walk the talk as well.

Blacker October - Why?

If September is black, October now looks definitely blacker.

Following the Dow Jones plunging to 8,579 on Oct 9, the Hang Seng Index sunk to 14,796 on Oct 10, representing 39.4% and 53.7% drop from their respective historical height last October. Stock markets almost everywhere saw severe beating.

This is notwithstanding the US's USD 850 billion bail-out and several major countries coming to the rescue by hefty interest rate cut, state guarantee to bank deposits and other measures. It is obvious from the stock market performance, from Jakarta to Moscow, that the investors confidence continues to sink to new low.

To many including Francis Fukuyama, this is but evident of "the Fall of American Inc". http://www.newsweek.com/id/162401/page/1.

The current credit crisis, stemmed from financial deregulation, a key aspect of Reaganism for economic growth is now being blamed by the Main Street. Fukuyama calls it - what was once fresh ideas have hardened into hoary dogma.

Most agrees that it is obscene and inequitable that the Wall Street drew out the fat cheque during the good time and the players largely escape any responsibility (recall Lehman Brothers CEO Dick Fuld who claims "it wasn't my fault") when the time is bad. The bail-out bill now lies squarely with every helpless tax payers who mostly make disproportionate gain, if any, during the good time. No wonder, Communism has fans up to this day!

Unrestraint capitalism or indeed unfettered freedom or uncontrolled democracy are all open to exploitation. Everything has an aspect of a yin and a yang. Making the right decision in a particular condition at a particular time is both the art and the science we human race got to constant make. This time is no different.

Let's persevere in this financial meltdown! After all, what goes down will come up. Did I not say yin and yang?

Credit Crisis - 1 Oct 2008

This is a historical moment for the global economy. It is anyone's guess how long this story will run and what the ending will be.

But here are some foods for thought.

Firstly, in a time like this, I cannot think of a more independently credible, knowedgable and clearer-minded guide than Warren Buffet. This is a great interview to watch, learn from and share with others who seek to understand what is going on.

http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett

The NYTimes article below - also from October 1, 2008 - is a very good summary of what the US economy is facing.

But first, this is another article which deserves reading because it tells what the financial system, policy makers and players experienced on the days of 17 - 18 September 2008. It makes a riveting read. http://www.nytimes.com/2008/10/02/business/02crisis.html?hp

Apart from anything else, moral of the story is that it pays to have good people at the central banks. And at this time, thank goodness for Ben Benanke and Henry Paulson.

But first, this is what I learnt from the past day or so. The crux of the crisis is not the stock market but the credit market. Banks simply do not want to lend because they do not know if they will get their money back. Banks and financial institutions are pulling their credit lines from other banks creating a knock on effect.

In the past 2 weeks business and consumer credit is drying up. Qualified borrowers find their loan offers rescinded, and even then home mortgage applications for the last 2 weeks of September fell 16% from already low levels previously. Consumer credit (car loans, appliance loans, credit cards) are hard to get approved even for prime customers so people simply cannot buy even if they want to. The credit crunch is felt in car sales for September which fell 16%, 35%, 35% for GM, Toyota and Ford respectively.

More critically, businesses find their limits on overdrafts and trade credits reduced or cut. This is the time of the year when retailers stock up for the Christmas season but banks are not extending trade credits expect for the largest stores. The effects on especially the smaller businesses will be dire because without credit they cannot take delivary of inventory. For many, the only way out is to pay out of cash flow meaning they need to cut on expenses, which for most means staff retrechments.

Major retailers are reportedly cutting year end orders by 30%. Expect to see cancellations of orders to cascade and hit factories and manufacturers in China and elsewhere because the supply chain is 6-8 months long. They simply cannot unwind the orders and with their margins being so low many manufacturers will go under. Arguable, the credit crisis may eventually cause more unemployment and hardship in China than even in the US.


----------------------------------------------------------------------------------

NYTimes October 1, 2008
Economic Scene
Lesson From a Crisis: When Trust Vanishes, Worry

By DAVID LEONHARDT
In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.

All of which may be true. But there is good reason for the public’s skepticism. The experts and policy makers who so desperately want to take action have failed to tell a compelling story about why they’re so afraid.

It’s not enough to say that markets could freeze up, loans could become impossible to get and the economy could slide into its worst downturn since the Great Depression. For now, the crisis has had little effect on most Americans, beyond their 401(k) statements. So to them, the specter of a depression can sound alarmist, and the $700 billion bill that Congress voted down this week can seem like a bailout for rich scoundrels.

Mr. Bernanke and his fellow worriers need to connect the dots. They need to use their bully pulpits to teach a little lesson on the economics of a credit crisis — how A can lead to B, B to C and C to Depression.

Let’s give it a shot, then.

