Friday, October 31, 2008

Tainted milk and eggs: What next?

Oct 31, 2008

Melamine often added to animal feed: Chinese press

BEIJING: Animal feed producers in China commonly add the industrial chemical melamine to their products to make them appear higher in protein content, state media reported yesterday.

The latest revelation may be an indication that the scope of the country's latest food safety scandal could extend beyond milk and eggs.

The practice of mixing melamine into animal feed is an 'open secret' in the industry, the Nanfang Daily reported in an article that was republished on the websites of the official Xinhua News Agency and the People's Daily.

Publicising such a problem is rare in the Chinese media and appears to be a tacit admission by China's central government that melamine contamination is widespread.

The news comes after four brands of Chinese eggs were found to be tainted with melamine. Agriculture officials say the contamination could have been due to tainted feed given to hens.

The discovery of the tainted eggs followed on the heels of a similar crisis involving compromised dairy products that landed tens of thousands of children in the hospital and was linked to the deaths of four infants in China.

The Ministry of Health said on Wednesday that 2,390 children remained hospitalised after drinking tainted milk.

That scandal was triggered by dairy suppliers who added melamine, a chemical used to make plastics and fertiliser, to watered-down milk in order to pass quality control tests and make the product appear rich in protein.

Health experts say ingesting a small amount of melamine poses no danger, but in larger doses, it can cause kidney stones and lead to kidney failure.

Chemical plants used to pay companies to treat and dispose of excess melamine. But about five years ago, they began selling it to manufacturers who repackaged it as 'protein powder', the Nanfang Daily report said, citing an unnamed chemical industry expert.

Melamine is high in nitrogen, and most protein tests zoom in on nitrogen levels. The inexpensive powder was first used to give the impression of higher protein levels in aquatic feed, then later in feed for livestock and poultry, the report said.

'The effect far more exceeds the milk powder scandal,' the newspaper said.

In the past week, melamine has been discovered in at least four brands of Chinese eggs. No one has fallen ill yet.

China's leading egg processor, Dalian Hanwei Enterprise Group, was among the companies found to have tainted eggs, which were first identified by Hong Kong food safety regulators.

The company's website said that, besides the domestic and Hong Kong markets, its egg products are exported to Japan and countries in South-east Asia.

The government in Dalian, in the north-eastern Liaoning province, has said it was first alerted to the problem of melamine-tainted eggs on Sept 27. But it did not explain the delay in reporting the problem.

Chinese media alleged that the Liaoning authorities kept quiet about the melamine-tainted eggs for weeks and ordered a media blackout to cover up the problem.

The milk scandal was similarly covered up for months before it emerged last month.

The animal sanitation inspection department of Liaoning suspected the tainted Hanwei eggs came from chicken feed and ordered an investigation into the Mingxing Feed Company as early as Oct 6, the Beijing News said.

Police have now taken into custody the manager of the Mingxing Feed Company, said the report, citing the manager of the Hanwei Group.

Earlier this week, the Hong Kong government also detected the chemical in two other brands of Chinese eggs.

Hong Kong's government said yesterday it is in talks with Chinese officials over a proposal to certify eggs from the mainland as melamine-free.


[So going back to the tainted milk - was the milk tainted by the middle men diluting the milk and adding melamine to up the "protein" score, or was the melamine fed to cows as tainted feed and which ended up in the milk? Or both? But as cows would eat grass or grain, these feed do not need "protein enrichment", so the original theory may be true - middle men tainted the milk.

I wonder what happens if a melamine tainted egg were fertilised? Do we end up with a pokemon? Literally a pocket monster?]

We're all prey to dumb fashion trends

Oct 31, 2008

By Andy Ho
THE educated folk who invested in DBS High Notes 5 or Lehman Minibonds are upset. The banks and brokerages are saying this group is not among the 'vulnerable', like the elderly and less-educated, who deserve to be compensated.

According to the Department of Statistics, only 10 per cent of households in Singapore earn $200,000 or more annually. We might assume these are the 'non-vulnerables'. The average household income is about $65,000. We might then assume those earning that or less are among the 'vulnerables'.

Middle-aged, vulnerable wage earners would have taken years to save $50,000 - the sum many of them sank into the doomed products. Their children may just be about hitting that tertiary education age and its associated expenses. These workers have little time left to replenish their savings.

Younger professionals may have lost savings that would have gone towards that first Housing Board flat. And the recession may see many lose their jobs too.

These investors, including the non-vulnerable, may now feel like mugs. But the industry too should have known what precisely it was hawking right there in the bank foyer - complex, opaque, highly risky financial products.

Financial institutions say investors should take responsibility for themselves. But not every investor can understand these complex mathematical creations or the arcane legalese of their prospectuses. Even someone with an MBA or a PhD in finance might be flummoxed.

The industry bandies about terms such as 'risk' and 'returns' to rationalise why 'sophisticated investors' - the non-vulnerables - need not be compensated. But the fact of the matter is, few can make perfectly rational investment decisions consistently - and that includes financial professionals too. We are all subject to what are called 'cognitive biases'. Psychologist Daniel Kahneman won the Nobel Prize in economics in 2002 for his seminal work in this area of behavioural finance.

Cognitive biases can hit everyone equally - the non-vulnerable as much as the vulnerable investor. Sophisticated institutional investors such as mutual fund managers, insurers, actuaries and accountants are equally handicapped.

Examples of cognitive biases include:

# Over-confidence - we attribute higher earnings to companies that consistently understate their predicted earnings;

# Over-optimism - we underestimate the likelihood of fraud, often because of our faith in regulatory oversight;

# The 'availability heuristic' - or simply put, the tendency to pay more attention to recent trends, like the long bull run, and less to low-likelihood but high-risk possibilities, like the Lehman collapse;

# Susceptibility to fads - from the tulip bulb mania of the 16th century to the securitisation mania of the 21st. History is chock-full of examples of our susceptibility to dumb fashion.

Such biases can lead investors into making peremptory decisions, even when a lot is at stake. They don't maximise their use of all available information. Instead, they just 'satisfice' - or 'satisfy' plus 'suffice'- so their eventual choices are often sub-optimal. The rational actor model that economics assumes as the norm - that individuals always maximise their interests - doesn't always, or even frequently, hold true in real life.

The same goes for the assumption that capital markets are efficient, and thus always price fairly. Or that market competition ensures that banks that mis-sell financial products will pay the price in having less business. All such assumptions assume the universality of the rational actor model.

The financial industry can and does exploit our cognitive biases. This would be true even when investors in complex instruments do make money. As a wit once said: 'Not all biases apply at all times and in all settings to all investors.'

Research shows that the way consumers buy financial products is greatly influenced by not just product type, but who sells them. I buy a can of tuna at the corner store, consume it and have no further relationship with the store. Not so with retail financial products. I must be confident the bank I purchased the product from would still be around five years hence, when the instrument matures.

So the bank that sells me a complex product will continue to have a relationship with me. Even before I agree to a deal, I must trust and have confidence in the bank. I depend on its reputation.

But we now see that banks may have engaged in predatory selling, or mis-selling. This can happen everywhere. As a 2002 report by the British regulator, the Financial Services Authority, noted, there can be 'serious discrepancies between consumers' recollections of discussing risk and what financial advisers say'. A 2004 study in the International Journal of Bank Marketing confirmed that expert and lay investors can perceive financial risks in significantly different ways.

The bulk of customers buying complex financial products are repeat passive buyers, according to a study published in the Journal of Services Marketing last year. Most of them feel they don't know how to tell a good financial product from a bad one. Faced with a proliferation of products, they can't compare them effectively. They fall back instead on the reputations of their banks.

Thus, it is not surprising that most buyers of complex instruments are passive investors, unlikely to switch banks. As such, at most times banks have little incentive to address such cognitive biases, in themselves or in their customers - until, of course, a major crisis strikes and they have angry investors on their hands.

Like now.

That is when what is called 'reputational risk' kicks in: In order to salvage their reputations and preserve future business, banks may do their utmost to assuage angry investors.

What about the individual investor? How can he cope with his cognitive biases? The short answer is, not very well. To save face, many investors may in fact prevent themselves from learning from their own mistakes. They may attribute their losses to chance rather than to defective decision-making. Gains, of course, are the product of their superlative investment skills.

Given our inherent incapacity to calculate risks precisely, perhaps only those who can bear the potential financial losses - like the top 10 per cent of households - should buy complex financial products. The rest of us may want to stick with fixed deposits and government securities. And next time, be wary of financial institutions bearing gifts.

Thursday, October 30, 2008

Fed swap line for S'pore

Oct 30, 2008

THE US Federal Reserve on Wednesday announced temporary 'swap' lines of credit with central banks in Brazil, Mexico, South Korea and Singapore to help those countries ease a credit squeeze.

The US central bank said it would be providing of up to US$30 billion (S$44.6 billion) in liquidity to each of the banks, Banco Central do Brasil, Banco de Mexico, the Bank of Korea, and the Monetary Authority of Singapore.

The actions come 'in response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies,' the Fed said.

'These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining US dollar funding in fundamentally sound and well managed economies.'

In a statement released on Thursday morning, MAS said the move is a 'precautionary measure' and 'part of coordinated central bank actions' to reassure financial institutions in Singapore, most of which have global operations, that they have access to US dollar liquidity.'

'MAS judges that it is not necessary to draw on the swap facility at this time, but will continually assess the need as global conditions develop.'

The swap facility has been authorised through 30 April next year.

The MAS emphasised that there is 'sufficient liquidity... to meet the needs of the banking system here,' and that it 'stands ready to take measures necessary to strengthen the orderly functioning of financial markets and the stability of the financial system in Singapore.'

