Two New Sets of Rules

By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Monday, 11 October 2010, 7.20 am, 9.20 am, and 7.20 pm)

We all find satisfaction playing and watching sports and games. Certainly, what makes the sport or game more enjoyable is because it has a set of rules guiding the teams as to what can and what cannot be done.

Trade between countries is also guided by rules. The World Trade Organization (or WTO) can be considered the referee of sorts. Its role is to supervise international trade and provide a framework for resolving trade disputes.

In sports, some players will be tempted to increase their performances through drugs that have not been made illegal yet. Trading nations also behave like that. They want to increase their exports through any loophole that has not been made illegal yet.

One of these loopholes is currency manipulation. This does not fall under the WTO. This may be because throughout history, currency manipulation has been rare. The exception was in the 1930s when a period of currency manipulation occurred.

Recently, currency manipulation has been brought up and is viewed as unfair for trade. The direct way of currency manipulation is through the forex markets. The indirect way is through easy money policies. This is because low interest rates normally lead to a weaker currency.

In the past fortnight, both the US Fed and the Bank of Japan have taken steps to renew their easy money policies. The irony is that all their previous easy money policies had failed miserably. Instead, all the liquidity created has either sat in bank coffers, or lent out to the same zombie companies.

In the case of Japan, after twenty years of easy money policies and massive construction projects, the country is full of roads, bridges and tunnels which are mostly under-utilised.

Many say the Japanese government should have allowed its zombie companies to collapse. And it should have given its economy a major structural reform. Likewise, many say that the US government should have saved its zombie banks by taking control of them and restructure the economy towards the new industries.

Last weekend, the G7 ministers met in Washington to discuss currency manipulation. While new rules on this might eventually emerge, the world also needs another set of new rules to guide how finance industries behave.

Right now, the freedom and preference given to the finance industries in many advanced countries is a major obstacle. Let me illustrate.

Without rules in the game of football, what we see are just men kicking a ball around the field with no purpose. With rules, the action of two teams of players kicking the ball into each other’s net has meaning. This is one set of rules the world needs for trade.

But we also need another set of rules to guide how players behave within a team. A star football player can easily kick the ball into the net for his personal glory. But if that star player does not work with his team players to score goals, his team will not benefit.

Like the star footballer, the role of the finance industry is to allocate money to businesses. When the finance industry fulfills this role well, the whole economy succeeds. If the finance industry is given too much freedom and it looks only after its own interests, the economy suffers.

Many say this is what is dragging down both the Japanese and the US economies. Perhaps that’s why their easy money policies cannot work to benefit their economies.

So two new sets of rules are needed today. One set of rules on currency manipulation for trading nations, and one set of rules to guide the behavior of the finance industry within the economy.