The Global Economy in Turbulent Times

CHAPTER 103 Mahathir’s Challenge¹

The public has been asking with increasing frequency why the biggest banks in the world are in such a sorry state of affairs. Was it because of a black swan?, referring to Nassim Taleb’s unlikely but not impossible catastrophe that no one ever seems to plan for, but that does not mean it does not exist.² Indeed, I have heard it quoted in a recent issue of Time that it is not just one black swan; it is a bunch of black swans that have hung out for a while and since created this gigantic problem.³

Twelve days ago, I had one of those rare opportunities to spend some quality time with Tun Mahathir at a private brainstorming session with select experts (including some from abroad), and on February 4, 2009, participated in his strategy session on the global financial crises. Tun’s challenging query was simply this: Why did the US financial meltdown—not just its scale—happen so very swiftly (most were caught unaware), wreck so completely (US financial system in particular), and reduce so systemically (the efficacy of the global financial international mechanism)? How could subprime mortgages provoke such worldwide dislocation? These are legitimate but very difficult questions to answer.

I have since thought about it a lot, and shall now try to unravel, as best I can, the mystique of this upheaval (which the Financial Times called, with tongue-in-cheek, Asia’s Revenge), in so far as I have managed to string the sometimes rather incoherent parts together. ...