On Tuesday, the Fed extended a temporary US$15 billion currency line to New Zealand's central bank to help it boost lending and unblock the global credit squeeze.

The FOMC has previously authorised such arrangements with the European Central Bank, the Bank of England, the Bank of Japan and the central banks of Australia, Canada, Denmark, Norway, Sweden and Switzerland.

[A comment online asked if Singapore was in trouble if we needed such a safety line extended to us. We would seem to be lumped together with Mexico and Brazil. Stable economies? How come M'sia, Indonesia are not extended this safety line. But South Korea was also extended the safety line. The US has also had arrangements with NZ, England, Australia, Canada, Denmark, Norway, Sweden, Japan, Switzerland and the European Central Bank. So we are in mixed if not good company. I too was concerned about the image or message this would send out, but I think this is a precautionary measure that is intended to assure and inspire confidence. Still, pessimists will read what they want out of this.]

Wednesday, October 29, 2008

'13 keys' predict winner

Oct 29, 2008

WASHINGTON - US HISTORY professor Allan Lichtman believes he has the secret to predicting who will win the vote in any US presidential election and he has the record since 1984 to prove it.

'The 13 Keys to the White House' - a system he developed 27 years ago with mathematician Volodia Keilis-Borok - has proven right in every White House race since then, he told AFP.

The '13 keys' are a set of variables which will tell whether the presidency will change party hands in the quadrennial contest, which takes place this year on November 4.

The true-or-false statements assess the conditions facing the incumbent party - this year President George W. Bush's Republicans - on issues such as the candidate's standing, the party's legislative power, security and the economy, and the level of charisma of the two major party candidates.

Using these metrics, Dr Lichtman, who lectures on the history of US presidential elections at American University in Washington, called the 2008 race two and a half years ago.

Before Mr Barack Obama was even in the running, he told Foresight magazine in February 2006 that the Democrats would retake the White House.

'I could see the winds of change were blowing, based on the keys,' he said.

'Long before the nomination contest unfolded, the Democrats could take a name out of a phone book and still win.' For the party holding the presidency to lose it, Dr Lichtman says, six or more of the 13 keys have to be false.

In early 2006, Mr Bush and the Republicans had eight falses. Today, Dr Lichtman said, there are 'at least' eight falses. To him, Republican candidate Senator John McCain hasn't had a chance since as far back as 2005.

The keys give no weight to the candidate's vice-presidential running mate, how his wife looks, or how the campaign goes.

'The basic theory behind the whole system is that American elections are basically a verdict on the performance of the party holding the White House,' Dr Lichtman said.

'The basic thesis is it is governing, not campaigning, that counts. It's why you can make these predictions before you even know who the nominees are.'

For the outgoing Bush administration, Dr Lichtman counts nine false keys spelling failure on November 4 for the Republicans:

1: After midterm elections, the incumbent party holds more seats in the House of Representatives than it did after the previous midterm elections. False.

2: There was no serious contest for the incumbent party nomination. True.

3: The incumbent party candidate is the current president. False.

4: There is no significant third-party or independent campaign. True.

5: The economy is not in recession during the campaign: Technically true, but Dr Lichtman counts this as a false because of the deep financial crisis.

6: Real per-capita economic growth during the current president's term equals or exceeds mean growth during the previous two terms. False.

7: The incumbent government brings about major changes in national policy that improve the people's lives. False.

8: There is no sustained social unrest during the term. True.

9: The incumbent administration is untainted by major scandal. True.

10: The incumbent administration suffers no major failure in foreign or military affairs. False.

11: The incumbent administration achieves a major success in foreign or military affairs. False.

12: The incumbent-party candidate is charismatic or a national hero. False - Dr Lichtman says 'John McCain... is a national hero in the sense he performed heroically in a war, but to win that key you have to be a leader in war like (1953-61 president Dwight) Eisenhower.'

13: The challenging-party candidate is not charismatic or a national hero. False.

Dr Lichtman acknowledges that as an African-American, Mr Obama's candidacy is 'an unprecedented situation' in US presidential showdowns.

However, he said, 2008 will resemble 1980. Under Democratic president Jimmy Carter, who lost the race to Mr Ronald Reagan, 'You had a bad economy, difficulties in foreign affairs, with Iran hostages crisis, the invasion of Afghanistan by the Soviets, the boycott of the Olympics.

'The same thing with Bush. You have a got a bad economy and you have difficulties in foreign affairs with the ongoing, unresolved war.'

Using the 13 keys, he is also willing to predict the size of victory over Mr McCain. 'I predicted two and one-half years ago an eight-point margin. It could be pretty close (to that), maybe bigger.' -- AFP

Which credit products are suited to the masses?

Oct 29, 2008

By Oliver Chen & Anand Srinivasan

FOR many investors in Singapore, the current financial crisis has been magnified by its impact on the structured credit products that were issued by several financial institutions in Singapore during the past few years. While only a few of these investment products have suffered forced redemptions at a fraction of their face value, all the products in the category have gained attention.

Some of the products that have been in the news include High Notes, Pinnacle Notes, Jubilee Notes and Minibonds. They fall in the general category of what are referred to as 'first to default credit-linked notes'.

What exactly does that mean? Let's start from the simplest possible instrument - a bond. Bond issuers pay an interest rate or coupon that depends on two factors: the likelihood of bankruptcy and the recovery that is expected if bankruptcy does occur. Issuers that are more risky will have to pay a higher interest rate to induce people to invest in their bonds.

Credit-linked notes are similar to bonds in that the note investors are lending the face value to the note issuer in return for regular interest payments and the return of the face value of the note at maturity. As with a bond, a note with a higher likelihood of default or a lower expected recovery in the event of default will need to offer a higher interest rate. However, there is an important difference in the nature of the risks assumed by investors in bonds and those in credit-linked notes.

A first to default credit-linked note will reference several different firms. If any of those referenced firms experiences a credit event, including bankruptcy, the note is synthetically structured so that it will have a forced redemption where the proceeds paid on redemption will depend on the recovery rate of the bond of the defaulting referenced firm. If the value of the bond was 10 per cent of face value on the date of bankruptcy, typically the investor would lose 90 per cent of his investment.

For an investor in a first to default note, the relevant probability of default is the probability that any one of the referenced firms will default before the maturity of the note. Unlike a typical portfolio where having a larger number of issuers will lower the impact of a given issuer's default on the investor's return, having a greater number of issuers in a first to default credit-linked note increases the likelihood of default.

Take the example of High Notes 5, a first to default note. Lehman's bankruptcy has rendered the investment worthless. In contrast, a diversified bond portfolio that had invested in Lehman and the same firms as in High Notes 5 would not be greatly impacted by Lehman's bankruptcy. If the portfolio had 10 per cent of its money invested in Lehman, and the recovery rate of Lehman bonds was 10 per cent of face value, the loss to the portfolio would be around 9 per cent, one tenth of the loss as compared to a credit-linked note investor.

With several of the note issues, their pricing was further complicated by the fact that the money borrowed from the note investors was in turn used to purchase underlying securities consisting of other credit-linked notes. Such credit-linked notes are even more complicated than first to default notes, and so there are still other risks to consider.

In the note issues that we have examined, the firms that are referenced for the first to default structure are clearly stated in advertisements. However, a general description of the structure of the notes and the risks of the underlying securities was found only on much more detailed reading. These products would indeed be difficult for the average investor to understand.

Even pricing the first to default structured note would require assessing the probabilities of default and the possible recovery rates for each of the reference entities. Taking into account changes in value of the underlying securities would further complicate matters.

So why were these complicated products issued? On one side, investors were looking for larger coupons relative to the 2 per cent available on a typical certificate of deposit. And in the low interest rate environment which prevailed before mid-2007, risks needed to be magnified in order to obtain attractive coupons.

These notes were issued in part so financial institutions could obtain insurance against the first default in the referenced firms. For example, although Lehman did not issue the Minibonds, they obtained insurance against default of the referenced firms because Lehman was the swap counterparty and would obtain a payment if that first default occurs. The payment would come from the principal of the note investors. The note investors were in fact providing insurance in this structure.

One could argue that retail investors invest in equity-based unit trusts all the time, which, as we have seen in recent days, can have downside risks comparable to the credit-linked note. Does the unit trust investor look into the prospects of each company the unit trust invests in?

But that is not a valid comparison. An investor in a unit trust is told the policy and investment style of the unit trust. These give a clear understanding of the risks involved. Also, the impact of any one firm on the value of the unit trust will be small, unlike in first to default notes where the value is critically dependent on each of the referenced firms.

A key consideration in deciding whether such structured products should be marketed to retail investors should be whether the risks involved can be readily understood. Some structured products, whose risks are very difficult to understand, may never be suitable for retail investors. Having a regulatory framework that mandates clear and transparent disclosure of risks would prevent a recurrence of what we are witnessing, while at the same time allow the market for structured products to develop in a sustainable manner.

Dr Chen is Director of the Master of Science in Financial Engineering programme at the NUS Risk Management Institute. Dr Srinivasan is an Associate Professor of Finance at the NUS Business School. The views expressed here are personal and cannot be construed as financial advice.

Speculative bubbles and murky theories

Oct 29, 2008

By Caroline Baum
THREE months ago, the world was running out of oil. Seriously. I kid you not. Everywhere you turned, you heard whispers that the day of petroleum reckoning was at hand.

Now there is too much oil, prodding the Organisation of Petroleum Exporting Countries (Opec) to cut production targets for the first time in two years. Last week, Opec, confronted with the halving of oil prices since July, announced a 1.5 million barrel-a-day cut in output.

World markets greeted the news of reduced oil supply by pushing prices down further. Crude oil fell US$3.69 a barrel last Friday to US$64.15. Then on Monday, oil dropped a further 93 US cents to US$63.22, a 17-month low.

