The 2008 Economic & Financial Tsunami – An Overview for the Lay Person

by Joseph K. H. Cheng, B. Soc. Sc. (Hons) HK

The present financial and economic crisis is aptly described as the Economic & Financial Tsunami of 2008 ( E&F T 2008 ). Its speed and magnitude of devastation is as overwhelming and destructive as a tsunami caused by the forces of nature. Only this time, it is totally man made.

In my humble opinion, it is clearly avoidable had there been prudent financial and fiscal management. The obvious culprits are corporate greed and incompetence on the part of the US government in allowing the crisis to have started and gone this far. Now, it is like a wild fire that has gone out of control and has spread to the four corners of the global village. Each and everyone on planet earth will be adversely affected to some extent. Not even God can change history. Therefore, it pays for the lay person who is unavoidably affected to try to understand the nature of this E&F T 2008 and to take whatever steps possible to safeguard oneself as far as possible to seek shelter from its devastating fallouts. Hopefully, all those in power will learn from their mistakes and have the wisdom and fortitude to avert total global disaster.

I will not even begin to try and bring comfort to everyone by saying that the nature of the crisis is simple. It is extremely complicated but what else can one expect since human behaviour is in the centre of the picture. This paper is intended for the general reader. It is the civic right of every citizen to have a say in any public policy that affects the entire human population. How else can the lay person take part in the public discussion on possible remedial actions to stop the advance of this tsunami unless one has a basic understanding of the principles at work ? To this end, this paper will attempt to take the lay person through a crash course in all the relevant working principles. I must emphasize that I do not purport to give any personal financial advice. Each person and each country has some particular circumstances to consider as regards specific remedial or precautionary measures that should be taken. Seek professional financial advice as and when you need it.

For the professionally trained people, this paper is just the ABC of economics and finance. As for the lay reader I hope you will find the contents useful for a basic understanding of this global crisis at hand. You should find that most principles described here are within the limit of your common sense. Anyway, my aim here is to try to highlight the connections and relevance between the various economic and financial principles with respect to different aspects of the present crisis so that the lay reader may gain some basic understanding of its nature and the possible effects of any remedial measures ( that have been taken or to be taken by government ) on the general public. Before rushing into this crash course in economics, banking and finance it is only fair for me to provide a very brief personal profile. I am a retired tax consultant who used to work in Hong Kong from 1971 to 2005. I started my career as an assessor of taxes in the Hong Kong Inland Revenue Department of the former British colonial government. I found that I was a bit too rebellious to be a civil servant. So, I went to work for Price Waterhouse & Co. , CPA instead after a few years in the Inland Revenue Department. It was valuable experience to be working on both sides of the fence ( as a government official once and in the professional and commercial fields later ). I have both the academic training and working experience in economics, accounting, auditing, taxation and business / management consultancy. I had my own practice for over 20 years from 1982 providing all the above services to some prominent clients in the fields of banking, property development, construction, manufacturing, trading, insurance and shipping. I hope you will agree that I am at least qualified to explain the working of the basic principles of the various disciplines involved in this paper.

As the present crisis is ongoing and the facts are widely reported I will assume some general knowledge of the facts such as the tsunami started in earnest since the commencement of the US sub-prime mortgage meltdown in August, 2007 Freddie Mac and Fanny Mae which account for some 50% of the US housing mortgage market between them are not even involved in the worst types of mortgages in terms of recoverability. It is the so called CDO ( Collateralized Debt Obligation ) which is a blatant attempt to evade accounting disclosure requirements that is the origin of the sub-prime meltdown. The tsunami came to a head during the past few weeks with the collapse of the giant merchant banks starting with Bear Stern followed by Lehman Brothers. The related financial field of insurance underwriters, namely, AIG ( American Insurance Group ) and big US savings banks followed suite. The wild fire has now spread to Europe where UK is the first to be hit followed closely by Germany. There is also news about the possibility of the Iceland government and even the South Korean government heading for bankruptcy. The US states of California as well as Massachuette have also sounded the warning bell. The lightning speed of propagation of this crisis is frightening. It does not come as a surprise to anyone who knows the working principles of the world economic and financial system.

To have some basic grasp of the present turmoil one needs some basic knowledge in economics, accounting, finance, banking, fiscal and monetary policies. More important still is the way these various disciplines work in unison with one another in real live scenarios. It is the subtle connection between their interaction that provides the key to the understanding of the tsunami. To avoid confusing you with technical details I will confine my discussions to the barest minimum of the theoretical basis needed to understand the issues at stake. Whenever appropriate I will explain the relevance of the particular principle involved in the situation in question. This will help you to appreciate how the principles are applied in real live situations.