The speculative behaviour in business and banking is not finite. It is linked with a continuous cycle of more investment, more production and more speculation. This phenomenon when unmonitored may build up into a pure speculation. Adam Smith called this as the overtrading and Hyman Minisky names it as euphoria.
Such euphoria has often caused nations great damage especially in the modern economic life. The panicky crises have taken place to stifle the economic and social life of nations until they have been resuscitated through the rescue packages.
Almost national economy goes through some tremors and shocks during the complex interplay of its economic activity. This is particularly so, and more frequently, in the banking sector. Banks generally deal in money. Money is a public good, as such it lends itself to private exploitation. Banking is notoriously difficult to regulate. Whenever the prudential regulations (PR), to keep the banks within their prescribed tasks are slackened or they are made to go unruly in the speculative venture due to political or self motivated pressures, they are most possibly exposed to panic and crises. When such crisis takes on a collective force within regional or global perimeters, economies go through a systemic problem.
However in all viable circumstances (except through macro-economic situations), solutions to check the crises are mostly untenable unless very arduous life saving measures are applied (through financial bailouts and exogenous supports).
The macroeconomics driven crises are generated due to government running large budget deficits, financing them from the central bank, holding interest rates artificially low for lending to the influential clients, etc and as such, leading to high inflation and the collapse of the currency.
In such situations, a discipline on the government and the central banks may be sufficient to reverse the situation of course when the things have not gone too bad. It is generally said that a good economy should have a sound macroeconomic policy.
The present day experts are convinced that the financial liberalization and globalization have rendered positive impacts on the local and international economies, while the increased volumes of uncontrollable / volatile capital inflows and wanton competition of thought-less speculations have done tremendous harm to individuals and nations. This has led to major financial crises. In the recent period some of them can be mentioned as in Europe (1993), Mexico (1995), and finally in Thailand and South and North East Asia (1997 and early 1998).
The world has a lesson from the banking crises taking place in the last decade. The economic life of a big part of the globe, specially the developed countries, was disrupted.
The heavy bailouts by the International Monetary Fund could not provide immediate remedy until the suffering countries took to sifting and employing regulatory measures.
So far as South East Asian countries are concerned, the crises started with Thailand (July 2,1997) when the Thai currency (Bhat) was floated in the international financial market. Until then, the nation was lauded for its economic progress and miracles. Very soon, a massive outflow of its foreign invested capital started taking place.
The rate of Baht went on depreciating and the inflation took to soaring heights. Till then, the currencies of the South East Asian countries were mostly pegged to the dollar and were considered as very stable. But this perception was soon shattered. Thai nation witnessed a breakdown of its economic and banking system.
The multivariate causative study reflects that this nation relied heavily on the foreign perception and did not take adequate precautions for sustained banking and financial policy.
A single assumed threat from the Japanese and then from the US (these threats never materialized) that they would increase the interest rate on their financial assets, created an unpredictable and horrendous repulsion on Thailand and other South East Asian financial markets. About one third of the Thai banks and financial institutions were closed. Finally a bailout of $17 billion was provided by the IMF.
The same adversity befell the Malaysia (during late 1997). A 30 per cent devaluation of its currency (ringgit) took place. Many banks had to close down. Arduous adjustments and rescue packages took the nation back on line. The government alleged that it was conspiracy to damage the Malaysian economy.
A more serious crisis of the sort was experienced in Indonesia. The economic and social circumstances, during this critical period, were the same as that of other countries.
Besides these countries, the most hard hit were Korea (which received a bailout of $57 billion), while Hong Kong, Vietnam and Singapore were hurt with less intensity. The effect of this colossal, systemic crisis or melt down had also affected the Oceanic countries (Australia and Switzerland). This was regional crisis and its resonance is gradually dying down due to more careful corrective measures in terms of open but wise trade policies, curtailing external debt, improving current account etc.
Certainly, each of these crisis-ridden nations did have its own typical reasons for the fall out which were addressed in the light of specific socio-psychological, political and economic circumstances. But, there was also a commonality of events or situations which were not prudently monitored and the havoc occurred.
These commonalities with varying levels of intensities were high speculative stock markets, loose financial regulations, some heavily protected industries, a fixed exchange rate regime, lack of fundamentals in terms of labour force and hi-tech manufacturing, etc.
On top of these, it was the exploitation of free market in domestic and international finance to maximize personal profits and rates of returns on their investment in short and long- term without a concern to the consequences.
There is much for Pakistan to learn from the unscrupulous financial trends which existed in the South East Asian economy prior to the systemic crisis. Our national economy is fast on the track of its development. There are several avenues in banking and financial sectors, which have not yet been properly opened up.
However, at present, the wise watch dog and surveillance strategies of the State Bank have proved highly safeguarding .The governmental efforts towards the promotion of Pakistans image in the world trade and finance market has created incentives for the foreign investment, particularly in the banking sector.
The banks have taken induction into equity markets with sound approach and Dr Ishrat Hussain has rightly observed that, in this fast changing and dynamic world of financial liberalization, global market integration and private capital inflow it would be imprudent on our part if we do not remain ever vigilant and agile. We have to help them (banking and industry) in remaining sound and healthy under varying market conditions and unanticipated exogenous shocks-external or internal,
The financial leaders, at the helm of affairs are well aware of the historical pressures in the economy of nations. Yet a local crisis of the Karachi Stock Exchange (AprilMay 2005) has shown that we are not totally immune from hazards unless more caution is observed which requires careful, prudent, well-regulated, conduct of our financial institutions. We cannot afford any mistakes.