How quickly things change. Or do they?

All speculative bubbles have a kernel of truth behind them to justify their existence. This time around it was China and India. These emerging Asian giants were gobbling up all the commodities the world could produce to fuel their rapid industrialisation.

It wasn't that the story was untrue; it was just old. Growing global demand probably was the reason for the gradual rise in oil prices from US$20 a barrel to US$40 earlier in the decade, and even to US$60 by mid-2005.

It was the moon shot to US$147 that took on a life, and a litany, of its own. Emerging nations didn't start gobbling up crude, coal and copper all of a sudden in the middle of last year.

Yet analysts on TV and in print told us with a straight face that the doubling in oil prices from July last year to July this year was a result of fundamental demand, not speculative buying or investors, including pension funds, 'diversifying' into 'alternative investments' in search of 'uncorrelated returns'. (That sounds a lot better than admitting you were suckered into buying what was going up and are now stuck with a pile of stuff that no one wants.)

'It happens in every market,' says Mr Michael Aronstein, president of Marketfield Asset Management in New York. 'Once it goes up an enormous amount, creating unfathomable wealth for the fortunate participants, someone makes an ex-post case as to why we are only at a beginning and it's not too late to get in.' This advice is 'generally formulated by someone who has a vested interest in selling the stuff', he says.

By the early 1980s, following two oil shocks in the previous decade, the running crude commentary went something like this: Oil prices couldn't go down because they were controlled by a cartel (Opec). Banks extended credit to the Oil Patch based on - you guessed it - a belief that the underlying asset couldn't go down. When prices plunged to about US$11 a barrel in 1986, that myth went down with them.

The spike in crude oil earlier this year had the support of the popular theory of 'peak oil'. In a 2005 book, Twilight In The Desert: The Coming Saudi Oil Shock And The World Economy, investment banker Matthew Simmons argued that oil production by Saudi Arabia, the world's largest producer, is 'at or near peak sustainable volume' and likely to decline in the foreseeable future.

But just a few years before the peak-oil theory was hot, the world was 'Drowning In Oil', according to the Economist magazine's March 6, 1999, cover story. Oil was trading at US$13.50 a barrel at the time. 'We may be heading for US$5,' the Economist predicted. 'Consumers everywhere will rejoice at the prospect of cheap, plentiful oil for the foreseeable future.'

Only, oil prices took off after that and never looked back till recently.

Like the world of fashion, trends in markets come and go. Oil is a limited, albeit vast, resource. At some point in the future, we probably will run out of petroleum, at least as we know it.

Man's ingenuity is equally vast. When the time comes, given all the tax incentives that will be thrown in the direction of alternative energy, I have full confidence the world will not return to travel by horse and buggy.

The silliness that accompanies speculative bubbles isn't to be outdone by what passes for economic analysis. It's just over three months since commodities began their sharp, swift descent, and already the nonsense is starting: Lower oil prices are going to boost consumer demand.

Whoa! The price of oil (and other raw materials) is falling because of a cutback in demand, both actual and expected. Expressed as a graph, the demand curve for oil has shifted back, to the left. Consumers demand less energy (petrol, heating oil) at any given price than they did before. To say that lower prices will stimulate demand, a widely held misconception, confuses a movement along the demand curve (lower price, higher quantity) with a shift back in the curve (lower price, lower quantity).

Why this is such a hard concept to understand, I'm not sure. People imbue oil prices with all kinds of mystical powers. They see a falling price and treat it as a cause, not an effect.

That oil prices are falling in the face of Opec's announced production cuts - a reduction in supply would tend to raise the price, not lower it - suggests that demand is falling even faster than Opec can reduce supply.

That won't boost demand, but who knows? Maybe it will help recapitalise the banks!


Power cut causes 'baby boom'

Oct 29, 2008

THE HAGUE - A SMALL Dutch community has recorded a 44 per cent rise in baby births nine months after a power cut plunged its 23,000 inhabitants into darkness for two days, a spokesman said on Tuesday.

In December last year, the blades of an Apache helicopter accidentally severed the high voltage cables providing electricity to the nine villages that make up the municipality of Maasdriel in the east of the country.

During the ensuing 50 hours of darkness, many inhabitants sought mid-winter hospitality in other towns, 'but some found heat among themselves,' town spokesman Annelies van Eijkeren told AFP.

There were 26 babies born in Maasdriel in September - a 44 per cent rise on last year's 18, she added.

While authorities may want to boost the population, 'we are not envisaging doing so by cutting the power', said Ms Van Eijkeren. -- AFP

[This phenomenon is already well-documented. There are of course 2 lessons to be learnt from this. One is less distractions at night could mean more attraction between couples. The second lesson may explain why poor families have more kids. No electricity, or no TV, or no radio/music means less distractions and more interaction leading to more babies. So perhaps it makes more sense to provide cheap electricity to the poor to help control their "growth"?]

Turning copper slag to sand

Oct 29, 2008

New plant will recycle used slag to make concrete.

By Jessica Cheam

SINGAPORE'S building industry is taking steps to green itself, with the opening on Wednesday of a new plant which will recycle used copper slag to make concrete.

The plant by Geocycle Singapore can process 360,000 tonnes of collected copper slag from local shipyards, which will be a substitute for sand in making ready-mixed concrete.

The Sungei Kadut facility will also function as a research and development centre for alternative and eco-friendly building materials.

It is a joint venture firm by cement maker Holcim Singapore and local recycling firm ecoWise, which have equal stakes.

[Okay. sounds like a good idea. Helps solve the sand shortage. BUT... isn't copper a good conductor of electricity, and isn't Singapore prone to heavy thunderstorms with lots of lightning strikes?

So houses built with copper-sand - can they do without lightning rods? What happens when the house is struck by lightning? Will the house become a "Faraday cage" and block phone signals?]

Tuesday, October 28, 2008

Small-chested cannot drive?

Oct 28, 2008

HANOI (Vietnam) - VIETNAM is considering banning small-chested drivers from its roads - a proposal that has provoked widespread disbelief in this nation of slight people.

The Ministry of Health recently recommended that people whose chests measure fewer than 28 inches should be prohibited from driving motorbikes - as would those who are too short or too thin.

The proposal is part of an exhaustive list of new criteria the ministry has come up with to ensure that Vietnam's drivers are in good health. As news of the plan hit the media this week, Vietnamese expressed incredulity.

'It's ridiculous,' said Mr Tran Thi Phuong, 38, a Hanoi insurance agent. 'It's absurd.'

'The new proposals are very funny, but many Vietnamese people could become the victim of this joke,' said Mr Le Quang Minh, 31, a Hanoi stockbroker. 'Many Vietnamese women have small chests. I have many friends who won't meet these criteria.'

It was unclear how the ministry established its size guidelines or why it believes that small people make bad drivers. An official there declined to comment.

The average Vietnamese man is 5 feet, 4 inchestall and weighs 121 pounds (55 kilograms). The average Vietnamese woman is 5 feet, 1 inch tall and weighs 103 pounds.

Statistics on average chest size were unavailable.

The draft, which must be approved by the central government to become law, would also prohibit people from driving motorbikes if they suffer from array of health conditions like enlarged livers or sinusitis. The rules would cover the vast majority of Vietnam's 20 million motorbikes. It would not apply to drivers of cars or trucks.

Motorbikes account for more than 90 per cent of the vehicles on Vietnam's chaotic roads, which are among the world's most dangerous.

Nearly 13,000 road deaths were recorded last year, and Vietnam has one of the world's highest rates per 100,000, according to the World Health Organisation. The majority of accidents involve motorbikes, which many workers in the nation of 85 million need to do their jobs.

When Mr Nguyen Van Tai, a motorbike taxi driver, heard about the proposal, he immediately had his chest measured. Much to his relief, Mr Tai beat the chest limit by 3 inches.

'A lot of people in my home village are small,' said Mr Tai, 46.

'Many in my generation were poor and suffered from malnutrition. And now the Ministry of Health wants to stop us from driving to work.'

Vietnamese bloggers have been poking fun at the plan, envisioning traffic police with tape measures eagerly pulling over female drivers to measure their chests.

'From now on, padded bras will be best-sellers,' said Ms Bo Cu Hung, a popular Ho Chi Minh City blogger.

Newspapers were inundated with letters on Tuesday from concerned readers who worried that they wouldn't measure up.

'I'm not heavy enough, what am I going to do?' Ms Le Thu Huong asked in a letter to Tuoi Tre newspaper. 'And what about people whose chests are small? Most of them are too poor to afford breast implants!' -- AP

Public policy planning - no easy matter

Oct 27, 2008

Winners of the Public Policy Challenge 2008 tackled tough issues and gained unique insights in the process
A RECENT public policy competition organised by the Public Service Division gave undergraduates an insider's glimpse into the intricacies of policymaking.

The three winning teams topped 100 groups of four each from the National University of Singapore (NUS), the Nanyang Technological University (NTU) and Singapore Management University.

Here are the winners' stories:

Putting theory into practice

DURING our undergraduate economic studies, we got to learn about the formulation of government policies and their effects on both the economic and societal front, which led to us developing a keen interest in the topic.

Thus driven, we wanted to apply what we learnt at the Public Policy Challenge.

Our key recommendations included adjusting the criteria of the Workfare Income Supplement, which is effective in reducing the income gap without distorting the work incentive.

The cut-off salary rate for WIS should also be pegged to inflation to account for the loss of real income in the high inflationary environment.

The team also recommended a 'reverse' workfare bonus assessment scheme, which takes into account factors such as dependency ratio when assessing the amount of workfare bonus an individual gets.

