Foreword by Dr Yaga Venugopal Reddy Former Governor of the Reserve Bank of India

Summary

Dr Michael Lim Mah-Hui and Dr Lim Chin sent me their latest book on the great financial crisis for comments. I was curious to know what this manuscript would add to the mass of literature and debate that is circulating at this juncture. After reading the manuscript, I am fully convinced that it is a valuable addition to the literature on the subject for several reasons.

First, the book is very lucid, easy to read and simple to understand. Second, it captures history, current context and the way forward. Third, it succinctly presents theory and focuses on policies and institutions rather than abstract thinking or anecdotes. Fourth, it gives an emerging market perspective while presenting in detail the debates on the subject in the western world, in particular the Anglo-Saxon world. Fifth, the book emphasizes the Asian point of view and it is presented in a way that captures the dynamic and evolving interrelationship between Asia and global economy. Finally, the analysis has several original elements in explaining theory and practice in public policies as well as the behaviour of financial markets.

The book analyses the causes or the origins of this crisis at three inter-related levels broadly covering economic and financial theory, financial sector practices, and macroeconomic imbalances and the international monetary system. The authors refer to the belief in Efficient Market Hypothesis that governed public policies in general and central bankers and regulators in particular as the primary cause of the crisis. I can fully endorse the prevalence of this view even in the year 2006 and early 2007. By then the underpricing of the risks in the financial markets and the dangerous level of macroeconomic imbalances had come to the fore. However, in the interactions between central bankers and market participants exploring methods by which soft landing could be engineered, market participants asserted the view that, interfering with market-determined pricing of risks would be a serious policy mistake.

It is “these same people”, as the authors describe, that pleaded and perhaps even demanded massive intervention of public policies within few months of their assertion to the contrary, once the crisis struck. The asymmetrical response of financial markets to the desirable level of public policy intervention seemed to be governed by the benefits that accrue to participants in the financial sector.