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7 things that defined the decade The Straits Times 28/12/2009

A LOOK BACK AT THE DECADE

The first decade of the new millennium has been one of profound change.
In Part 2 of our series looking back at the highlights of the past 10 years, The Straits Times
examines the wild economic ups and downs that drove people to cheers and tears in a
period marked by extreme volatility.

Dot-Bomb

THE decade started not with a boom, but a bust – namely in the prices of technology stocks
that had been listed without their companies ever making a dollar of profit. All that was
needed was a sexy idea and the promise of limitless growth on the Internet's new e-
commerce frontier. By March 2000, the technology-heavy Nasdaq Composite Index in the
United States had crossed the 5,000 mark – more than doubling its value in just one year.

But that proved to be the peak of the bubble and the ensuing crash wiped out US$5 trillion in
market value of technology companies from March 2000 to October 2002. In Singapore, the
pain of the dot.com bust was felt most acutely by unit trust investors. Taking advantage of a
liberalisation of CPF investment rules in 1998, some had poured their life savings into
technology funds which were heavily marketed at the time – even to the elderly.

Tech funds lost as much as 70 per cent of their value following the crash, and most are still
underwater even today.

Enron

US ENERGY giant Enron may have been named "America's Most Innovative Company" by
Fortune magazine for six consecutive years, but no one expected it to apply its creativity so
expertly to cooking its books. From inflating revenues to hiding losses in "special purpose"
subsidiaries, the litany of sins revealed by a whistle-blower in October 2001 eventually led to
what was then the largest corporate bankruptcy in US history.

To America's embarrassment, the Enron debacle was followed by a series of scandals at big
names like Tyco and WorldCom. The accounting scandals eventually led to the
establishment of the Sarbanes-Oxley Act in 2002 (which punished fraud more severely) and
a more general push for corporate transparency worldwide.

In Singapore, accounting standards were tightened and companies moved to the current
rules requiring quarterly reporting of financial results. The Enron scandal also led to the
shutting of Arthur Andersen, one of the world's largest accounting firms.

Greenspan's legacy

UNTIL his retirement in 2006, Mr Alan Greenspan was arguably the most closely watched
individual in the world. As the longest-serving chairman of the powerful US Federal Reserve,
he presided over the world's most important financial variables – US interest rates and the
US dollar. Yet, he once famously said: "I guess I should warn you, if I turn out to be
particularly clear, you've probably misunderstood what I've said!"

What is now clear, however, is the octogenarian's principles and policies largely shaped the
path of the global economy this decade. His favourite remedy of aggressively easing interest
rates – and thus encouraging spending and borrowing – helped the world get back on its feet
once again after the dot.com bust and the Sept 11 terrorist attacks.

But it was also Mr Greenspan's unshakeable faith in free markets that led to the downfall.
Believing in his "efficient markets hypothesis" that the prices of assets will always find their
right value, he allowed a housing bubble to develop in the US and turned a blind eye to sub-
prime loans and complex derivatives that caused prices to spiral further upward.

The collapse of the US housing market last year eventually pulled much of the world into the
worst recession since the Great Depression.

Oil and commodities shock

DURING the 80s and 90s, the price of oil generally remained stable at below US$30 a barrel,
after adjusting for inflation.

But oil prices started rising sharply in 2003 in tandem with a worldwide economic boom,
hitting a peak of US$147.30 a barrel in July last year. The boom was a result of rising
demand for oil, particularly in rapidly industrialising nations like China and India. At the same
time, oil supplies worldwide are dwindling.

Financial speculators also moved in. The relentless trading of oil contracts exacerbated the
price spike and led later to calls for increased regulation.

The story of too little supply chasing too much demand spilled over to other commodities
such as agricultural produce, and the steel, copper and other metals that fed the mid-
decade building boom.