It was a fulfilling experience.

It was tough considering multiple issues, but that has enabled us to better understand certain unpopular policy choices that the Singapore Government has had to make.

The competition itself has helped us gain a deeper appreciation of the complexities and challenges of public policymaking, especially in the context of a small and open Singapore.

First-prize winners, Team PVP, from NUS, are: Economics majors Ho Kim Cheong and Khaw Kaimin (second year); and Lim Po Ben and Melvyn Yan Jinglin (third year).

Infinite demands, finite resources

OUR recommendations, among many others, included long-term modifications to the health-related policies, and increasing stability by sourcing Singapore's food supply through contract farming.

This, after considering the infinite demands of the population versus finite reources, risks, rewards and policy-tradeoffs, and after research on countries' policy models, journals, among others.

Our take?

A policymaker cannot please all.

He or she needs strong foresight. Also, policies must receive consistent constructive feedback and monitoring during development, because it is a highly delicate balancing process, fraught with uncertainty and many ethical considerations.

Failures can lead to waste of resources, loss of public confidence, or worse, hurt Singapore's long-term interests.

Such work takes a whole dedicated team. This brought home the impressive work of the civil sector - its integration of various ministerial functions to commit to broad uniform goals.

Good work, Singapore!

Second-prize winners, Team Quintessential, from NTU, are: Cherrie Ng, (third-year business major), Isaac Chua (third-year accountancy major), Catherine Ng (third-year accountancy major) and Sok Hourng (third-year business major).

Aerial view of policymaking

NO SLEEP, mounting anxiety, interpersonal conflict and nerve-racking presentations - surreal yet strangely intriguing.

We recommended greater commitment to small and medium-sized enterprises as we hoped to root them to Singapore.

We also wanted to modify the existing Community Involvement Programme to allow students a choice of which beneficiaries to help, allowing them to develop a greater sense of connection with their beneficiaries and promote the spirit of volunteerism.

We encountered one revelation: all policies, no matter how thoughtfully framed, are bound to affect other sectors of society, sometimes adversely.

The competition, it seemed, turned out to be a unique opportunity to gain an aerial view of policymaking, while being fun.

Third-prize winners, Team one-sixty-five, from NUS are: Neo Ru Bin (fourth-year political science major), Sharon Roberts (fourth-year sociology major), and Lye Kit Wan and Valerie Tan (fourth-year geography majors).

Sunday, October 26, 2008

New, sounder system will emerge

Oct 25, 2008

Former Federal Reserve chairman Alan Greenspan testified before a US congressional committee on Thursday on the financial crisis. We carry an edited excerpt of his prepared statement.

WE ARE in the midst of a once-in-a century credit tsunami. Central banks and governments are being required to take unprecedented measures.

In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences. This crisis, however, has turned out to be much broader than anything I could have imagined. It has morphed from one gripped by liquidity restraints to one in which fears of insolvency are now paramount.

Given the financial damage, I cannot see how we can avoid a significant rise in layoffs and unemployment. Households are attempting to adjust, as best they can, to a rapid contraction in credit, threats to retirement funds and increased job insecurity. All of this implies a marked retrenchment of consumer spending as households divert an increasing part of their incomes to replenish depleted assets.

A necessary condition for this crisis to end is a stabilisation of home prices in the United States. They will stabilise and clarify the level of equity in US homes, the ultimate collateral support for much of the world's mortgage-backed securities.

At a minimum, stabilisation of home prices is still many months in the future. But when it arrives, the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk. Broken market ties among banks, pension and hedge funds and all types of non-financial businesses will become re-established and our complex global economy will move forward.

Between then and now, however, to avoid severe retrenchment, banks and other financial intermediaries will need the support that only the substitution of sovereign credit for private credit can bestow. The US$700 billion (S$1 trillion) Troubled Assets Relief Programme is adequate to serve that need. Indeed the impact is already being felt. Yield spreads are narrowing.

As I wrote last March, those of us who have looked to the self-interest of lending institutions to protect shareholders' equity are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets' state of balance. If it fails, as occurred this year, market stability is undermined.

What went wrong with global economic policies that had worked so effectively for nearly four decades? The breakdown has been most apparent in the securitisation of home mortgages. The evidence strongly suggests that without the excess demand from securitisers, sub-prime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults far fewer.

But sub-prime mortgages pooled and sold as securities became subject to explosive demand from investors around the world. These mortgage-backed securities, being 'sub-prime', were originally offered at what appeared to be exceptionally high risk-adjusted market interest rates. But with US home prices still rising, delinquency and foreclosure rates were deceptively modest. To the most sophisticated investors in the world, the securities were wrongly viewed as a 'steal'.

The consequent surge in global demand for US sub-prime securities, supported by unrealistically positive rating designations by credit agencies, was the core of the problem. Demand became so aggressive that too many securitisers and lenders were able to create and sell mortgage-backed securities so quickly that they never put their shareholders' capital at risk and hence did not have the incentive to evaluate the credit quality of what they were selling.

It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets.

This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today.

When markets eventually trashed the credit agencies' rosy ratings in August last year, a blanket of uncertainty descended on the investment community. Doubt was indiscriminately cast on the pricing of securities that had any taint of sub-prime backing.

There are regulatory changes that this breakdown of competitive markets requires in order to return to stability. It is important to remember, however, that whatever regulatory changes are made, they will pale in comparison to the change already evident in today's markets. Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.

The financial landscape that will greet the end of the crisis will be far different from the one that entered it little more than a year ago. Investors, chastened, will be exceptionally cautious. Structured investment vehicles and a myriad of other exotic financial instruments are not now or ever likely to find willing investors. Regrettably, also on that list are sub-prime mortgages, the market for which has virtually disappeared. Home and small business ownership are vital commitments to a community. We should seek ways to re-establish a more sustainable sub-prime mortgage market.

This crisis will pass, and America will re-emerge with a far sounder financial system.

Blue chips wilt, as STI plunges 8.3%

Oct 25, 2008

Regional sell-down sees index suffer 4th biggest one-day points drop ever

By Goh Eng Yeow

THE financial tsunami of the century slammed into Asian markets yesterday, leaving a frightening trail of destruction in its wake.

Singapore's benchmark Straits Times Index (STI) plunged 8.3 per cent or 145.39 points - its fourth biggest one-day points drop in history - to a five-year low of 1,600.28.

'The uniformity of the regional selldown says it all. It is like a going-out sale. Everything's up for grabs,' said a trader.

The trigger for the sell-down was the plummeting Dow Jones and S&P 500 futures indexes, which lost as much as 10 per cent each before trading was temporarily halted.

Elsewhere, Tokyo plunged 9.6 per cent, Hong Kong fell 8.3 per cent and Seoul collapsed 10.6 per cent.

The panic sell-off then spread to Europe where London, Paris and Frankfurt fell by 8 to 10 per cent each.

Even oil was badly hit with crude prices plunging 6.4 per cent to US$63.50 a barrel - the lowest level in nearly two years. And gold - a traditional safe haven in troubled times - was down 5 per cent to US$714.70 (S$1,072) an ounce.

This prompted talks that some big hedge funds were in serious financial difficulties, bleeding heavily from investor redemptions and margin calls from anxious bankers as share prices dived.

Their sell-down was reflected in the strengthening of the Japanese currency. They have been making huge purchases of the yen and selling other currencies to repay their massive yen loans.

The Singapore dollar fell 4.6 per cent against the yen, bringing its total loss for the week to 12.8 per cent.

Hardest hit on the local bourse were the blue chips, which had escaped the recent maulings relatively unscathed.

United Overseas Bank plunged $1.72, or 12.5 per cent, to $12.08, while OCBC Bank was down 61 cents, or 11.1 per cent, to $4.88. DBS Group Holdings was down a smaller but still painful 8.6 per cent, or 94 cents, to $10.04.

Even cash-rich firms were hit. Singapore Airlines, which sits on $6.1 billion of cash, fell $1.22, or 10.4 per cent, to $10.52. Sembcorp Marine, which has a $1 billion war chest, lost 13 cents, or 9.6 per cent, to $1.23.

But some traders said the sell-down had reached the point of madness, as solid firms such as SIA, DBS and Fraser & Neave were sold down to way below break-up value. They urged investors to take heart as blue chips, the bedrock of Singapore's economy, are here to stay.

It will be business as usual at F&N, SIA, UOB and DBS next week, even though their share prices have taken a battering. Firms such as ComfortDelgro and SMRT will be ferrying hundreds of thousands of passengers as usual, whether there is a financial crisis or not.

The local blue chips had also learnt from the hard knocks in previous crises like the Asian financial crisis in 1998.

Those who kept the faith might find themselves richly rewarded, as blue chips come charging back stronger than ever, when the financial storm passes.

[Too bad I don't have the cash to invest in blue chips. I would pick them up if I could. The market is mad. From irrational exuberance, to panicked pessimism. The problem lies with the short term investors. They invest only for the short term so in the short term there are no good news. But rationally, in the long term, not every stock is going to go bust. Not every business are going to be equally unstable. But irrationality cannot be explained or countered. I wonder if the STI will fall to 1200 like the anonymous stock punter said in a street interview.]

20 more products found tainted with melamine

Oct 25, 2008

Julie's products banned; Malaysia-made Khong Guan items also affected
By Tessa Wong
MELAMINE has been found in 20 more food products, making it the biggest batch of items discovered by the Agri-Food and Veterinary Authority (AVA) to contain the potentially harmful chemical.

They include well-known products such as Lotte Koala biscuits and Julie's crackers.

Three of them are from China while 17 are from Malaysia, making this also the first time that non-China products available here have been found to be tainted.

