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196 Taiwan Development Perspectives 2009 I. Foreword The collapse of Lehman Brothers touched systematic breakdowns in the U.S. and EU financial markets that have not only severely eroded the confidence of investors and depositors in banking and insurance institutions, but also caused a worldwide market panic. The United States and the European Union have jointly lent an impetus to bailout plans, with hundreds of billion dollars being injected into the troubled banks to resolve the worsening illiquidity problems arising from capital shortages. Before the bailout plans were rolled out, several countries had started relaxing monetary policy to prevent the liquidity crisis from escalating to a national scale. Besides, public funds were used to buy bank stocks to stabilize market confidence in the banking industry. The United States and some European countries are strong enough to consistently adopt loose monetary policy and bailout plans to cope with the financial crisis in the Group of Seven. But other European countries such as Iceland and Ukraine are endangered by economic bankruptcy. The crisis has also made serious impact on Asian countries. American dollars keep flowing out of the area and the depreciation of the Korean hwan continues. It would be quite appropriate to say that the Asian Financial Crisis of 1997 is being repeated. The international financial crisis arising from the subprime loans failure is quite similar to what occurred in the 1980’s and 1990’s. It resulted from economic bubbles, which were blown up by slack monetary and credit policy. Then, after money supply started being tightened and credit crunch was on the way, the bubbles went burst. The crisis is originated from the combined effects of bubbles in real estate, housing loans and derivative markets, and the scope of its impact has quickly escalated worldwide thanks to financial globalization and the Internet. The economic bubbles this time are somewhat different from what were evidenced in the real estate and stock markets in Japan and Taiwan in the 1980’s, because the impact of the latter was only local and had no direct influence on the international financial system. Originally, various securitization products – such as Mortgage-Backed Securities (MBS), Asset-Backed Securities (ABS) and Credit Default Swap (CDS) – were designed as financial vehicles to diversify credit risks and improve the asset liquidity of banks. However, while these securitization vehicles are comprehensively used as underlying assets of derivatives with more complicated structures such as Collateralized Debt Obligation (CDO) and Synthetic CDO (SCDO), issues over information opacity and risk underestimation emerge. The credit rating companies were either not fully aware of the potential risk of these fancy products or, even worse, conspired with investment banks to mislead the general public. Moreover, the investment banks used lots of subprime loans purchased from banks to create new types of financial derivatives. The loans with different credit quality were repacked as complicated structured notes. Although the structured notes were useful securitization tools for banks, the risks of these products were severely undermined, because the investment banks did not make proper disclosures on the products structures and the credit rating companies as well did not fully capture all the critical risk dimensions, such as the default risks of the issuing and selling banks. While the U.S. financial authorities failed to effectively supervise and manage the risks of structured notes and derivatives, the investment banks were then able to successfully promote these high leveraged products across the world by their far-reaching marketing networks and distinguished reputation for financial engineering. The sequences of adverse market responses to the burst of subprime loan bubbles have seriously battered global financial system and economy.
Strategies for Cross-Strait Financial Exchange and Cooperation under Financial Tsunami 197 II. Influence of Financial Tsunami on Cross-Strait Financial Development The international financial tsunami makes it clear that the consequence of supervisory failures might turn out to be disastrous. While financial liberalization had once become the prevailing thoughts for most of the policy makers in the Western economies, the United States and the United Kingdom were ever the most aggressive promoters of liberalization in trade, international capital movement, and direct investments by the financing industry. The rapid growth of the knowledge and Internet-based economy has made such financial strategy even more powerful and popular. Ironically, however, the victims who suffer most from the financial tsunami are fortuitously those countries that are zealous advocates for financial liberalization and internationalization. With regard to cross-strait financial integration, what influences of the financial tsunami will have on the strategy China and Taiwan must adopt to establish a regional financial center by their joint efforts as a result of the possible restoration of conservatism in the global market? What are the impacts on cross-strait financial development? This is a topic worth further exploring. First, many people are worried that the rescue of the endangered financial system by government intervention, such as currently evidenced in some industrialized economies such like the United States and some European countries, illustrates that the value system advocated by capitalism is being challenged again. Somehow, such concern makes sense. The current situation is quite similar to that which is evidenced before the Great Depression arrived in the 1930’s. As the United States stock market bubbles burst in 1929, the American Communist Party firmly believed in the principle of market self-adjustment, and the Hoover administration as well as Federal Reserve Board failed to identify and remedy the potential risks of the irrational exuberance in the stock market, resulting in a large-scale surge in bank financial distress, and tremendous panic over the entire financial market. Finally, the unprecedented Great Depression came as a consequence of the seemingly never-ending vicious economic cycles initiated by various mutually reinforced factors composed of the market breakdowns, credit crunch, deflation, national product decrease and increase of unemployment. Accordingly, we could learn that it is the erroneous monetary and financial policies that shall be blamed for the crisis of capitalism. Thanks to the lessons learnt from the Great Depression, as well as the breakthroughs in academic research in the areas of economy, monetary policy and finance market, the United States and European countries are now able to take decisive measures and make effective coordination to fight against the crisis in a timely manner. In the meantime, the growth of knowledge-based economy also helps ensure that banks have sufficient liquidity by smooth information exchange and a slack monetary policy effectively adopted on the basis of internationally consistent executions. Second, owing to the relative immaturity of financial market development in terms of globalization and the government’s rigid supervision and control over financial innovations, the impacts of financial crisis on Taiwan are less dramatic compared with the Western economies. As Taiwan’s financing industry has yet to be internationalized, banks can at most fund exporters, purchase overseas mutual funds or invest in other kinds of overseas financial securities, instead of designing and selling products globally. In other words, restricted by their capability constraints, banks in Taiwan have just a few business areas in the international market to survive. Among those few areas are investment banking, hedge funds, and mutual funds. All this explains why Taiwan still has a long way to go to evolve as a regional financial center. Third, financial internationalization in Taiwan and China is still immature, and as both are export-oriented economies, their trade surplus has infused more than a trillion of dollars into their foreign exchange reserves and private foreign exchange assets (including those owned by banks, insurance companies, retirement funds,
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CONTENTS Preface Overview ix xi Foc
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Agriculture and Fisheries Impact of
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CHUANG, Yih-chyi( 莊奕琦 ) Pro
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TAN, Ching-yu( 譚瑾瑜 ) Associ
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enth effort on the part of the Foun
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ills pertinent to parliamentary ref
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