Preventing the Next Fire While This One Blazes

• By DAVID WESSEL

When firefighters are still struggling to extinguish the blaze, talking about fire prevention seems premature. The worst financial crisis since the Depression isn't over, yet it's time to put the best brains to work at reconstructing the financial regulatory structure so we don't go through this again.

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• Real Time Econ: Officials' Thoughts on Regulation

Capital Journal columnist David Wessel argues that the government has big questions to answer about reconstructing the financial regulatory structure.

Trying to wait until the fire is out will yield one of two bad outcomes: a simple-minded, myopic rush to regulation that will make the financial system no safer and the world economy worse off, or talk about "reform" that fades into inaction. Beginning the renovation of regulation will help speed the end of this painful episode. As Barney Frank, chairman of the House Financial Services Committee, puts it: "People...aren't going to go back into the water until we tell them we've killed most of the sharks."

Preventing all future crises is not the goal. That would be the equivalent of banning stoves and furnaces: We'd have fewer destructive fires but we'd be cold and miserable. The goal is to prevent mishaps from burning down the world economy. Here are three of the threshold questions that need pondering:

Who shall be saved, and who shall be allowed to die?

The policy of the U.S. government is that no large, interconnected financial firm can be allowed to fail because such failures threaten the broader economy. Main Street banks that take deposits are no longer the only "systemically important" institutions. Now, brokerage firms such as Bear Stearns and insurers like American International Group are too big or too intertwined with the economy to fail.

The government must draw a circle to identify which firms or kinds of firms will be saved. No more sleep-deprived government officials making case-by-case decisions on Sunday nights.

What about big hedge funds? Private-equity houses? Huge pension funds? The circle can't be drawn in indelible ink. Institutions and markets keep evolving. And firms inside the circle must pay for taxpayer-provided protection in fees (akin to the premium for deposit insurance that banks pay) or through rules that force them to hold more capital, borrow less readily or keep more cash on hand for emergencies (which means lower profits). Otherwise, investors will make risky loans to these outfits, knowing the taxpayers will bail them out. But make the charge for being "systemically important" too onerous, and big bucks and smart people will move just to the outside of the circle -- and we'll be back where we started.

How paternalistic should regulation be, and who should be the parent?

The problem wasn't only that the U.S. wasn't tough enough on Citigroup or that the U.K. mishandled mortgage lender Northern Rock. "The far bigger failure -- shared by bankers, regulators, central banks, finance ministers and academics across the world -- was the failure to identify that the whole system was fraught with market-wide risk," the head of Britain's Financial Services Authority, Adair Turner, said this year. "We failed to put together the jigsaw puzzle." So there's an emerging consensus that every country needs an overarching guardian of financial stability.

But anointing a financial-stability guardian is like sending a lone chaperone on a camping trip with a busload of teenagers: Technically someone has supervision but likely won't prevent hanky-panky. The danger is that all we do is identify an agency to take the blame when the next crisis arrives. Hence the reluctance of some inside the Federal Reserve, the leading candidate for this role in the U.S., to take the job, a reluctance matched only by the Fed's conviction that only it can possibly do the job.

Nonetheless, we're going to get a guardian, and that's better than the status quo. The question is how much power to give it. The easy answer: enough to protect the system but not so much that it micromanages business executives or consumers who may choose to take prudent risks. The harder question is whether to give the guardian enough clout to, say, impose rules on borrowing when everyone is getting too giddy or to ban particularly risky strains of loans. Or whether, instead, the guardian should be the Paul Revere of the financial system, limited to shouting warnings.

Can we install air bags in the financial system that deploy automatically?

Today's mess reflects the failure of every check on the system, from credit-rating firms to central bankers. But just as maddening are rules that encouraged and sometimes forced banks to do things that are hurting the rest of us now. That's dumb.

A bank that wanted to set aside extra reserves in good times, for instance, was blocked by accountants who deemed that to be improper "earnings smoothing." So it's time to choose between accounting rules that aspire to a Platonic ideal of truth and rules that foster stable markets and a better economy. The rules that govern the size of banks' capital cushions prompt them to raise capital at unpropitious moments like today after they've taken big losses instead of prodding them to build bigger cushions in good times. That shows the wisdom of proposals to create a new kind of bank debt that automatically converts to equity capital, triggered either by financial ratios set in advance or by government declaration of "unusual and exigent circumstances," to borrow a phrase from the Federal Reserve Act.

Getting all this right is crucial. As the reaction to the Depression proves, the changes will be far-reaching and long-lasting.

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Malaysia Stimulus Tops $16 Billion

State Strains Budget to Shield Economy From Global Downturn

 

By ELFFIE CHEW

KUALA LUMPUR -- Malaysia's government Tuesday unveiled a 60 billion ringgit ($16.26 billion) economic-stimulus plan that will strain government finances in an effort to shield the economy from the global downturn.