Also among them were Khong Guan biscuits made in Malaysia. Khong Guan biscuits made in Singapore are still safe to eat, as well as other biscuits made here, the AVA said.

Two of the China-made products, the Lotte Koala's March Cocoa Chocolate Biscuit and Hello Kitty Strawberry Cream Filled Biscuit, should have been removed from shelves by now.

The third, an unbranded non-dairy creamer meant for re-export and never sold in stores or used in food production here, has been sealed in the manufacturer's warehouse.

On Sept 19, the AVA banned all China dairy and other products which may contain China dairy, such as confectionery.

The made-in-Malaysia tainted items, which comprise 12 Julie's products and five other brands, are to be withdrawn immediately from shelves.

The AVA has also imposed a ban on all Julie's products. Test results for other Malaysia-imported biscuits have proven that they are safe to eat for now.

The AVA has urged those who bought the tainted products not to consume them.

It has said that the levels of melamine in the products are low. For example, an adult weighing 60kg would have to eat 378 pieces of Julie's Golden Kaka Crackers every day of his life to be in any danger.

Melamine, a chemical more commonly found in plastic, has been at the centre of a worldwide food scandal which originated in China.

It was added to milk to artificially boost its protein content, and has since caused four infant deaths in China and thousands of others to fall ill with kidney-related sicknesses.

Dozens of places including Hong Kong, Canada, France and India have pulled China dairy products as a result.

As of yesterday, over 3,200 types of milk and milk products, chocolates, biscuits, non-dairy creamers and other products have been taken in for analysis.

The number of tainted items here has now more than doubled, from 13 to 33. They include ice-cream bars, milk candy, flavoured milk and crackers.

Woman kills 'avatar-hubby'

Oct 25, 2008

TOKYO: A 43-year-old piano teacher was so angry about her sudden divorce from her online husband that she logged on and killed his digital persona, police said.

She used his identification and password to log on to the popular interactive game MapleStory to carry out the virtual murder in mid-May, a police official in northern Sapporo city said on condition of anonymity, citing department policy.

'I was suddenly divorced, without a word of warning. That made me so angry,' the official quoted her as telling investigators and admitting to the act.

The woman had not plotted any revenge in the real world, the official said. She was charged with illegally accessing a computer and manipulating electronic data, police said. If convicted, she could face a prison term of up to five years or a fine of up to US$5,000 (S$7,500).

As in Second Life in the United States, players in MapleStory raise and manipulate digital images called avatars that represent themselves, while engaging in relationships and social activities and fighting against monsters and other obstacles.

The woman used login information she obtained from the 33-year-old office worker when their characters were happily married, and killed his online character. The man complained to police when he discovered that his beloved avatar was dead.

The woman was arrested on Wednesday and was taken across the country, travelling 1,000km from her home in southern Miyazaki prefecture, to be detained in Sapporo where the man lives, the official said.

The police official said he did not know if she was married in the real world.

In recent years, the obsession by some people over virtual lives has had consequences in the real world.

In August, a woman was charged in Delaware in the United States with plotting the real-life abduction of a boyfriend she met through Second Life.

Virtual games are popular in Japan, and Second Life has drawn a fair number of Japanese participants. They rank third by nationality among users, after Americans and Brazilians.


[Crime of the future.]

Tuesdays are special for 50+ at POSB

Oct 25, 2008

By Elizabeth Wilmot

POSB branches are designating a special counter dedicated to customers aged 50 and above for the first three hours of business every Tuesday.

The initiative, which starts next week, is termed '50+ Tuesdays' and will apply at all 49 branches.

Customers will be served snacks and drinks as they wait and magnifying glass bookmarks will also be given out.

'I think it's a step in the right direction. It makes us feel secure with our money despite the financial turmoil,' said Mr Kambarudin Ibrahim, a 52-year-old technician who has been banking with POSB for 45 years. 'When the bank does something like this, it's a booster for our confidence.'

Mr Kiew Mee Chean, a 60-year-old who gives freelance tuition to primary and secondary school students, agreed: 'It's good and very convenient and I don't have to queue. I am also very happy and comfortable with the staff here.'

POSB will also offer its '50+ Fixed Deposits' scheme, which rewards customers based on age, not the amount placed with the bank.

For a six- to nine-month fixed deposit tenor, a person aged between 50 and 59 years can get an interest rate of 0.850 per cent. Those 60 and above can get 0.855 per cent.

Customers can choose varying tenors of six to nine months, 10 to 11 months, 12 months, 18 months or 24 months. The minimum sum is $10,000.

POSB managing director Davy Wee said: 'We appreciate the support of many generations of Singaporeans who have been with POSB through the years.

'We also want to honour grandparents, who have been taking care of the family and keeping it closely knit. We will continually look for meaningful ways to show how much we value this group of customers.'


Rethink S'pore economic growth model, says don

Oct 25, 2008

SINGAPORE should relook its economic growth model in an era of tighter government regulation and multilateral oversight that could evolve in the aftermath of the global financial crisis.

Professor Linda Lim from the Ross School of Business, University of Michigan, told the Singapore Economic Policy Conference yesterday that the growth model that has served Singapore may be out of place in a changed environment.

Prof Lim said the growth strategy - the 'EDB (Economic Development Board) model of give them a tax break and they will come' - has both tried to do too much and achieved too little in terms of delivering high and secure incomes and living standards.

'We've 40 years of savings and repressed consumption, so do we throw it at UBS and Citigroup and lose 60 per cent of the value, or do we use it for ourselves?' said Prof Lim, a Singaporean and a frequent contributor to The Straits Times.

Instead of letting the state make big bets on a few major, capital-intensive, projects dependent on foreign capital, labour and skills in which they have no intrinsic comparative advantage, it might be worthwhile to consider releasing capital and talent to local entrepreneurs, she said.

These people can innovate and create value in smaller but nimbler locally rooted enterprises, she added.

Prof Lim said that a national government, for example, should not use domestic savings to create employment disproportionately for foreigners simply in order to claim success in establishing a particular sector of its choosing that may not be validated by underlying market forces.

Singapore, she said, can become a 'global model' for environmentally-friendly buildings and lifestyle.

Other clusters of 'regionally integrated' economic activities might be in the creative fields of traditional and modern Asian and Western arts and culture.

Another cluster is social and health services in, for example, developing policies, systems, products and services for an ageing population, Prof Lim said.

'Don't think of yourself as an outpost of a declining empire, or a second Shanghai or a second Boston. Why not be a first Singapore?' she told the audience of economists and academics.


[I would like to see more local entrepreneurs. Unfortunately, true entrepreneurs are few and far between. The ones we get are usually those who jump on pearl bubble tea, sushi counters, papa roti, peanut pancake, and other fads of the day. Besides Qian Hu, Creative, and Hyflux no other entrepreneur springs to mind. And Creative hasn't had a new big thing for a while. ]

Talent won't flow smoothly

Oct 25, 2008

By Lee Siew Hua

CULTURAL barriers do not come down easily in Asia, and for this reason, Minister Mentor Lee Kuan Yew believes talent will not flow smoothly across borders any time soon.

To illustrate, MM Lee shared his long-time observations of China and India, saying: 'You can take a Chinese or an Indian, bring them to America and, as a minority in the American milieu, he will begin to absorb the American ethos.

'But you bring a few Americans to China or India and you think you can spread this ethos into India and China, you're dead wrong.'

He was speaking at an hour-long dialogue yesterday that capped the three-day Singapore Human Capital Summit. It was attended by about 700 international business leaders and human resource specialists.

Moderator Narayan Pant, Insead's dean of executive education, had brought up a lingering concern that Asia's cultural differences are a challenge to incoming top talent, who need to behave differently in diverse parts of Asia to succeed.

'Do you see that changing?' Professor Pant asked. 'Is talent going to become even more fungible than before because cultural barriers to success go down?'

Mr Lee's reply: 'I don't think that's possible because our group of people do not change so readily.'

The theme at the dialogue was Building Competitiveness: Harnessing Strategic People Trends In Asia. Nine questions were posed by Prof Pant and the audience, ranging from leadership to the depth of the recession.

MM Lee also noted that missionaries sent to China and India in the past converted an 'infinitesimal' number in China and India - both ancient civilisations with their own beliefs.

Cultural barriers are a 'constant concern' for Singapore, which has opened its doors to foreigners.

'We have a population that's already attuned to the Singapore way of doing things. They don't rush. They accept certain norms of behaviour.

'If we've more foreigners than Singaporeans, then the Singaporeans will become like the foreigners, and we lose our basic attributes. We'll be down the spiral.'

That is why a core of Singaporeans is needed - a case he had made in July when he disclosed his own comfort level is for 65 per cent of the population to be born-and-bred Singaporeans.

Yesterday, he pointed out that the Republic will have to bring in foreigners at a rate where 'they imbibe our values'.

At the very top tier of migrants and Singaporeans, it does not matter. 'People lead different lives...They've got their own pleasure centres.'

But at the mid-level, where Singaporeans and foreigners live and work cheek by jowl, 'it is important the Singaporeans outnumber the migrants'.

MM Lee said that the Chinese will never become non-Chinese, and neither will the Indians be non-Indians. The same goes for the Malays, Thais or other groups.

But put small groups of them in America, scatter them, and they become like the Americans, he observed.

'Only an A-Team will do'

Oct 25, 2008

First-class leaders needed to face challenges ahead

By Kor Kian Beng

IS THERE a need for a new type of leadership to steer Singapore into the future? Or will what has worked in the past continue to work in the future?

These questions flitted through 41-year-old Jonas Ang's mind as he sat through a dialogue at the Human Capital Summit with Minister Mentor Lee Kuan Yew yesterday.

The human resource director decided to pose them to the man most responsible for building modern Singapore.

