KUCHING: As the global technology industry struggles with the aftermath of the Silicon Valley bank’s downfall, an economist is urging Malaysia to learn from this cautionary tale and re-evaluate its monetary policy.
Centre for Market Education (CME) economist Carmelo Ferlito said that during the lockdowns, political and monetary authorities worldwide, including Malaysia, adopted expansive policies to stabilise their economies. These authorities injected funds into the system and kept interest rates low. Unfortunately, these actions unintentionally caused excessive investment activities in the tech sector, which ultimately contributed to the collapse of the bank.
As businesses began to invest more, the prices of raw materials and labour started to rise.
“The drive to invest resulted in increased wages and demand for consumer goods, ultimately causing inflation. Malaysia’s monetary policy must be mindful of these potential consequences when balancing economic recovery with financial stability,” he told New Sarawak Tribune.
According to him, Nobel laureate Friedrich von Hayek had previously cautioned against the dangers of continuous credit expansion. “Sustained credit expansion can result in unsustainable price increases,” Hayek noted. “Once the demand for consumer goods surpasses available funds for investment, interest rates are forced to rise, making it more difficult for businesses to borrow money.”
He said that in the past, people and businesses relied more on savings and cash, and borrowing money was not as common or easy as it is today. Now, debt and credit are seen as necessary for our daily lives. When financial problems happen, quick actions are often taken to fix the situation. Sadly, these quick fixes can sometimes cause even more financial issues, leading to an ongoing cycle of problems and attempts to solve them.
Consequently, many new investments remained unfinished, leaving entrepreneurs disappointed. Ferlito added, “Business owners who had anticipated favourable conditions for long-term investments were confronted with rising interest rates and a less favourable money supply. Malaysian policymakers should carefully consider the impact of their monetary policies on businesses and ensure that they promote sustainable economic growth.”
Adding to the complexity of the situation, financial innovations during periods of growth have created a fragile and unstable system. Ferlito cited economist Hyman Minsky, who explained that “during periods of calm growth, businesses invent and reinvent new ways of making money, new ways of investing, and new ways of financing different activities.”
The combination of innovation, market democratisation and deregulation has led to disasters like the FTX debacle, which showcased every flaw in our fragile financial system. Such incidents reveal a wide range of issues, including influence-buying, Ponzi schemes disguised as ‘innovative finance,’ insider dealing, corruption, and fraud. It’s like a poorly built house that seems fine on a sunny day but starts to fall apart as soon as it rains.
“Creative borrowing methods and risky investments led to a hidden fragile system, ultimately causing the bank’s downfall,” he concluded.
