Looking back on a year of tumult - BT

RARELY in economic or financial history has as much turmoil been visited upon the world in a single year as has happened during 2008. To name but a few events, we have seen the collapse of one-time blue-chip institutions like Bear Stearns and Lehman Brothers; the bailouts of others, including the insurance giant AIG, the US government-linked mortgage lenders Fannie Mae and Freddie Mac, and also household names like Citigroup, the Royal Bank of Scotland and Lloyd's Bank. Major international banks have been recapitalised with taxpayer funds and some have been effectively nationalised, which hardly anyone would have dared to predict at the start of the year. There has been wealth destruction on a scale not seen since the Great Depression; indeed, this financial crisis is believed to be the worst since the terrible 1930s - something most of us never experienced.


The US Federal Reserve, after being behind the curve in the run-up to the crisis, has gone into overdrive. It opened various lending windows, funnelling more than US$1 trillion to financial institutions, taking even toxic mortgage debt as collateral. It slashed interest rates aggressively from 4.25 per cent for the Fed funds at the start of the year, to near zero. It also adopted an unorthodox policy of quantitative easing. The US Treasury came up with a US$700 billion financial bailout package.

In the background to all this turmoil was the tension and drama of the US presidential election, which produced the first African-American winner. Early indications suggest that Barack Obama might just be a leader of vision and decisiveness, the singular silver lining amid the dark clouds that dominated 2008. The year ended with news of a mind-boggling financial fraud estimated at US$50 billion, perpetrated by one-time respected financier Bernard Madoff. It was perhaps a fittingly shocking end to an annus horribilis.

For those of us on the other side of the world from the epicentre of the storm, the financial crisis has revealed some sobering truths. One is that the idea of 'decoupling' - that Asia's economies had somehow acquired an independent dynamic of their own - was a fantasy. The Singapore economy has gone from 7.7 per cent growth in 2007 to almost certain recession, and probably negative growth in 2009. Just about every Asian economy is feeling the downdraft of the made-in-America financial crisis. Even China and India, which were assumed to be relatively insulated, have been hard hit; their stock markets have, in fact, been the worst performers in Asia this year.

The financial storm is far from over, but we have some indications what 2009 might have in store. It will be a year of global recession. But it will also be one of dramatic policy moves, including perhaps the biggest-ever economic stimulus packages in history. It will be a year of tighter financial regulation, conservative, 'back-to-basics' banking and risk-averse investing. In short, 2009 promises to be the year of the hangover after a decade of financial excess. Hopefully, it will also be the year of the recovery, however slight.