The plan -- larger than expected and the biggest economic stimulus initiative Malaysia has ever taken -- amounts to 9% of gross domestic product and will drive the fiscal deficit to 7.6% of GDP this year. It will be implemented during 2009 and 2010, Finance Minister Najib Razak said.

The plan follows seven billion ringgit in stimulus steps announced in November and complements efforts by the central bank to support the economy. Bank Negara has cut policy interest rates a total of 1.5 percentage points in three policy moves since November.

Yeah Kim Leng, chief economist at Kuala Lumpur-based rating agency RAM Holdings Bhd., said the new spending will help boost confidence as it focuses on curbing unemployment and helping distressed companies affected by the downturn in exports.

"The plan should help cushion the negative effects from the deteriorating global conditions and prevent the local economy from spiraling downwards," Mr. Yeah said.

The program will include 15 billion ringgit in fiscal spending and 25 billion ringgit in so-called guaranteed funds. The government also will make 10 billion ringgit in equity investments, and plans 10 billion ringgit of other measures including tax breaks.

Malaysia, a major producer of palm oil and rubber, is taking these steps amid a climate of falling commodity prices. Its electronics industry has been hit hard by declining global demand, hammering the country's exports.

Mr. Najib, who also is deputy prime minister, said the economy could register anywhere between a 1% contraction and 1% growth in 2009. The government had previously forecast a 3.5% GDP increase but Mr. Najib said it was now trimming it back "due to the deteriorating global economy."

Kuala Lumpur-based CIMB Bank's Chief Economist Lee Heng Guie said the only disappointment in Tuesday's package was that it didn't contain tax cuts for companies or consumers.

Robert Prior-Wandesforde, a Singapore-based economist at HSBC Bank, said the measures are too late to provide much support to growth in the first half of the year when the economic pain will be at its peak. But they will start to kick in just as the central bank's rate cuts begin to work and possibly as China's slowing economy regains its footing, helping support regional trading partners such as Malaysia, he said.

Malaysia had forecast a 4.8% budget deficit for this year before unveiling these new measures, which will involve large amounts of public debt to pay for the excess outlays over revenue.

Higher public borrowing often tends to push up market interest rates, making it more expensive for private companies to raise funds or access the bond market. But Mr. Najib played down the impact of the aggressive plans, saying that "financing of the deficit will not crowd out the private sector."

He said "there is ample liquidity in the domestic financial system" to absorb a pumped-up level of sovereign debt. He also said conditions in the economy could get worse.

Mr. Najib predicted unemployment would hit 4.5% this year, higher than the 3.7% registered in 2008. He also said he expects foreign direct investment flows into Malaysia to fall to 26 billion ringgit in 2009 from 51 billion ringgit in 2008.

"It will be a deep and prolonged global recession," he said.

News of the stimulus plan triggered selling of Malaysian government bonds but boosted the ringgit and the stock market.

The five-year benchmark yield rose 20 basis points, or hundredths of a percentage point, to finish the day at 3.8%. The stock market, as measured by the benchmark KLCI Composite index, closed down 0.3% at 855.25, but that was off its low of 848.34 in reaction to the news. The U.S. dollar fell to 3.690 ringgit Tuesday from 3.715 ringgit Friday. Malaysian markets were closed Monday for a holiday.

CIMB Bank's Fixed Income Research Head Lum Choong Kuan said the increase in fiscal deficit underpins concerns that the supply of government bonds may be bigger than earlier estimated.

Write to Elffie Chew at elffie.chew@dowjones.com

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Key facts on the world's water supply

March 11 (Reuters) - Water scarcity is likely to change the way of life of millions of people in the U.S. West, one of the richest and most technologically advanced regions in the world. Other parts of the planet may take cues from the West on how to deal with a global water crisis that is expected to worsen with climate change.

Following are some facts and figures about the world's water:

-- There are 1.4 billion cubic kilometers of water on the planet but almost 97 percent is salt water. Most freshwater is locked up in glaciers or deep underground, leaving only a fraction available for human consumption or use.

-- Most experts believe there is still enough water to go around, but its distribution is very uneven. According to the Pacific Institute for Studies on Development, Environment and Security, North Americans have access to over 6,000 cubic meters per person per year stored in reservoirs. But the poorest African countries have less than 700 and Ethiopia has less than 50 cubic meters per person per year of water storage. Wealthy but water-scarce countries such as Saudi Arabia can afford expensive desalination projects, but poor ones cannot.

-- Agriculture accounts for 66 percent of human water consumption, industry 20 percent, domestic households 10 percent, according to the World Water Council. About four percent evaporates from man-made reservoirs.

