The empire of monkeys
Old Aesop knew the trick. Sometimes a well-told fable illustrates a truth more effectively than a forceful collection of facts
Greg Langley
© Richard Wilkinson
As it is with “The Tortoise and the Hare,” so is it with “The Empire of Monkeys,” newspaper columns penned for the Chinese financial magazine “Caijing” by Andrew Sheng. In his ongoing tale, clever monkeys create a derivative market for bananas.
In one episode their wheeling and dealing causes a market collapse, and in another the inevitable bailout undermines the credit rating of the kingdom. A commission sagely concludes that, “A monkey in an Armani suit is still a monkey!”
Bitterly amusing as these fables are, what is striking is that the author is one of Asia’s most highly regarded regulators. “The idea stemmed from a quote from the Governor of the Bank Negara Malaysia [Central Bank of Malaysia], who in the middle of the deposit-taking crisis in the said, ‘Never leave monkeys in charge of bananas,’” explains Andrew Sheng, the chief advisor to the China Banking Regulatory Commission.
In his columns, anger seethes below the surface. “I was upset that those in Wall Street, people who we in Asia had always looked up to, who preached integrity and professionalism and told us we suffered from crony capitalism, proved in the end to be no better than us.”
If his articles often have a sense of being written quickly from the heart, this is not true with his latest book. In From Asian to Global Financial Crisis , he offers a considered Asian regulator’s perspective on the devastating effects of unfettered finance.
The Asian Financial Crisis, Sheng argues, was a test of governance in a region as it emerged into the borderless world of large capital flows, complex derivatives and changing world order. The current crisis is a test of global governance, yet similar features are evident: excess liquidity, lax regulation, overleveraging and, notably, crony capitalism.
“For example, the Asian Crisis was the first to identify the carry trade as an issue. Once the Japanese started lowering interest rates to zero, the carry trade became fashionable,” he explains. “Until then it was only known to specialist hedge funds and investment banks. Today, even retail does it, so the resulting capital flows are much larger and on a global scale.” For Sheng, the result was that leverage could be significantly larger. The problem was that policy- makers either did not understand the complexity of the beast or were unwilling to dig into the shadow banking system (institutions that lend money but do not accept deposits and are therefore not subject to the same regulation as banks).
If you can’t identify bubbles, then what in the hell are you there for? Andrew Sheng
A sense of disappointment laces the conversation when discussing his book: disappointment with policy- makers, central figures in Wall Street, the media and with regulatory peers. Active in finance since, when he commenced working for Bank Negara Malaysia – where he eventually rose to become chief economist and assistant governor – Sheng intimately understands the pressures that “independent” central bankers face.
“Yet, the job is to be countercyclical,” he explains. “You can’t say, ‘We’ll let the bubble burst because we can’t identify it.’ One of my points in the book is if you can’t identify bubbles, then what in the hell are you there for? Your job is to make a judgment whether you like it or not – not to pick up the pieces.”
Vanity Fair and Rolling Stone – neither of which is a finance magazine.
Andrew Sheng
Chief adviser to the China Banking Regulatory Commission and board member of the Qatar Financial Centre Regulatory Authority and Sime Darby Berhad, Malaysia
Adjunct professor at the Graduate School of Economics and Management, Tsinghua University, Beijing, and the University of Malaya, Kuala Lumpur
Chairman of the Securities and Futures Commission of Hong Kong from 1 October to 30 September
senior manager, Financial Sector Development Department at the World Bank
Chaired Financial Stability Forum’s Task Force on Implementation of Standards in and from October to September ; Chairman of Technical Committee of IOSCO.
“The financial media has been very kind to the profit makers. Where has the fourth estate been? A lot of the serious issues associated with the crisis have not been debated in the media.
“It’s been said it cost executives dearly when their firms collapsed, but studies show Bear Stearns paid about $1 billion and Lehmann $1.4 billion in bonuses before they collapsed – much, much more than was paid before the crisis. If it wasn’t for a few academics following these topics, they would remain uncovered because neither the media nor the regulators are following it.”
MARKET EVENTS ARE SPONTANEOUS
As a decision-makercaught in the maelstrom of the Asian meltdown, Sheng often asked himself what more he could have done to stop it. He has since realized that market events are spontaneous. There may be conspiracies or plots trying to influence the tide, but it is the interaction amongst all parties – deliberate, calculated or random – that causes events to unfold.
“Neither the most brilliant minds nor the largest economy in the world could stop the force of the Asian Crisis, which became not just economic, but political in nature,” he decides in the first part of his book. In the ambitious second part, he looks at current events and asks if the world is addressing the structural issues or “just wrapping duct tape on the broken international order and hoping that it will still work.”
Sheng seeks to identify a path for Asia as it emerges as a force in world finance. If unfettered finance leads to instability and destruction, while extreme state intervention results in disastrous overregulation, then the answer is a “golden mean.” This is “dynamic and complex interaction and interdependence between creative disorder in the market and the rigid order of bureaucracy, and between individual freedom and social responsibility.”
Is Asia prepared to be the third financial force in a networked world where a chain of apparently harmless domestic events can be catastrophic when linked globally? Not yet. But the recent crisis is an opportunity for Asian countries to strengthen international cooperation and build capital markets.
“Yet capital markets are not created overnight. They are much more complex and volatile,” explains Sheng. “Skills need to be developed and countries need to open up. But zero interest rates are making conditions very volatile, so Asian central bankers are cautious. It means Asia is in a kind of collective (in)action trap,” he comments.
This could result in large policy mistakes for globalization as a whole, but they can be avoided. The way Asia reforms itself and prepares to undertake its role will determine the future stability and sustainability of international finance structures. If and when the next crisis occurs, he concludes, “there will be no one else for Asia to blame but ourselves.”
