THE FAILURE TO REGULATE GREED

The Philippine Star
10/06/08

So there, the much-ballyhooed $700-billion rescue package to bail out banks sinking in toxic mortgage debts has been passed and signed.

Whether this mammoth rescue package would actually avert further bank failures, cushion the U.S. and world economies from further weakness, and restore confidence in financial markets remains to be seen.

The general consensus at the moment, as presidential candidate Barrack Obama put it, is that the bailout would just put out the fire. A lot more needs to be done to bring back the sick patient to health, while at the same time pin down culprits and institute accountability.

A better picture is now emerging as to how the U.S. home mortgage sector dragged its supposedly rock-solid financial markets and even developed country economies in a tailspin, and more importantly, how regulators have allowed something like this to happen.

If there's one lesson learned out of this fiasco, it's that when it comes to money, people and their greed can't be left to their own devices, and that the more sophisticated the financial products are, the more they should be regulated.

Back to vanilla banking

The demise of structured products like the collateralized debt obligations, credit default swaps and credit linked notes almost pushes us back to the era of plain vanilla banking or the basic deposit taking and lending; more importantly, though, expect more stringent measures to be in place.

Most likely too, for a long while, we won't be seeing the careless, subprime lending that banks in the U.S. engaged in when markets were wallowing in liquidity. It’s back to rigid credit investigations for every borrower, when barely a year-and-a-half ago, U.S. banks were approving home loans to every Tom, Dick and Harry.

Now that the government stands to use up as much as $700 billion or even more of taxpayers’ money, in part by raising the amount of insured deposit to $250,000 from a hundred grand, it stands to reason that regulators will be taking their jobs more seriously.

Poor quality controls

On the other side of the world, China’s eagerness to become the world’s next economic heavyweight is also taking a toll from its laxity of quality control regulations. Battling the melamine-in-milk scourge, China now shares top spot in notoriety with the Wall Street meltdown. This, just months after the big recall of Made-in-China toys that cost Chinese exporters quite a pretty sum in losses.

There is now pressure on China to tighten its regulatory controls, which ultimately means higher cost end-products at a time when world trade is slowing down and other equally eager emerging economies are ready to wage price wars of manufactured products.

Capping the string of unfortunate scandals that increasingly is weakening its already precarious state of export prospects, China is also coming to grips with the fact that a number of its banks have substantial exposure to the toxic U.S. home loans. Triple jeopardy indeed.

The other side

If it's any consolation, the global economic weakness is damping demand and that's bringing the price of oil and other commodities down. What previously looked like runaway inflation in most countries, including the Philippines, now appears a lot more manageable.

The central bank, which will meet today to decide on monetary policy – advancing its usual Thursday schedule because Gov. Amando Tetangco will leave for the annual IMF meeting in Washington – will have to consider that inflation may have peaked at 12.5 percent in August while economic growth will probably slow to below 5 percent.

In all its three meetings starting June, the Bangko Sentral ng Pilipinas raised the benchmark overnight borrowing rate by a total of one percentage point to quell the economy’s fastest inflation in 17 years.

The NSO will report September inflation tomorrow, which Tetangco estimated to range between 11.8 and 12.7 percent.

With prospects of growth cooling from last year's three-decade high, the BSP will probably end its rate-hike cycle and resume cutting rates before the year is over to stimulate the economy next year.

Elsewhere in the region, China and Taiwan cut their policy rates last month to cushion their economies from a global downturn after credit markets continued to be tight despite the liquidity unleashed by the world's major central banks.

Somber prospect of local economy

Economic Planning Secretary Ralph Recto said that economy this year will probably grow between 4.4 and 4.9 percent as exports, which account for about 40 percent of GDP, are expected to falter due to shrinking demand from the U.S. and perhaps even neighbors like China.

The government had promised to do its part to stimulate the economy by spending more for infrastructure and social services. But this perennial pledge will probably be delivered only next year in preparation for the 2010 national elections.

As always, the Philippines' overseas nationals working as domestic helpers, nurses, I.T. engineers, seafarers, etc. will continue to save the day for the nation that remains dependent on opportunities abroad for its work force.

What is worrisome now is that employment opportunities abroad could also dry up as global markets roil from the global financial mess. Bulk of the remittances come from the U.S., and in view of the reported job cuts by American companies last September, there could be a some new human resource protection policies that will be adopted by the Americans in the coming months.

The prospects are ominous and the situation is fluid. In the meantime, all we could hope for is some extended calm before another storm.

Collegiate Champions League update

The San Sebastian College-Cavite Baycats captured the NAASU crown by outlasting the STI Olympians in game three of their best of three series, 86 to 77 last Saturday at the Makati Colseum. The Baycats are automatically in the elite “Sweet 16” of the ongoing SMART-PLDT-Champions League 2008 Philippine Collegiate Championship games. They join early qualifiers Ateneo Blue Eagles, San Beda Red Lions, De La Salle Green Archers, Jose Rizal University Heavy Bombers and the MLQU Stallions.

The NAASCU runner-up, STI Olympians and St. Claire College Caloocan Saints, are relegated to the “Wild Card” phase and will compete with other qualified teams for slots in the four zonal championships. Two zonal winners from Northern-Central Luzon, Southern Luzon, Visayas and Mindanao will advance to the FilOil Flyng V “Sweet 16” Final Challenge to be held in Manila starting November 24, 2008. 

For more details about the biggest collegiate basketball event for the year sponsored by SMART and PLDT, visit the official website, www.CollegiateChampionsLeague.net

Should you wish to share any insights, write me at Link Edge, 25th Floor, 139 Corporate Center, Valero Street, SalcedoVillage, 1227 MakatiCity. Or e-mail me at reydgamboa@yahoo.com. For a compilation of previous articles, visit www.BizlinksPhilippines.net.