Mr Lee's immediate response: 'That's a very pertinent and deep question which I've asked myself.'

He said the Singaporeans of today have higher aspirations and are better educated than in the past, but that has also led some to believe that they know better than the Cabinet ministers.

'You can see it in the letters to the press, which isn't a bad thing provided they understand that they may not be right, because the ministers aren't stupid,' he said.

Changing times notwithstanding, Singapore must continue to have an A-Team of leaders in place, he added.

He said: 'If we field a B-Team, we are in trouble. We've got to have an A-Team. I don't care whether it's the PAP (People's Action Party) or any other party.

'You need first-class people with good minds, a sense of obligation to do a good job for the people and the ability to execute. That's an A-Team.'

How is an A-Team picked? MM Lee gave a peek into the process.

First, potential leaders undergo rigorous selection tests. They are then put through at least two five-year terms before they get to higher office, he said. 'So we know that they got what it takes.'

A type of leader that Singaporeans must guard against is the glib speaker who cannot perform.

Said MM Lee: 'That you can talk plausibly doesn't mean you can perform effectively. They're two different qualities. A good politician must be able to do both.'

One reason for the stringent criteria for future Singaporean leaders is the competition the country faces from up-and-coming economies like China and India, he said.

Still, there is something very much on the side of future Singapore leaders.

This is the Singapore system, characterised by traits like the rule of law, transparency, fair play and meritocracy, he said.

India and China will take at least 20 to 50 years to catch up with Singapore in this aspect, he believes.

Canadian and Singapore PR Edouard Merette, who has lived here for 12 years, agreed with MM Lee.

The peaceful, safe and efficient environment here is one reason why his company, Aon Consulting, decided to set up its regional headquarters and a research centre here.

Said Mr Merette, Aon Consulting's CEO for Asia-Pacific: 'Singapore is a modern society in a Third World area. You can give compliments only to Mr Lee's leadership.'

Why the ILO changed its mind

Oct 25, 2008

S'pore has proven that its tripartite approach to labour ties works: MM

By Goh Chin Lian

THE International Labour Organisation (ILO) used to say Singapore was taking the wrong tack with how its unions operated. It has now changed its view.

It even encourages trade unions from developing countries to learn about Singapore's tripartite approach to industrial relations, Minister Mentor Lee Kuan Yew said last night.

He was speaking to participants of the Singapore Human Capital Summit, where he was asked by Mr Md Mosleh Uddin, Secretary of Bangladesh's Ministry of Establishment, for advice on dealing with unions.

Responding, Mr Lee said ILO representatives used to tell Singapore that the way the unions were run was wrong.

'You must have unions that confront employers, hard bargaining, then out of that comes maximum benefits for the employee,' he recalled.

Having started out in his career as a lawyer representing unions in negotiations, Mr Lee said he understood what unions wanted.

When Singapore left Malaysia in 1965 and was bereft of a hinterland, it faced two options.

It could continue with a climate of strikes, sit-ins and riots carried out by the mainly communist-controlled unions, and perish.

Or it could, as it did, seek to survive by making itself useful to the developed countries of the world.

This was done through several measures: restoring to employers their right to hire and fire; using a secret ballot to decide whether to go on strike; having disputes which involved essential services settled by arbitration; and ensuring fair arbitration.

'So over the years, we had unions working together with the Government and working in negotiations with employers in a tripartite fashion called the National Wages Council,' he said.

The council makes yearly recommendations after reviewing the economy's performance.

But Singapore's approach is not easy to duplicate, said Mr Lee.

'It was a stroke of destiny that created this condition, and if we do not keep this sense of equity, it will be lost.'

It means that employers have to not only give unions a fair deal but also ensure that they make sufficient returns for their business and shareholders.

The Government's role is to 'give everybody a fair bite' through good housing, education and health services.

'They are heavily subsidised, so you can be a taxi driver's son or a hawker's son, you will not be denied healthy living conditions,' he said.

'How you perform is up to you - your motivation, your willingness to put in the effort to learn, to acquire knowledge and skills and to be useful to the economy. And that's how we began.'

Mr Lee noted that a United Nations Habitat report yesterday cited Singapore as being the only city in the world not to have slums. He said this was also the result of a deliberate effort from the outset.

'If we have slums, we will have a lot of dispossessed people who get alienated and finally become rebellious.'

S'pore lauded as slum-free city

Oct 25, 2008

By Shobana Kesava

SINGAPORE is the only city in the world without slums, a new report by the United Nations Habitat has found.

The director of UN Habitat's monitoring and research division said the achievement was one that should be studied and, if possible, replicated in other cities.

'There is about 6 per cent slums in more developed countries, so to have zero incidence is an achievement worth celebrating,' said Professor Banji Oyeyinka.

The world organisation released its findings yesterday in cities, including Singapore, to coincide with the 63rd anniversary of the UN.

The report studied factors that contributed to harmonious urbanisation in 245 cities which provided data to UN Habitat.

In Asia, where half the population lives in cities, a third live in slums, the bi-annual State of the World's Cities 2008/2009 report said.

These were defined as areas where there was overcrowding, a lack of safe drinking water, sanitation, durable housing materials and rights over tenure.

Prof Banji said Singapore showed how long-term planning worked to achieve success in slum elimination.

A quarter of Singapore's population lived as squatters or in slums in 1959, with as many as 200 people living in a shophouse before the Government stepped in to build public housing. Over 44,000 flats were ready in 1964.

Asked how much time was necessary for a concerted effort to eliminate slums, Prof Banji said it would depend: 'Just for provision of clean water throughout a city, it would need 10 years of consistently and effectively applied policies.'

For the world to understand the best methods to eliminate such pools of disease and poverty, he invited researchers studying cities to collaborate with UN Habitat. He also invited non-government organisations and universities to send their data.

The Centre for Liveable Cities, Singapore, set up by the National Development Ministry and Ministry for the Environment and Water Resources in June to enhance Singapore's expertise in urban development, is interested in collaboration.

Its director Andrew Tan said: 'We want to learn the best practices of other cities, like Japan's responsible communities, which take care of the cleanliness of their own environment.'

About 50 researchers, analysts and policymakers attended the launch.

The UN Habitat's next report will be released in 2010.

500 protest lost savings

Oct 25, 2008

The rally at Speaker's Corner, the third so far, was led by former NTUC Income chief Tan Kin Lian.

By Gracia Chiang

WELL-EDUCATED, English-speaking investors flocked to Speakers' Corner on Saturday to make their frustrations heard.

For the third week in a row, about 500 investors gathered in Hong Lim Park eager to find out how they can seek redress for Lehman-linked financial products they claim were mis-sold to them.

Organised by former chief executive officer of insurer NTUC Income Tan Kin Lian, the rally was intended for those who had sunk their money into such products to band together and exchange suggestions.

Unlike the previous two Saturday rallies which saw mostly Mandarin-speaking and older investors, many who showed up on Saturday evening were those who did not fall into the 'vulnerable' group which financial institutions have said they would focus on when compensating investors.

Following calls from the Monetary Authority of Singapore (MAS) for priority to be given to the 'highly vulnerable' investors, including the elderly, retired and less educated, DBS Bank, Maybank and Hong Leong Finance said last week that they would be fast-tracking such cases.

Those who don't fall into this group are now complaining of being sidelined.

At the rally on Saturday, Mr Tan and 30 other volunteers handed out 1,000 forms for investors to fill in. They are asked to fill in information like whether they were led to believe there was a guarantee on their investment.

He said the forms would make it easier for them to lodge formal claims with their financial institution.

He is also starting a fourth petition, this time urging MAS to find a collective solution if mis-selling is found instead of having financial institutions compensate investors on a case-by-case basis.

'It's taking so long and there are so many people who are distrustful of the process. They say, 'If I say the wrong thing, I'll get less,'' said Mr Tan, referring to institutions holding individual evaluations with clients.

He also encouraged investors to band together and request for an open forum with the institution that sold them the product.

[Comment: You can't help but wonder whose fault is it. The Bank for selling the product, the "relationship manager" for pushing the product, the "investors" for buying the product. The sad truth is that no one is to be blamed (except for the devious minds that came up with products). The banks were selling the products because they believed it was a solid product (and paid well). The relationship managers sold the products because they got a good deal and the banks said it was a solid product. And the investors bought because they believed what they were told about the product. If there was mis-selling, it was because of the misunderstanding as to the nature of the product, and to its inherent risks. Can the banks reimburse these investors for their loss? I guess it depends on what was their sales pitch to the investors. If the banks had failed to understand the products they were selling, then they have a responsibility to their customers.]

Friday, October 24, 2008

Look into better care of the dying

Oct 23, 2008

By Andy Ho
THE authorities are promoting Advance Medical Directives, or AMDs. They want us to understand our right to refuse life-sustaining therapies, even if doing so results in death. That is passive euthanasia.

Last week, Health Minister Khaw Boon Wan suggested we might even have to consider legalising active euthanasia - presumably for the terminally ill who are mentally competent.

As no survey to gauge public opinion on this subject has been conducted, we don't know how much support there is for these proposals. But we know this much from the United States: There was considerable public anger over news that doctors had allegedly euthanised some patients who could not be evacuated during Hurricane Katrina.

So far, fewer than 10,000 people in Singapore have signed an AMD in the 11 years it has been available. It is repeatedly asserted that the slow uptake is because a doctor's signature is also required. But it could well be that few want a right that ends all rights, literally.

Active euthanasia is unlike, say, organ trading. That was welcome by some as it can save lives. To give the right to end all rights, however, is a different matter altogether. Active euthanasia cannot be legal unless there is real support for it.

