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Being an American currently living in Indonesia I think there are some structural things missing in the analysis here. The big one is why banks in rich countri

Being an American currently living in Indonesia I think there are some structural things missing in the analysis here. The big one is why banks in rich countries are too big to fail. In Indonesia if there was a banking crisis, there is no way that a bank like BCA could be bailed out. There would be no alternative to failure and while there are concerns about overly predatory practices regarding consumer debt, it is different than it is in the US. Instead the economy is built on a very different basis. 60-70% of Indonesians are self-employed. There are a number of corporations which have institutional investment (including some very large companies) but on the whole the vast majority of the actual economy runs on the basis of small business and the self-employed without investment capital beyond friends and family. What this means is that the amount of control that banks have over the economy is lower. In the event of a banking crisis, people would find ways of continuing to trade and work, and you can't have the massive and debilitating layoffs that occur in the rich countries. In essence the banking system may be less protected, but at the same time, it is less influential and so while the effects of a collapse can be temporarily severe, it doesn't have the same reach that it does in the US. A big part of the rich country trap is a economy that runs on investment capital, where the banks are a major source of that capital. A small-business-centric economy is far more robust against this sort of crisis.

ashray 13y ago
Well, I live in India and it's quite similar to Indonesia (have traveled to Indonesia before..) in the ways that you mention. Many people in India operate under the same principles, small privately owned and financed businesses. However, the big banks do indeed deal with the major corporations. At this point of time, the reserve bank of India has published a report stating that the failure of ONE major corporation will prove catastrophic for our economy. [1] Sounds absolutely crazy but it seems to be true. This is because banks have over extended credit (once more ?) and maintain very low liquidity. If one of their debtors defaults, the bank will be finished, thereby unleashing a domino effect on their creditors and debtors.. crash and burn. Add to this, the fact that the country runs on a major current account deficit (export/import imbalance) means that the government will not be able to do any massive bailouts. The foreign exchange reserves in the country are still small. Which means, we can't print more currency to hack our way out of the problem either because we'll see hyperinflation in a very bad way. Of course, the regular joe here will be able to find a way to continue running his business because he may not have a big relationship with a big bank. But macroscopic factors like big banks failing and the economy collapsing will hit him and everyone else hard as well. There will be massive layoffs for folks who work in big corporations and while in absolute percentages of population this may not look like much, it'll still impact a few hundred million people easily in a country like India. TLDR; Banks in India need to be reigned in, otherwise things are going to get very ugly sometime soon. [1] - http://www.moneycontrol.com/news/economy/rbis-financial-stability-report-is-devilthe-details_1016722.html http://www.moneycontrol.com/news/economy/rbis-financial-stab...
- einhverfr 13y ago
  Keeping it in perspective though, the 2006-2008 crisis had our banks eating up, over three years, an entire year's worth of GDP in government bailouts (including secret federal reserve bailouts). And that was damage reduction. I am not saying things would not be bad if, say, BCA and similar banks were to collapse here in Indonesia. If they did, the corporate world here (including the toll roads) would be sorely hurt. And people would lose savings. And much more. However, there are catastrophes and there are catastrophes. I am hard pressed to imagine a case where the results would be worse than the 2006 crisis in the US.

ashray 13y ago

Well, I live in India and it's quite similar to Indonesia (have traveled to Indonesia before..) in the ways that you mention. Many people in India operate under the same principles, small privately owned and financed businesses. However, the big banks do indeed deal with the major corporations. At this point of time, the reserve bank of India has published a report stating that the failure of ONE major corporation will prove catastrophic for our economy. [1] Sounds absolutely crazy but it seems to be true. This is because banks have over extended credit (once more ?) and maintain very low liquidity. If one of their debtors defaults, the bank will be finished, thereby unleashing a domino effect on their creditors and debtors.. crash and burn. Add to this, the fact that the country runs on a major current account deficit (export/import imbalance) means that the government will not be able to do any massive bailouts. The foreign exchange reserves in the country are still small. Which means, we can't print more currency to hack our way out of the problem either because we'll see hyperinflation in a very bad way. Of course, the regular joe here will be able to find a way to continue running his business because he may not have a big relationship with a big bank. But macroscopic factors like big banks failing and the economy collapsing will hit him and everyone else hard as well. There will be massive layoffs for folks who work in big corporations and while in absolute percentages of population this may not look like much, it'll still impact a few hundred million people easily in a country like India. TLDR; Banks in India need to be reigned in, otherwise things are going to get very ugly sometime soon. [1] - http://www.moneycontrol.com/news/economy/rbis-financial-stability-report-is-devilthe-details_1016722.html http://www.moneycontrol.com/news/economy/rbis-financial-stab...

einhverfr 13y ago
Keeping it in perspective though, the 2006-2008 crisis had our banks eating up, over three years, an entire year's worth of GDP in government bailouts (including secret federal reserve bailouts). And that was damage reduction. I am not saying things would not be bad if, say, BCA and similar banks were to collapse here in Indonesia. If they did, the corporate world here (including the toll roads) would be sorely hurt. And people would lose savings. And much more. However, there are catastrophes and there are catastrophes. I am hard pressed to imagine a case where the results would be worse than the 2006 crisis in the US.