Morningstar Advisor - August/September 2009 - 27

Nevertheless, because Asia remains a dynamic, fast-growing region, there is no doubt that for regional growth to be stable, some form of monetary cooperation and a regional financial market is inevitable. When it happens, diversified global portfolios will comprise a more equal distribution of assets at the geographical level, so that investors are not exposed excessively to only one or two major currencies, but at least three, if not four, global reserve currencies and related assets. The competition for resources in this more equal environment would offer better choice for investors globally. Conclusion Financial crises prove that financial engineering cannot create perpetual prosperity. It takes good governance—at the corporate, financial, and social level—to generate long-run sustainable stability. All crises have to be solved by governments, and if not satisfactorily, by the next government. Finance must serve the real sector. The three key functions of financial sector are to protect property rights, reduce transaction costs, and have high transparency. These are Western concepts that were not understood well within the Asian experience. But Asians do have the advantage of being pragmatic and have deep historical and cultural wisdom to accept the facts of life and adjust accordingly. Asians have to recognize that we live in an interdependent world, and that we need to cooperate to live in an increasingly small and fragile planet. We have national rights, as well as global responsibilities. How we move forward will depend on all our fountains of patience and understanding to listen to other views and, hopefully, find the right way forward. K Andrew Sheng is adjunct professor at the Graduate School of Economics and Management, Tsinghua University, Beijing, and the University of Malaya, Kuala Lumpur. His book, From Asian to Global Financial Crisis: An Asian Regulator’s View of Unfettered Finance in the 1990s and 2000s (Cambridge University Press), will be published in September. Footnotes 1 Angus Maddison, Contours of the World Economy, 1-2030AD, Oxford University Press, 2007. 2 There is a current tide of Western economists, led by Federal Reserve chairman Ben Bernanke, who blame the savings glut in East Asia for the excessive high liquidity that provided conditions for the asset bubble and subsequent deterioration in credit quality. See Ben Bernanke, “The Global Saving Glut and the U.S. Current Account Deficit,” Remarks by the Governor of the Federal Reserve Board at the Sandridge Lecture, Virginia Association of Economics, Richmond, Va., March 10, 2005. Having studied financial crises almost all my life, I come to the conclusion that crisis is ultimately political in nature. Even if it erupts as a financial crisis, its resolution is inevitably political because the distribution of losses is highly arbitrary and controversial. Ultimately, all financial crises are crises of governance. MorningstarAdvisor.com 27

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Morningstar Advisor - August/September 2009

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