So no less than a national survey to ascertain attitudes will do. Such a survey should avoid the methodological pitfalls of a recent Hong Kong study. That study is instructive since it was done in another former British colony that is also highly urbanised, materialistic, pragmatic and predominantly Chinese.

In a 2005 survey of 618 members of the public and 1,197 physicians published in Death Studies, researchers from the City University of Hong Kong reported that the public - especially older folk - were generally in favour of active euthanasia and 'non-voluntary passive euthanasia', which presumably means not resuscitating terminally ill patients, who had not signed an AMD, at the point of death. The public was neutral about withdrawing life support for the 'comatose', presumably those in a persistent vegetative state.

By contrast, Hong Kong physicians were neutral about 'non-voluntary passive euthanasia' but favoured withdrawing life support for the 'comatose'. However, they were dead set against active euthanasia - not surprising, since all Western-trained physicians swear to never take their patients' lives.

We cannot assume that the attitudes in Singapore would be similar. Aside from using terms like 'non-voluntary passive euthanasia' and 'comatose' without elaboration, the Hong Kong researchers had also translated euthanasia as an le si, which means 'a comfortable death'.

This alone might have biased survey responses by casting euthanasia in a favourable light. After all, an le si is redolent of zhong sen an si, a well-loved Chinese saying that means 'to value life with respect, yet face death with equanimity'.

Mr Khaw stressed that the sanctity of life must be respected. No one disagrees. But the question is which options would do that best. His suggestion for us to mull over active euthanasia may well have short-circuited the debate because it posed a false choice between prolonged suffering and taking one's life, pronto. Instead, taking better care of the dying is an important alternative that lies in between those equally distasteful choices.

Sound public policy must be based on empirical facts about, above all, how good our palliative care of pain and depression in the terminally ill is. Much has been said about palliating physical pain in these patients better but little about alleviating their depression.

Having to deal with progressive debilitation, such patients are naturally depressed. Treating that depression can strengthen their resolve to try to cope with life instead of ending it.

The suicidal, whether terminally ill or not, have similar thought patterns. In The Savage God: A Study Of Suicide, the poet Alfred Alvarez wrote evocatively: 'Once a man decides to take his own life, he enters a shut-off, impregnable but wholly convincing world where every detail fits and each incident reinforces his decision.

'An...expected letter which doesn't arrive, the wrong voice on the telephone, the wrong knock at the door... - all seem charged with special meaning; they all contribute. The world of suicide is superstitious, full of omens.'

The suicidal could, likewise, perceive a physician's willingness and availability to assist in suicide as affirming his decision to end it all. In fact, the terminally ill who are suicidal may be looking for a different kind of affirmation.

Physical pain aside, these people also experience 'existential suffering'. As they lose their roles in society and see their own personalities disintegrating in a downward spiral, they come to fear having to burden their family.

If so, it does not appear very compassionate for a doctor to prescribe lethal drugs for such a patient to take his own life. The compassionate doctor should instead assure such an individual that his remaining days are still meaningful and he would be around to help him through his last days.

Only as we know more about the process of dying can we evaluate what responses would be the most humane. While there is much we don't know yet, one thing is sure: Much more money must be devoted to, and more doctors trained in, palliative care.

We have only four hospices, all run by voluntary welfare organisations, which helped 1,200 patients last year. There were another 3,200 patients receiving home-hospice services. Over half of nursing home inmates are sent to hospitals to die. Many may also be dying (badly) in these homes, not hospices.

Yet just $5 million in subsidies was available last year for hospice care. Much more must be done - and done soon - before the Government tables active euthanasia for public debate.

Safeguarding Singapore's reserves

Oct 23, 2008

How did Singapore accumulate its reserves? Why is the Government spending more of it? Why should we be prudent? Prime Minister Lee Hsien Loong explained in Parliament on Tuesday.
Striking a balance between present and future needs

THESE reserves are a major resource for Singapore. They give people confidence that Singapore is able to cope with anything that may come its way. They are our nest egg and insurance for a rainy day. Even during tumultuous times like now, nobody has any doubt that we can weather the crisis.

Imagine if we did not have these reserves. Would anybody have taken us seriously if the Government had then guaranteed all the bank deposits in Singapore? Guarantee using what?

It's taken us more than 30 years to build up the reserves. We started accumulating in the 1970s. There was a favourable external environment that allowed Singapore to grow strongly year after year. We had a young population, we did not need high social spending, health care was a small proportion of our annual expenditure. The Government could and did adopt prudent and conservative fiscal policies. We ran budget surpluses over many years.

We collected the surpluses, we invested them carefully, they became our reserves. At first, the Monetary Authority of Singapore (MAS) managed them. But when the reserves grew larger than what MAS needed to protect the Singapore dollar, Dr Goh Keng Swee decided to create a separate organisation - the Government of Singapore Investment Corporation (GIC) - dedicated solely to managing the reserves for long-term growth.

GIC was the forerunner of today's sovereign wealth funds - not quite the first in the world but among the first. It began with two employees: the managing director and his secretary. It now has about 1,000 people working for it.

Besides GIC, we also built up government-linked companies: DBS, SIA, Sembawang, Keppel and so on. As they grew, we transferred them over to Temasek Holdings to be managed commercially. The ministries, we decided, should not be running companies.

So now we have two investment organisations: GIC and Temasek, both highly regarded around the world for their competence, their integrity, their track record. They pursue sustainable returns over the long term and they avoid excessive risk-taking for short-term gains.

As our reserves grew, we became conscious about the need to protect them. We saw other countries become bankrupt because of corruption, incompetence or populist measures. We understood the nature of electoral politics. There are strong pressures to spend more. Every election could be an auction of populist policies to spend the reserves.

The first generation of Singapore's leaders and voters had gone through life-and-death struggles and got out of poverty. We could rely on the Government's fiscal prudence and the people's good judgment to safeguard our reserves - to save, work, earn, not spend, relax, enjoy. But for the long term, we knew we had to institutionalise safeguards in the system, otherwise we would be in trouble.

We took the first step in 1991 when we amended the Constitution to create the elected president. The elected president has a number of functions but protecting the reserves is one of the most important. The first big move we took was to protect the principal sum of the reserves. Past reserves, all those accumulated by previous governments, that is locked up. What the present government accumulates, it can spend. But we allowed the present government to spend the dividend and interest income from past reserves.

It was a simple but not perfect approach. We were not putting aside part of the income to grow the nest egg. Also, when we said investment income, it was only interest and dividends, it didn't include capital gains or losses. And we didn't take inflation into account.

We debated for several years how to refine the balance between providing for present needs and building up for the future. Should we lock up some proportion of the net investment income (NII)? The question was hotly debated in the 1990s.

Then president Ong Teng Cheong had been part of these discussions when he was in the Cabinet. When he became president, he was in favour of changing the Constitution to lock up 50 per cent of the NII. But the government was cautious. We studied this for several years and eventually decided on a 50-50 split. We implemented the new rule in 2001 because we could see the pressures for more social spending.

So we went from 100 per cent to 50 per cent of NII. But we were not yet ready to change the interest and dividends framework. We continued to study how we could improve the system. We looked at other governments, like Hong Kong and Norway. We studied the Ivy League universities in the United States with huge endowments. They have robust and sophisticated spending rules to preserve the value of their endowments and generate a stable sustainable income flow year after year.

We were able to pick the brains of some of the people who operate these endowments. But we had to fit the ideas into the Singapore context. There were three things we had to consider:

First, economically, we needed a sound formula to overcome the inadequacies of the present system. Second, politically, we needed a simple and fair system which Singaporeans could understand and support - and most importantly, help withstand political pressures to spend more. And third, constitutionally, we needed a scheme which would fit into our system of checks and balances, where the authority is split between Parliament, which approves the money, the Government, which decides what it wants to spend on, and the President, who has custodial powers and can say no.

Finally, after many iterations, the result is this constitutional amendment, which has the President's support. This amendment retains the principle of safeguarding 50 per cent of our gains as past reserves. But it sets an important new basis for calculating the net investment returns. The key phrase here is 'long-term expected real returns'. Every word in the phrase means something.

Scheme designed to prevent casual squandering

THE net effect of this rule change is that it would allow us to draw somewhat more than under the old formula. But we need to be careful how we spend it.

Broadly, the additional money ought to be spent on investments in our future: infrastructure, education, R&D, increasing competitiveness, reducing direct taxes. We're going to draw a steady amount (from the reserves), so even in down years these long-term programmes can be funded.

But I should caution that our reserves are not a limitless resource. If you think that we're doing this because we just want more money, that's exactly what we're frightened about. That's the mindset against which this whole scheme is designed to protect, to prevent such casual, wrong-headed squandering of hard- earned reserves. Once gone, it's finished.

That is why when I proposed changing the NII formula two years ago, I also proposed raising the GST from 5 per cent to 7 per cent to fund increased social expenditure: health care, Workfare, help for the low-income and elderly. Social spending is something which is ongoing that the people ought to pay for. But investment in the future, that is something that can come from transforming the financial reserves into capabilities to generate new reserves. It's not a hard distinction.

We always must take a long-term view. Right now, the financial system globally is under severe stress. The problems will take more than a few months to clear - at least a year, quite possibly longer.

Singapore cannot avoid the fallout. Our economy is competitive, our banks are sound, but we are linked to the world. As Stephen Roach said: 'You either believe in globalisation or you believe in decoupling. You cannot be globalised and decoupled.' We are globalised; we are not decoupled; we have to be prepared for a rough time.

We are preparing measures to help businesses reduce costs, lighten the burdens of households, especially low-income households, and help workers tide over the downturn.

This is quite a different outlook from the one we had when we decided to make this constitutional amendment in 2006. Growth in 2006 was more than 8 per cent, the markets were booming, investments were doing brilliantly. The formula we have come up with has to work in both circumstances.

