The Policy Maker as Fire Warden
By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 4
September 2008, 7.50 am and 7.20 pm)
When there’s a fire in a building, a good fire warden
would calmly announce to everyone the steps to take, and then
march them to safety. It’s not necessary to frighten everyone
with details of the fire.
On the other hand, with an untrained fire warden, the
situation could turn disastrous. A stampede could ensue and
lives could be lost unnecessarily.
Managing an economy also requires the skill of a good fire
warden. Last Saturday, Alistair Darling, the British Chancellor
of the Exchequer, must have forgotten this.
That was when he alarmed everyone by saying that the
British economy was going through its worst downturn in 60
years. He even warned that things would get worse. After
realising his mistake, he said the following day that he was
actually referring to the global economy.
But that follow-up remark fell on deaf ears. Sterling
pound and stocks in London fell hard when markets opened on
In comparison, US Fed Chairman Ben Bernanke looks like a
better fire warden. When the current subprime crisis began more
than a year ago, he told us not to worry and that it would be
Although things have gotten worse, Bernanke’s earlier
optimism, some say lies, had good intentions. He just wanted to
make consumers feel good so that they would continue to
In economics, we learn of a term call the “multiplier
effect”. This refers to the situation whereby an initial
spending rise leads to an even greater increase in total
Let me explain. A company spends $1 million to build a
factory. The money goes to pay the builders’ wages and the
suppliers. The builders and suppliers will, in turn, spend on
food and clothing. This chain of events will continue.
Ultimately, a multiple of the initial $1 million will be
This “multiplier effect” is very important when
combined with consumer sentiment.
The latest research suggests that in recent years this
multiplier effect has grown larger. One possible reason is
because we are using less cash today, which takes the pain out
of spending, and makes the multiplier effect larger.
This stands to reason. Using cash is usually more
painful than using a credit card, which is more painful than
using “Nets”. Indeed using “Nets” stops being painful if you
don’t look at your bank statements. Then it’s almost as if
everything is free.
This may explain why the global economy and financial
markets have become more volatile in recent years. It also
means that policy makers must be more careful of their roles as
After Alistair Darling’s pessimistic view, the fear
now is that British consumers could spend even less from this
week, dragging the UK into a deeper recession.
Fortunately for Singapore policy makers, the
challenges are not the same. This is because the Singapore
economy is more heavily dependent on the external sector,
rather than on domestic consumer spending.
So it’s alright to paint a gloomy economic picture for
Singaporeans. In fact, there could be two benefits of being
Firstly, it could better prepare Singaporeans to face
the external threat, just like a good coach prepares his team
players for the competition. Secondly, bad news could redirect
some of the $4 billion Singaporeans spent, on shopping overseas
last year, back home.
How does former US Fed Chairman Alan Greenspan rate as
a fire warden? Well, we know he is famous for saying a lot of
things and yet for saying nothing. Perhaps, that was his
By confusing investors, Greenspan would create a
number of pessimists who want to sell, which is equal to the
number of optimists who want to buy. As a result, the market
does not move up or down. It moves sideways and remains calm.
That looks like a fire warden at his best.