Thursday, September 18, 2008

The Finance Portfolio

On 2 September 1998, the Prime Miniser sacked his Deputy cum Finance Minister. On 4 September, the Prime Minister became Acting Finance Minister. On 7 September, the Prime Minister became Finance Minister I.

Ten years later, on 17 September 2008, the post of Finance Minister I was passed on to the Deputy Prime Minister.

Traditionally, the Finance Minister post belonged to the Finance Minister, who is now relegated to Finance Minister II.

The role of the Finance Minister traditionally is to take care of the finances of the nation, particularly, how much to spend and how much to tax, and when necessarily how to raise funds to fill in the gap.

The management of the national economy belongs to several agencies, of which the most important is the central bank. This is because the Finance Minister tends to overspend as an expansionary fiscal policy is the no-brainer means of stimulating the economy.

The role of the central bank is to try to play alongside the political master - monetary policy to be contractionary when fiscal policy is expansionary and monetary policy to be expansionary when fiscal policy is contractionary.

In a politicised environment, there is a tendency for both fiscal and monetary policies to take the same stance - pushing together which often results in an overextension of the productive capacity of the economy to the extend that oversupply becomes a major problem. To solve oversupply, more cash is pumped in to hold up asset prices - now with the reason of saving the banks. Nobody wants to do anything, in order not to be blamed for the implosion which will surely happens.

In the end, the market is allowed to display its awesome power - to reward those who succeeds and punishes those who misjudge. The market collapses. The banks go under because their overgeared customers cannot repay their debt. The central bank becomes a one-trick pony - it keeps on pumping in cash.

No - the way forward to a better economy in future is to de-policise the finance portfolio - by prohibiting the Prime Minister or his Deputy from touching finance - so that those who know economic and monetary history may have a chance to do some pre-emptive measures to manage the economy.

Yes - get a more independent-minded Governor for the central bank. Or, do we get a governess?

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