-- Providing clean drinking water to the poor is one of the biggest development challenges. The United Nations Millennium Development Goals pledged at the start of this decade "to halve, by 2015, the proportion of the population without sustainable access to safe drinking water and basic sanitation." The U.N. says that since 1990, 1.6 billion people have gained access to safe water. But nearly a billion people still lack safe drinking water.

(Sources: Reuters, World Bank, International Monetary Fund, United Nations, Pacific Institute for Studies on Development, Environment and Security, World Water Council

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GIC:Forced selling seen by investors in next 12-18 mths

SINGAPORE, March 10 (Reuters) - A Government of Singapore Investment Corp (GIC) official said on Tuesday he expects more forced selling of assets by investors in the next 12-18 months as the "de-leveraging" in financial markets continues.

GIC also sees investment-grade corporate bonds as more attractive than equities currently, the fund's director of economics and strategy Yeoh Lam Keong, told the Investment Management Association of Singapore conference.

"This is a very destructive process for assets," Yeoh said, showing a slide that indicated total write downs in the financial sector could reach $3.8 trillion by 2013 and that only about 30 percent of the losses had been booked so far.

GIC, one of the world's largest sovereign funds with an estimated $200 billion-plus in assets, had invested aggressively in troubled international lenders, picking up multi-billion-dollar stakes in Citigroup <C.N> and UBS <UBSN.VX>.

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China reviews Cola-Huiyuan deal under anti-monopoly law

BEIJING, March 10 (Reuters) - China is reviewing Coca-Cola Co's <KO.N> bid to acquire China Huiyuan Juice Group <1886.HK> under the anti-monopoly law, Commerce Minister Chen Demin said on Tuesday.

Chen was speaking after a press conference during the annual parliamentary meeting.

Coca-Cola said in December it had filed an application for anti-trust approval in China. The case is being closely watched by analysts and lawyers since it is the first to test the nascent law.

Coke agreed to pay HK$12.20 a share in cash, nearly three times its HK$4.14 price before the deal was announced last September.

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Mobile Fair - Demand to stay strong despite downturn - U.N.

GENEVA, Feb 16 (Reuters) - Mobile telephones are seen as "a basic necessity" around the world and should enjoy persistent strong demand throughout an economic downturn, a United Nations agency said in a report published on Monday.

"With or without a recession," millions of people in India, China, Nigeria, and other emerging markets will seek out mobile phones, according to the International Telecommunication Union (ITU).

Increasingly cost-conscious households in Europe and North America are also expected to keep up their mobile use, and many will drop their fixed-line telephones as a way to save money, the ITU said in a report released for the Mobile World Congress trade show in Barcelona.

"Once a user gets a mobile phone, it is difficult to give up, and in many countries mobile phones have become a necessity," its Confronting the Crisis report found.

"Many communication technologies including mobile telephony and broadband still offer huge growth potential, with or without a recession," it said. "With its strong growth potential, mobile telephony can help facilitate economic recovery."

There were 4 billion mobile subscriptions worldwide at the end of 2008, after an average of 24 percent annual growth since 2000. Saturation rates are above 100 percent in Singapore and Hong Kong, compared with 30 percent in Nigeria and just over a quarter in India, two of the fastest expanding mobile markets.

The ITU said people in developing countries are increasingly reliant on telephones for voice and information services, such as farmers and fishermen who get text messaging for information about commodity prices and the weather.

The popularity of mobiles in developing markets such as China, Pakistan, Malaysia, Thailand and Bangladesh could create an opportunity for a technology "leapfrog" where Internet services could be provided to consumers without computers.

Companies that have invested heavily in emerging markets include India's Bharti Airtel <BRTI.BO> Norway's Telenor <TEL.OL>, South Africa's MTN <MTNJ.J>, Egypt's Orascom Telecom <ORTE.CA>, Kuwait's Zain and Vodafone's <VOD.L> Vodacom.

Afghanistan, where landline cover is almost non-existent after three decades of war, has drawn a subsidiary of Cable & Wireless <CW.L>, Swedish-Finnish TeliaSonera <TLSN.ST>, and the United Arab Emirates' Etisalat <ETEL.AD>.

COST-CONSCIOUS CALLERS

In richer markets, such as western Europe and North America, the ITU said mobile operators may better placed than fixed-line telephone providers because the investments required to maintain cellular networks can be less onerous.

Many developed-world customers are likely to favour their mobiles to home lines as a result of a downturn, but may be more careful about their spending and delay purchases of handsets, its report said, signalling trouble for telecom equipment and gear makers such as China's Huawei [HWT.UL] and ZTE <0763.HK>, Ericsson <ERICb.ST>, Nokia <NOK1V.HE>.

Pre-paid and flat-rate packages could also become more popular, according to the Geneva-based ITU.

"There is some evidence that consumers are already postponing plans to upgrade their mobile phone and have become more cost-conscious when making calls," it said.

"Operators will find it harder to promote value-added services to wary consumers and the adoption of new services (such as mobile TV) will certainly be impacted."