Supposing we had spent all the investment income in a good year. What would happen in bad years when returns may well be negative? Thus, our spending (of the reserves) will be based on long-term expected returns. In good years, spend less than what we actually earn, put aside more for the future. In bad years, try to preserve the value of our investments but draw on our accumulated surpluses at a prudent rate.

We didn't time the constitutional amendment to deal with this downturn. But it will put in place the right spending rule for this and future downturns as well as boom years.

Will we need to go to the President to spend more from past reserves in this recession? If, as a result of having to run a deficit, we need to ask the President's permission to draw on past reserves, we will do so. But fortunately, we have built up a comfortable buffer of current reserves since the last general election, which we can draw on if we have to run deficits over the next one or two years.

Thursday, October 23, 2008

Mahathir sees no end to crisis

Oct 23, 2008

FORMER Malaysian leader Mahathir Mohamad, the leader who steered Malaysia through the 1997-98 Asian financial crisis, said that the current global turmoil is far from ending and will soon spread to the region's export-dependent economies, in an interview with Bloomberg News.

'The worst is not over yet. We do not even understand what is happening,' Tun Dr Mahathir, who stepped down as prime minister in 2003, said in a Bloomberg Television interview yesterday in Putrajaya, Malaysia. 'Asian countries are going to feel the pinch of a world where the market has collapsed.'

Global leaders are starting to acknowledge the worst still lies ahead for their economies as stocks and commodities plunge, forcing a growing number of countries to shore up their battered banking systems.

Dr Mahathir bailed out Malaysian banks in 1998 and pegged the ringgit, ignoring advice from the International Monetary Fund (IMF), which later endorsed his capital controls.

Dr Mahathir, 82, reiterated his belief that governments worldwide should consider a new international monetary system that doesn't depend on any single currency.

'You may have to use a number of currencies for trading purposes, or you may have to use a special trading currency, probably based on gold,' Dr Mahathir said. 'Gold has intrinsic value. Money has no value, just pieces of paper and government assurances.'

[Terry Pratchet just has "Making Money", a Discworld novel out. In it, a sad character makes the same claim about the intrinsic value of gold. The protagonist however says that gold is just metal. A potato is food in a city or on a desert island. But gold is worth nothing in a desert island. Where's the intrinsic value in it? Mahathir needs to think deeper and look wider.]

The IMF this month forecast global growth would drop to 3 per cent next year, the dividing line between recession and expansion.

World leaders plan a financial summit in Washington on Nov 15 to discuss efforts to fix the crisis.

'A lot of people say rescue plans will work,' Dr Mahathir said. 'It's a question of confidence. You don't have confidence in money that is suddenly made to appear by magic.'

Asian Crisis
Dr Mahathir in 1998 defied the IMF's call to raise interest rates to stem a currency slide and instead provoked worldwide condemnation by pegging the nation's currency to the dollar and imposing controls on foreign money flowing out of Malaysia, insulating it from the external fallout.

The capital controls gave Dr Mahathir room to cut interest rates, overhaul banks and boost spending to help pull the country out of its recession.

To free up banks to lend, he set up a state-run agency to buy bad loans and infused them with fresh capital.

The US and several European countries this month announced plans to buy stakes in banks.

'I can't help feeling I'm vindicated,' said Dr Mahathir, who ruled Malaysia for 22 years, reported Bloomberg News.

Scotch tape's hidden X-ray power

Oct 23, 2008

NEW YORK: Physicists have made a startling discovery about a much more familiar form of matter: Scotch tape.

It turns out that if you peel the popular adhesive tape off its roll in a vacuum chamber, it emits X-rays. The researchers even made an X-ray image of one of their fingers.

Actually, more than 50 years ago, some Russian scientists had reported evidence of X-rays from peeling sticky tape off glass. But the new work demonstrates that you can get a lot of X-rays, a study co-author says.

'We were very surprised,' said Mr Juan Escobar. 'The power you could get from just peeling tape was enormous.'

Mr Escobar, a graduate student at the University of California, Los Angeles, reports the work with UCLA colleagues in today's issue of the journal Nature.

He suggests that with some refinements, the process might be harnessed for making inexpensive X-ray machines for paramedics or for places where electricity is expensive or hard to get.

The researchers and UCLA have applied for a patent covering such devices.

So is this a health hazard for unsuspecting tape-peelers?

Mr Escobar notes that no X-rays are produced in the presence of air. You need to work in a vacuum - not an everyday situation.


[A break from the financial crisis]

Wednesday, October 22, 2008

Making sure the right banks are helped

Oct 22, 2008


THERE is a long and growing list of financial institutions that have failed across the world recently: Northern Rock, Bear Stearns, Washington Mutual, Kaupthing, IndyMac, Hypo Real Estate Holding, Bradford and Bingley, and many others.

A bank is said to fail when it is unable to service its obligations. But failure does not necessarily mean that the bank is insolvent.

We need to understand the difference between a solvent and an insolvent bank. Insolvent banks are those that have made bad investments and, as a result, are unable to generate high enough returns to pay off their liabilities.

Solvent banks are fundamentally sound. But they too can fail if too many of their depositors decide to withdraw their deposits simultaneously. Since fire sales are inefficient, banks might be unable to fully realise the value of their good investments to satisfy their depositors, and thus fail because of temporary liquidity problems. Such banks are solvent yet illiquid.

As lender of last resort, central banks can prevent the failure of solvent banks. They can provide liquidity to such institutions. The rescued banks can then pay off the central bank in the future when the returns on their healthy assets are realised. In the absence of central bank intervention, the assets would have been sold off at fire-sale prices. Thus central banks can improve the efficiency of the banking system by providing emergency funding to solvent institutions.

However, there is a catch here: In practice, policymakers can find it hard to distinguish between solvent and insolvent banks. Central banks should ideally bail out only solvent institutions. But owing to imperfect information, they could bail out insolvent institutions as well.

Did the United States government really know for sure that Freddie Mac, Fannie Mae and AIG were solvent and merely illiquid - and thus candidates for rescue; while Lehman Brothers and Washington Mutual were insolvent - and thus candidates for bankruptcy and government seizure, respectively?

In a competitive banking system, such asymmetry of information can affect the risk-taking behaviour of banks. If they knew they might be bailed out even if they were insolvent, banks would make risky investments. They might end up holding sub-prime assets, and hence become vulnerable to shocks.

Central bank bailouts can be efficient insofar as they prevent the failure of solvent but temporarily illiquid institutions; but they can be inefficient insofar as they induce banks to invest in risky assets. Does that mean we should scrap the bailout policy tool altogether?

The answer is no. Absent the power to rescue illiquid banks, the central bank will lose major ammunition in financial crises. What can be done is to mitigate the moral hazard problem.

This can be accomplished by making banks more transparent and by improving banking supervision. With greater transparency, central banks are less likely to bail out insolvent institutions that have made bad investment decisions.

At times, central banks do knowingly bail out institutions that are insolvent. This is because such institutions might be too big to fail, in the sense that their failure would wreak havoc on the financial system. For instance, AIG was provided with emergency funding of US$85 billion (S$126 billion) because it was so intertwined with the financial system that its failure would have had unprecedented contagion effects.

Another tool that regulators have at their disposal is deposit insurance. If a bank were to fail, the provider of deposit insurance - be it a government or a commercial entity - pays the depositors.

But insurance can also give rise to moral hazard. For example, someone with car insurance might take less care of his car compared to someone without such insurance. Analogously, banks whose deposits are insured might be tempted to hold risky assets.

Nevertheless, by giving depositors the peace of mind that their money is safe, deposit insurance can discourage panic runs. In recent weeks, many governments have raised deposit insurance coverage. The US government increased deposit insurance coverage from US$100,000 to US$250,000. The British increased retail deposit protection from &pound35,000 (S$89,500) to &pound50,000. Australia, Hong Kong and, most recently, Singapore have decided to fully insure all deposits.

There can be circumstances when deposit insurance can be inadequate. Even with insurance, when a bank fails, depositors may have to go through a process of red tape to get their money. For instance, when the British bank Northern Rock collapsed last year, it took months for depositors to be paid off.

People have bank accounts to get ready access to liquidity. Even in the absence of bureaucratic hassles, depositors may still be tempted to withdraw their cash for peace of mind. For instance, depositors withdrew their money from Icesave as soon as they heard the bank was in trouble, despite deposit insurance.

Deposit insurance does provide relief. But it can also build up problems for the future. For instance, following the failure of Washington Mutual, the reserves of the US Federal Deposit Insurance Corporation (FDIC) were so depleted that it could not afford another rescue. On June 30 this year, Washington Mutual had US$143 billion in insured deposits, about three times the size of the deposit insurance fund. Fortunately for FDIC, JP Morgan Chase agreed to acquire the banking operations of Washington Mutual. Cynics say that the FDIC raised the deposit insurance coverage subsequently to avoid another failure.

Deposit insurance and central bank bailouts of solvent but illiquid banks are essential policy tools. But the authorities, especially in the US and Europe, need also to identify and deal with the roots of the problem - toxic assets on bank balance sheets and inadequately capitalised banks, among other things - before the financial crisis further undermines the real economy.

The author is Assistant Professor of Finance at the NUS Business School and an affiliated researcher with the NUS Risk Management Institute. This is the 10th article in the ST-NUS Business School series on the financial crisis.

Deposit insurance and central bank bailouts of solvent but illiquid banks are essential policy tools. But the authorities, especially in the US and Europe, need also to identify and deal with the roots of the problem - toxic assets on bank balance sheets and inadequately capitalised banks, among other things - before the financial crisis further undermines the real economy.