Two differing views on how to solve global financial crisis

PUTRAJAYA: Former prime minister Tun Dr Mahathir Mohamad and the 2003 Nobel Laureate in Economics, Professor Dr Robert F. Engle, have espoused different methods to solve the current global financial crisis.

Dr Mahathir said he was for a return to the gold standard to stabilise financial markets while Engle proposed a “counter cyclical regulatory system” at the Bridges – Dialogues Towards a Culture of Peace conference yesterday.

“In the past, the money we used was based on something that had value, now we are using pieces of paper where the value is dependent on what people say it is,” Dr Mahathir said, referring to the Bretton Woods system, set up in 1944, when fixed exchange rates were tied to gold reserves and the US dollar.

The Bretton Woods system broke down in the 1970s as industrialised countries moved to floating currencies and the influence of capital markets grew.

“Today, they say the ringgit is worth so much. Tomorrow they say it is lower some more,” Malaysia’s fourth prime minister said, referring to the 1997 Asian financial crisis.

Engle said the current crisis was not a result of foreign exchange volatility but due to the collapse of the US subprime mortgage market and the subsequent credit crunch that brought down US banking giants.

“I think we should look at a policy to tighten regulation when banks are doing well and to give more flexibility when the banking system is going through problems,” he said, referring to his “counter cyclical regulatory” approach.

In the run-up to the current crisis, Western banks had been given more flexibility during the boom period to create debt instruments as they saw fit, Engle noted.

Dr Mahathir agreed that governments needed to regulate the markets or businesses would “do whatever they think will bring them profit and not worry about the welfare of the people”.

“It is the government that has been entrusted by the people to look after their welfare, and not businesses,” he said, but acknowledged that “the government must be business friendly”.

He also said the possibility that Islamic banking could solve some of the problems of the current global crisis should not be dismissed.

The Star-Loong Tse Min