Why are we talking about the Depression, anyway?
Almost no economist thinks that even a terrible downturn would look like the Depression. The government has already responded more aggressively than it did in Herbert Hoover’s day. So a Depression-like contraction — a 30 percent drop in economic activity — is highly unlikely. The country is also far richer today, which means that a much smaller portion of the population is living on the edge of despair. No matter what happens, you’re not likely to see shantytowns.
But the Depression is still relevant, because the basic mechanics of how the economy might fall into a severe recession look quite similar to those that caused the Depression. In both cases, a credit crisis is at the center of the story.

At the start of the 1930s, despite everything that had happened on Wall Street, the American economy had not yet collapsed. Consumer spending and business investment were down, but not horribly so.

In late 1930, however, a rolling series of bank panics began. Investments made by the banks were going bad — or, in some cases, were rumored to be going bad — and nervous customers besieged bank branches to demand their money back. Hundreds of banks eventually closed.
Once a bank in a given town shut its doors, all the knowledge accumulated by the bank officers there effectively disappeared. Other banks weren’t nearly as willing to lend money to local businesses and residents because the loan officers at those banks didn’t know which borrowers were less reliable than they looked. Credit dried up.

“If a guy has a good investment opportunity and he can’t get the funding, he won’t do it,” Mr. Mishkin, who’s now an economics professor at Columbia, notes. “And that’s when the economy collapses.” Or, as Adam Posen, another economist, puts it, “That’s when the Depression became the Great Depression.” By 1932, consumption and investment had both collapsed, and stocks had fallen more than 80 percent from their peak.

As a young academic economist in the 1980s, Mr. Bernanke largely developed the theory that the loan officers’ lost knowledge was a crucial cause of the Depression. He referred to this lost knowledge as “informational capital.” In plain English, it means that trust vanished from the banking sector.

The same thing is happening now. Financial markets are global, not local, today, so the problem isn’t that the failure of any single bank locks individuals or businesses out of the credit markets. Instead, the nasty surprises of the last 13 months — the sort of turmoil that once would have been unthinkable — have caused an effective breakdown in informational capital. Bankers now look at longtime customers and think of that old refrain from a failed marriage: I feel like I don’t even know you.

Bear Stearns, for example, was supposed to have solid, tangible collateral standing behind some of its debts, so that certain lenders would be paid off no matter what. It didn’t, and they weren’t.
The current, more serious stage of the crisis began two weeks ago today, after the collapse of Lehman Brothers and the Fed’s takeover of the American International Group. Those events created a new level of fear. Banks cut back on making loans and instead poured money into Treasury bills, which paid almost no interest but also came with almost no risk. On the loans they did make, banks demanded higher interest rates. Over the past two weeks, rates have generally continued to rise — and these rates, not the stock market, are really what you should be watching.

The current fears can certainly seem irrational. Most households and businesses are still in fine shape, after all. So why aren’t some banks stepping into the void and taking advantage of the newly high interest rates to earn some profit?

There are two chief reasons. One is fairly basic: bankers are nervous that borrowers who look solid today may not turn out to be so solid. Think back to 1930, when the American economy seemed to be weathering the storm.

The second reason is a bit more complex. Banks own a lot of long-term assets (like your mortgage) and hold a lot of short-term debt (which is cheaper than long-term debt). To pay off this debt, they need to take out short-term loans.

In the current environment, bankers are nervous that other banks might shut them out, out of fear, and stop extending that short-term credit. This, in a nutshell, brought about Monday’s collapse of Wachovia and Glitnir Bank in Iceland. To avoid their fate, other banks are hoarding capital, instead of making seemingly profitable loans. And when capital is hoarded, further bank failures become all the more likely.

The crucial point is that a modern economy can’t function when people can’t easily get credit. It takes a while for this to become obvious, since most companies and households don’t take out big new loans every day. But it will eventually become obvious, and painfully so. Already, a lack of car loans has caused vehicle sales to fall further.

Could the current crisis lift — could banks decide they really are missing out on profitable investing opportunities — without a $700 billion government fund to relieve Wall Street of its scariest holdings? Sure. And is Congress right to fight for a workable program that’s as inexpensive and as tough on Wall Street as possible? Absolutely.

But in the end, this really isn’t about Wall Street. It’s about reducing the risk that something really bad happens. It’s about limiting the damage from the past decade’s financial excesses. Unfortunately, there is no way to accomplish that without also extending a helping hand to Wall Street. That is where our credit markets are, and we need them to start working again.
“We are facing a major national crisis,” as Meyer Mishkin’s grandson says. “To do nothing right now is to do what was done during the Great Depression.”

A Perspective of America

One of the beauty of this co-blogging business is that KY and I both live as outsiders in the most cutting edge and outward-looking metropolis on the edge of our respective continental-size countries. In observing the preoccupations of the day in our nooks, I think we can better illustrate the present realitiesof the two most powerful nations in the world.


