Financial Prudence - Intervention of the Invisible Hand

President Obama’s overarching hand, no longer the invisible hand of free market, on the entire financial system will be closely watched as it was deemed that a culture of irresponsibility took root from Wall Street to the Main Street.

One of the most striking aspects of his intervention was his increase in the volume and velocity of money supply in the economy. His government’s policy response to the crisis is to stabilize the confidence and to thaw the credit stalemate that crippled the entire US economy and affected world’s confidence. The domino effect brought devastating consequences to many economies. With the overhaul, they are looking to speed up structural adjustments.

The crisis which was magnified by the shakeout in the subprime mortgage market alongside the toxic CDOs and other derivatives were not properly understood. These weaknesses were due to a lack of transparency in management, inadequate supervision of banks and financial institutions.

In Singapore, whilst the subprime mortgages cause a precipitous drop in asset prices in the US, the effect is not as acute in Singapore. In fact, there was a stabilization of HDB prices which held up well in the heat of turmoil. Singapore’s banks are regulated in a conservative framework and the issues of indiscriminate credits extension are limited.

Whether it is DBS High Notes 5 and Merrill Lynch Jubilee Series 3 products, they have limited impact on most investors in Singapore and even for those who were affected; MAS stepped in and provided stern warning to banks to resolve any misrepresentations with certain groups of less sophisticated investors. There is also a Financial Industry Disputes Resolution Centre (FIDReC) for further mediation. Such acts are enough said of a responsible MAS.

Any ambitious reforms to the Singapore’s financial system may end up prompting more, not less, interventions by MAS. For so long as MAS set up a framework with sufficient monitors and safeguards with constant scanning of macro risks in the ecosystem, Singapore may be better off this way with a steady hand prompting and cueing markets than one that directly intervene in the market mechanism.

Point is -the hand should not be invisible when a crisis is imminent.