Early this week investment bank Lehman Brothers went bankrupt. This followed days of speculation as to whether it would or would not be bought over by another leading bank. Another financial institution, AIG, was also facing serious problems and has been saved thanks to the money provided by the US government (therefore the US taxpayer). In recent months, investment banks have had to bear the brunt of the fall in the values of property and now we are just left with two from the 10 there were a couple of years ago.
Last week a UK airline filed for administration, and other bankruptcies are expected in the autumn. The title of this week's contribution is more than legitimate as it reflects a question that many have been asking. Others are asking who's next. Others still are wondering whether all this will affect Malta, and thus go back to original point - the quicker this mess is sorted out, the less chance of it impacting on the Maltese economy.
We started off this year with an increase in the price of fuel and increases in the prices of commodities, especially cereals. It seemed that the upward spiral of prices would not end.
Currencies such as the US dollar and the sterling were losing value fast. Shivers were then sent across the financial markets, as it emerged very clearly that a number of financial institutions were over-exposed to credit risks, especially those operating in the property market, and particularly the sub prime market. Even though the uncertainty in the international economy was all too evident and the spectre of an economic recession was becoming a reality, up to two months ago, the price of oil was still racing upwards and nearly reached the price tag of US$150 per barrel.
Hence there was great fear that recession and inflation would bite in concurrently, denting very badly both consumer and business confidence. The price of fuel has in the meantime moved to below US$100. The US government has intervened to save the two leading banks involved in the house loan market - Freddie Mac and Fannie Mae. These were signs that some form of solution was round the corner. However, it was not to be. Alan Greenspan, the former chairman of the Federal Reserve (the US central bank) was reported to have said that this was the worst financial crisis in the last 100 years.
What is even more worrying is that developments are taking place at a very fast pace.
During the Great Depression of the early 1930s, it took quite a bit of time for news to cross the Atlantic for people to realise what was really happening, and therefore, the economic downturn got protracted in terms of time. Today, we learn of developments as they happen and therefore there is a great deal of knee jerk reactions, thereby rendering the situation more volatile. Unfortunately, the international political environment with the forthcoming US elections, the invasion of Georgia last month and problems in western Asia do not allow for an element of calm, which is so much needed in these circumstances.
How will all this impact Malta? The openness of our economy means that there is bound to be a negative impact. However, history has shown that the Maltese economy is resilient, and so we should have the strength to mitigate this negative impact. A great deal depends on whether the companies going bust have any investment (direct or indirect) in this country in some shape or form. If they do, then the impact will be greater than expected; while if they do not, the impact could be within manageable proportions. Up to a certain extent our size helps us. This situation could be likened to a storm that hits the centre of Mediterranean, but would bypass us because we are so small.
However, there is a lesson to be learnt. Speculation of whatever form and investment in the movement of capital rather than in the real economy, is damaging to an economy. In fact, one of the possible benefits of this international financial crisis, is that investors will get attracted again to investment in the productive economy (manufacturing, tourism, transportation, energy, services), rather than financial instruments, which are just tools for moving capital around the world. Investment in productive activities may be less exciting as it generates a lower return, but it is more stable and creates more jobs and more wealth.
Such productive activities have been starved of the necessary funds in the past, but may experience an inflow of funds in future. Similarly in Malta, we need to appreciate that we must channel funds into activities that create real jobs and real wealth. For example, further investment in property will only lead to making a bigger bubble that one day will burst. If, as a country, we learn this lesson, then the international financial crisis would not have been futile for us, and the quicker it ends the better. Let us get back to real business.