Over one late September weekend, our family holidayed at Lake George. Lake George is a rather large lake in upstate New York, most of which is ringed by the southern reaches of the Adirondack Mountains. It reminds me of the Lake District in Lancashire although both the lakes and the mountains are somewhat larger. Around the lake are dotted with small towns, motels, resorts and hundreds of beautiful vacation homes of the American elite.


The more I observe America, the more I can understand those Amercians who believe unquestioningly in the American exceptionalism. This is a land of unimaginable plenty in the material sense, but it is also a place where common decency and civilized behavior still prevail. It is very easy for Americans to forget about the troubles of the world simply because life is kind and they have it so good.


The drive from New York to Lake George took 4 hours. We drove through endless miles of green wooded hills and pristine streams, punctuated by a small town here and there. From the open highway, one sees nature and nothing else for hours on end. There is so much space about, unoccupied, uncultivated left to the golden sunshine and to nature. The weather was such that those hills were beginning to be dotted haphazardly with dashed of the colours of autumn: red, orange, gold and amber.

When we got there, the fresh water in the lake is crystal clear. It is hard to image waves lapping about without the smell of the sea - in fact, no smell at all - but thats Lake George. And as I found kayaking up and down the coast, not a spot of garbage washed up on the shore or debris floating about, not even streaks of oil even though power boats were cruising about. Space, woods, fresh air, clean water and pleasant weather: Americans are right to think of themselves as blessed.


Out there in the rural communities, the infrastructure was clean, well-maintained and tended with pride by the local community. The people are unfailingly good-natured, law abiding and polite. In the small towns, the civic and community infrastructure very much in evident: the local library, the village notice board, the volunteer fire service, the local police (sitting by himself with a newspaper in the cafe), the flags that bedecks the homes and on the streets, the banners and decorations for halloween, the signs of the local Rotary and Lions Club and the multitude of local churches. It is like a modern day reincarnation of a Norman Rockwell print. I had the sensed that, here people still uncynically live the healthy and wholesome life. I notice that from the way parents behave with their the small children - so relaxed and so much trust in other people - this seems to be a place where one can grow up believing that the world is safe, that the living will be comfortable and life will always turn out for the better.

Life is easy too. Too easy and clogged up with stuff, stuff and more stuff. As i paddled pass the summer homes, it is easy to see 5000 sq ft homes with 4 car garages and a dock complete with a boatshed for 2 boats, 2 jet skis and numerous kayaks. In the front patios, are hot tubs and all kinds of toys. You go into the local supermarket and it is clogged with consumer excess - everything that can be made, sold and then disposed off.

Closer to home, some weeks ago, a friend of Marisa (our Philipino helper) launched a collection within her neighbourhood in Park Slope, Brooklyn for second hand clothing in aid of victims of the recent hurricane in Haiti. All it took was passing the word among fellow parents of her son's soccer team, and within days they had a whole living room 2 feet deep full of clothing. Many of them are branded and brand new. They had so much stuff that they decided to send some off for typhoon victims in the Philiipines as well. Marisa also picked up some clothes for the girls - raincoats, winter stuff, brand new shoes, jeans etc. - we ended up not having to buy any more new clothes for them for the year! This is no means a one-off. In fact, occasionally there are gathering around town where people simply leave their excess clothing - often perfectly good stuff - for others to just pick up for free. We are astounded by the world of abundance that we live in; but also bemoan the excess of it all.

I was beginning to understand why Americans are not interested in the rest of the world - its simply the sense that for all the world's troubles none of that concern them because they just seem so abstract so far away. I can also understand why for so many Americans, who never seen another modern country apart from their own, would assume that America is No.1 at everything and somehow that everyone, if given a chance, wants to be like them.

The trouble is the world is not all like that or it would simply be a good thing if all can be like that. If the whole world try to live like Americans by aping the lifestyle, the world would collapse simply because it is so wasteful that it should be seen as an abberation in human history. It would be equally mistaken for America to export their template as it isfor others to replicate their template. Make no mistake, everyone can live as well but everyone must find their own best ways to do so. Tempting as it is to copy, simply not many places in the world has the "basic conditions" to do as they do - no one has the wide spaces and resources nor at the moment: the institutions, education level and human-societal development to replicate such a lifestyle.

But what we can do is to learn from that American sense of optimism and courage to assume that things can always be better and to assume personal responsibility for making that difference in the world. Since the first time I visited America in 1992, I have always been a fan of the prevailing decency, open attitude to others and the fact that people take personal responsbility to make a positive difference to their community, that one finds in America. I am pleased to see that pretty much intact even in the metropolis of New York; where my days are often brightened by such encounters.

To celebrate those moments, I intend to begin a series of postings of "Moments from my Metropolis"soon.