Tight credit could cause telecom operators to reduce their investments, and encourage industry consolidation, the report said, noting cost-saving outsourcing may also grow.

The ITU encouraged governments to include investments in telecoms in economic stimulus packages now being developed.

"Investing in high-quality, affordable information infrastructure, education and knowledge may be the best way to innovate out of this crisis, especially for developing countries ... Investing in broader access to knowledge becomes even more important during times of crisis, rather than less so."

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Buffett says economy fell off cliff, fears inflation

Economy near worst-case scenario, won't recover fast

* Democrats, Republicans should set aside differences

* Banks should "get back to banking"

(Adds Buffett comments throughout)

By Jonathan Stempel

NEW YORK, March 9 (Reuters) - Warren Buffett said on Monday the U.S. economy had "fallen off a cliff" but would eventually recover, although a rebound could kindle inflation worse than that experienced in the late 1970s.

Speaking on CNBC television, the 78-year-old billionaire said the country is experiencing a "close to the worst-case" scenario of falling business activity and rising unemployment, causing consumer confidence and spending to tumble.

Buffett called on Democrats and Republican policymakers to set aside partisan differences and unite under the leadership of President Barack Obama to wage an "economic war" that will fix the economy and restore confidence in banking.

He urged policymakers and regulators to communicate their efforts better to the public, though he stopped short of major, specific policy recommendations.

"People are confused and scared," he said. "People can't be worried about banks, and a lot of them are."

Buffett spoke nine days after his insurance and investment company Berkshire Hathaway Inc <BRKa.N> <BRKb.N> said quarterly profit fell 96 percent, largely from losses on derivatives contracts. Berkshire's book value per share fell 9.6 percent in 2008, the worst year since Buffett took over in 1965.

RECOVERY COULD TRIGGER MORE INFLATION

Buffett said Americans, including himself, did not predict the severity of home price declines, which led to problems with securitizations and other debt whose value depended on home prices continuing to rise, or at least not plummet.

"It was like some kids saying the emperor has no clothes, and then after he says that, he says now that the emperor doesn't have any underwear either," Buffett said. "We want to err on the side next time of not allowing big institutions to get as unchecked on leverage as we have allowed them to do."

He said, though, that efforts to stimulate the economy could trigger higher inflation once demand rebounds.

"We are certainly doing things that could lead to a lot of inflation," he said. "In economics there is no free lunch."

The stock of Omaha, Nebraska-based Berkshire has fallen by half since September, with growth in some units such as auto insurer Geico Corp offset by weakness elsewhere, including jewelry retailers that Buffett said have "gotten killed."

Buffett said Berkshire will write less catastrophe insurance this year after investing roughly one-third of its cash in high-yielding securities issued by General Electric Co <GE.N>, Goldman Sachs Group Inc <GS.N> and other companies.

He also said the economy had been mere hours away from collapse last September when credit markets seized up, Lehman Brothers Holdings Inc <LEHMQ.PK> went bankrupt and insurer American International Group Inc <AIG.N> got its first bailout. "The world almost did come to a stop," he said.

While acknowledging that the economy "can't turn around on a dime," Buffett said it will be "running fine" in five years. "This country will work fine even if we screw it up," he said.

In morning trading, Berkshire Class A shares were down $1,705, or 2.3 percent, at $71,490. Their 52-week high is $147,000, set last Sept. 19, Reuters data show.

BANKS SHOULD "GET BACK TO BANKING"

Buffett called on banks to "get back to banking" and said an overwhelmingly number would "earn their way out" of the recession, even if stockholders don't go along for the ride.

Saying that "a bank that's going to go broke should be allowed to go broke," Buffett nevertheless added that the "paralysis of confidence" in the sector is "silly" because of safeguards such as deposit insurance.

He said Wells Fargo & Co <WFC.N> and U.S. Bancorp <USB.N>, two large Berkshire holdings, should appear "better than ever" three years from now, while the ailing Citigroup Inc <C.N>, which Berkshire does not own, would probably keep shrinking.

Consumers, meanwhile, should reduce their dependence on credit cards, he said. "I can't make money borrowing money at 18 or 20 percent," said Buffett, whom Forbes magazine in October said was the second-richest American. "I'd go broke."

He said he still expects Berkshire's derivatives contracts, whose value depends on where four stock indexes trade a decade and more from now, to be profitable.

He said that over 10 years, "you will do considerably better owning a group of equities" than U.S. Treasuries.

Buffett also defended his imperfectly timed October opinion piece for The New York Times, where he said he was moving non-Berkshire holdings in his personal account to stocks.

"I stand by the article," he said. "I just wish I had written it a few months later." (Reporting by Jonathan Stempel; Additional reporting by Lilla Zuill; Editing by Lisa Von Ahn and John Wallace) Keywords: BUFFETT/

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