The result of all this was the highest inflation seen in decades. In Singapore, it hit almost 7
per cent, with the cost of everything from rice to cooking oil rising sharply. Companies were
forced to make one-off payments to staff to help them cope. But just as it caused pain, the
boom enriched oil-producing regions like the Middle East and Russia. Oil money would pay
for some of the most spectacular urbanisation the world has ever seen, in cities like Dubai,
Abu Dhabi and Moscow.

Property boom

PROPERTY will be a bittersweet flashback when economists and investors look back on
this decade.

In the US, cheap loans given out by banks, even to borrowers with terrible credit histories,
helped chase up house prices. Americans felt richer and spent more, fuelling an export boom
that drove much of Asia's phenomenal growth this decade.

But the eventual bursting of the property bubble – and the ensuing collapse in home prices –
had the opposite effect on Asia as Americans slammed their wallets shut. Exports collapsed
by up to a-third, sending countries like Taiwan, Korea and Singapore into their worst
recession in decades.

The US was not the only place where property prices soared. The economic boom years of
2004-2008 also led to global investors putting their money in the promising property markets
of Asia. The boom in luxury property led to record prices of over $5,000 per sq ft in
Singapore and a frenzied market for the collective sales of old condo sites.

The bubble burst with the onset of the financial crisis late last year, with prices correcting 20
per cent to 30 per cent.

But a surprise boom in suburban properties followed barely six months later, ensuring that
property stayed the way it was for most of the decade.
Sub-prime crisis

THE global financial crisis of September 2008 will probably go down in history as the defining
moment of the decade. But even though its story has been told countless times, it is still not
fully understood.
What seems to have happened was that new instruments in the financial markets allowed
banks to give "sub-prime" loans to dodgy borrowers in an almost limitless way. This was
because the banks were able to re-package and pass on the risk.

When the housing market collapsed in the US, these investments became close to
worthless. But by then, most of the world's biggest banks and insurers had already chalked
up trillions in inter-connected debts to each other, all related to these dodgy instruments.

The crisis bankrupted 158-year-old Lehman Brothers and its collapse in turn threatened to
bring down storied names like AIG, UBS, Morgan Stanley and Goldman Sachs.

Financial markets went into a tailspin and credit seized up. Panicked consumers and
companies stopped spending, trade slowed and jobs were axed. By the time spring came
round, economists were painting doomsday scenarios of double-digit declines and an
uncertain, slow path to recovery.

Realising the seriousness of the crisis, governments threw much-cherished free market
principles out the window. They put down blanket deposit guarantees to soothe investors and
effectively nationalised banks to bring their spiralling debts under control.

More than US$6 trillion in stimulus spending was pumped into economies in a bid to get
credit – and business – flowing again.

It all seems to have worked because the job losses have ceased and growth has turned
positive after a recession that has lasted less than a year. The question facing governments
now is how to remove these help measures without derailing the recovery. And the longer-
term task of re-looking financial regulation to prevent a repeat of the crisis has also barely
begun, ensuring that the after-effects of this crisis will last well beyond the end of thedecade.

"Chindia"
NEVER mind boom and bust, the most enduring story this decade has been the rise of
Asia's two economic giants – China and India.

In the last 20 years, China has been growing at more than 9 per cent per year, and India by
about 6 per cent. China is already narrowing the gap with the world's No. 2 economy Japan,
and by mid-century, it should overtake the US as No. 1. By then, China and India could be
producing half the world's goods and services.

To make things more intimidating, China and India seem to complement each other's
strengths. China is a manufacturing and engineering powerhouse, while India excels in
services industries like software, accounting and design.

And that's not even considering both countries' rapidly expanding consumer bases. China is
already the world's largest consumer of mobile phones and the third largest buyer of cars.
India's rising middle-class is already making its presence felt, snapping up property and other
investments in major cities of the world.

What happens next? Well, all eyes are on policymakers to see if they can properly control
economies that are speeding trains that threaten all the time to veer off-course.

But an equally big worry is whether these giants will team up in future and dwarf everyone
else. Annual trade between the two economies was just US$52 billion last year, but – as with
most "Chindia" stories – the sky's the limit.

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