American's Bank Failed Corporate Governance, then "V" Shape Economic Recovery? (PART II)

- relevant to P1, P3 of ACCA course

THE global economy is at a turning point but it will take at least another two years before a full recovery can be seen, economist Paul Krugman said. “On “V” shape economic recovery, he said it’s not going to happen this time. USA and the world cannot have an export-led recovery as the world’s economies are having serious difficultie. In addition the current collapse in world trade had debunked the earlier belief that Asia could decouple itself from the West.

Krugman, Nobel Laureate and professor of economics at Princeton University, said, “We have propped it (the banking system) up but not made it clean,” he said, adding that he was currently concerned not so much about the return to equities but the return of exuberance.

5 Lessons
Krugman, was speaking about the severe global financial crisis, five lessons can be learnt:-

a. Financial markets are prone to bubbles. The American recession caused 26 million unemployed! That is equal to Malaysia’s population. How long you think it takes to re-absorb them to workforce?
Comments: Well, Malaysian and neighbouring stock market has reached near record level, thinks its recovery is going to be tomorrow! I think not, but two years, at least!

b. The financial system is not safe. As described in earlier article. In terms of mindset and compensation, USA government seem to have forgotten the lessons very fast in view of surging bonuses prevailing again at US banks and that key decisions were still being made by “28-year-old guys” at the banks and major financial centres.
Comments: We are seeing unprecendented practice hiring Gen Y professionals to gamble on behalf of its senior management. Recent Obama Administration wants to curb banks excessive leveraging on loans and to split the highly risky banks from the conventional banks. So long as this is not done, the world of finance is only seeing the beginning of Economic Armegeddon.

c. Monetary policy cannot be used to resolve all problems with cheap money in low interest rate environment would help damaged confidence of investors and consumers to spend.
Comments: Look into any economic textbook, recession's medicine is always public spending to lead the economic confidence to invest and consume again.

d. Budget deficits are sometimes necessary but governments world wide know there is only a limit they can overspend.
Comments: see earlier article on world recession

e. Keynesian policies relating to the means to stimulate output and growth do work as a source of support.
Comments: Spot on comments. For the first time in modern history, governments coordinated to have massive spendings to stimulate trade and consumptions.

The business of banking should become boring again with the need for more regulations, although there appeared to be a lack of political will in this aspect.

Krugman does not think that public spending, at a maximum of about 4%-5% of GDP, would be large enough to drive the world economy to its next crisis, noting that the ballooning deficit in the United States was caused by structural imbalances such as healthcare costs.

Conclusion

Yes, economic recovery is nowhere in sight based on current statistical evidence. World class corporations have failed system of risk management which causes financial volatility. P1 (ACCA Public Accountant) becomes an ever more topic that all ACCA graduates-to-be should be very familiar. The world is in confidence crisis with wreaked corporate governance system. In my humble opinion, I think P1 is here to stay in ACCA syllabus or be absorbed into other papers as compulsory core topics. In my class, you will see how live companies and case studies of spectacular failed governance with the delayed governance code revision. You know, its just like the movies ending, after the bad guys are gone then only the police will come.