The Bush Administration has announced that a rescue package of almost US$700 billion is required to save some of the prominent banks from following the footsteps of Lehman Brothers two weeks ago. JP Morgan, Merril Lynch and a host of investment banks in New York and other cities are already crying foul.

Some of us already know that the world’s economy is worth US$60.2 trillion and the American economy about US$12.5 trillion. Just imagine about 6.5 percent of the total American economy is now being used to save the ailing investment banks including one of the world’s largest insurers, AIG, which itself needs about US$85 billion to be resuscitated from receivership.

Money has four uses: used as a standard, used as a saving, used as an exchange for buying and selling and used for speculation. Investment is speculation. Almost US$100 billion is traded everyday in the European money market. Some currencies go up and some currencies go down. Some currencies are not even accepted for trading. One of the currencies that is not well traded is our Malaysian ringgit.

Based on an economic strength of about US$124 billion (GNP) and total banking capitalisation of about RM60 million, we are not in the position to even worry about how President Bush would rescue these investment banks.

Malaysia is financially a small and insignificant nation depending very much on the current trading of petrol and tertiary sector incomes. With a population of about 25 million and an average per capita income of RM4,200, we are now walking on a tight rope.

Option 1

President Bush is able to rescue these ailing banks and they go back into business much more aggressively. Now as investors, where would they find more investment? We must realise the investments of Lehman Brothers are now in a quandary. No one knows for sure how will that particular receivership affect the economy of the world in the next five to six months.

What will be the rate of return be from the investments made hereafter? How long will it take for these banks, if managed properly, to return the money to the government because the government will need the money to help other sectors of the economy? What if these banks are not managed properly?

Will they be in the red again? Will they need another rescue mission?

Option 2

President Bush gets only minimal help from the Congress and the Senate controlled by the Democrats. Of course, he cannot bulldoze his rescue plans without their collaboration. Hence some of the banks including AIG will have to wait for time to wind up, or play a far less insignificant role in the years to come.

It simply means, investors, depositors and policyholders will have to accept that they are now much more poorer than they thought they would be.

In the wake of this, interest rates cannot be raised and money in fixed deposit markets may become less valuable and those receiving pensions and indirect incomes will have to suffer heavily.

We were told by economists (based on the Keynesian concept) that if the interest rates go up, the share market would drop or vice versa. Now with no money with the investor, we will find, a low interest rate and less bullish stock exchange.

Hence Malaysians have to be ready for the following:

1. Investors will be pulling back to find more stable markets. This will mean loss of jobs and loss of income for thousands of people in tertiary sectors. People in the financial, banking and insurance sectors will be the worst hit. The insurance industry in Malaysia holds slightly more than 7 percent of the GNP.

2. Our banking industry will tighten its lending and if this happens, business will cool down and will drastically affect the retail industry. The Malaysian retail industry with more than 2 million provisions shops and nearly a 1,000 supermarkets will be hardly hit. The retail industry is worth around RM70 billion and this figure may be drastically reduced to RM40 billion or even less, with reduced prices and lesser purchases. This may be a very difficult problem for us, as a nation to overcome.

3. Our secondary sector hardly exists and most of the production is based on heavy industries such as automobiles and steel and shipyards. However, the vibrant nature of our small and medium industries could give us sustained strength to overcome some of the problems faced by the ailing steel industries and automobile companies. The government must gear up this sector and reduce the role of foreign workers in this sector to generate more opportunities for Malaysian job seekers.

4. The government must now seek a tough stand on foreign migrant workers and also on multiple entry visas and control those who do business away from Malaysia while staying in Malaysia.

Option for Survival

We need a very bold, tough and creative finance minister who can speak for all: the investors, the consumers and the workers. The government must now come up with bold contingency plans and reduce the role played by the non-productive government-linked companies. If need be, some could even be shut down.

Structural changes in the economy must be made and rates on utilities must be controlled. Consumer laws should be enforced very stringently on all sectors of the economy to ensure moderation of production and curbing of inefficient use of resources.

The government must now seriously enforce price checks on all items from a plate of fried rice to a unit of saloon car. Either we survive or we are doomed as a nation. The days are getting worse. Malaysians must get together.

BN and Pakatan Rakyat must find a way to work together.