Freedom & hate speech hypocrisy

Freedom per se has no value. It is what freedom is for. It is the use to which it is put. It is the sense of responsibility and restraint with which it is exercised. 

THE crude and disgusting video by some American citizens mocking Prophet Muhammad has caused great anguish to Muslims around the world. Blasphemous provocations by some media mavericks in France are adding insult to injury.

Even before the sacrilege perpetrated by the video Innocence of Muslims, the deeply-wounded Muslim community was living in humiliation and helplessness.

The 65-year-old American-aided genocide in Palestine continues to rage unabated.

In Syria, Western mercenaries are leading the civil war with overt and covert help from the Western alliance. Iran is under daily threat of annihilation. In blatant violation of international law, American drone attacks continue mercilessly to murder innocent civilians in Afghanistan, Iraq, Libya, Yemen, Somalia and Pakistan.

There is in most Muslim minds a perception that Islam is under attack; that Muslims are under siege; that behind the beguiling rhetoric of democracy, human rights and the war against terrorism, there is a cunning plan to re-colonise Muslim lands and seize their wealth for the insatiable appetite of Western economies.

It is in this background that the exploding Muslim rage against blasphemy must be understood.

However, understanding something does not mean justifying it. Human life is sacred and no idea and no theory can excuse the murder of innocents.

It is with sadness and shame that I note the violence and deaths resulting from the airing of the obnoxious video. Equally painful is the mindless damage to Buddhist religious places in Bangladesh because of Facebook insults to Islam.

Having said that I must state that we all have a duty to show respect to others and to not denigrate what they hold as sacred.

We have a duty to censor ourselves when we speak to others about what lies close to their hearts and souls.

Blasphemy violates the sacred; it trespasses boundaries that must exist in every civilised society; it causes pain to millions.

God and all His prophets must not be defiled. Blasphemy should be a punishable criminal offence in much the same way sedition and treason are.

Unlike free-speech advocates who place this freedom at the heart of their new abode of the sacred, I think that freedom per se has no value.

It is what freedom is for. It is the use to which it is put. It is the sense of responsibility and restraint with which it is exercised.

Blasphemy is a form of hate speech. Andrew March admits that “many in the West today use speech about Muhammad and Islam as cover for expressing hatred towards Muslims”.

Geert Wilders and makers of Innocence of Muslims are hate mongers, not human rights pioneers.

Behind hate speech is the ideology of racial or religious superiority. Hate speech amounts to discrimination.

It promotes denigratory stereotypes. It attacks basic premises of the human rights system, premises as deep as equal human dignity, respect for others and equal protection.

It must be asserted that Islamophobia is a new form of racism.

Further, the claims by Western leaders, including President Barrack Obama and Secretary of State Hilary Clinton that the constitutional principle of free speech permits no state interference is an overstatement.

In the US, the First Amendment of the Constitution has since the beginning been interpreted to mean that “prior restraints” on freedom of expression are not allowed.

But this does not exclude the legal possibility of post-event prosecutions and sanctions. For example, defamation is actionable. Contempt of Court is punishable.

For much of its history the USA has had a Sedition Act. Supreme Court decisions over the decades have vacillated between various criteria for determining the justification for invasion of free speech.

But there has always been the possibility of post-event restrictions to avoid danger to society. There is freedom of speech but sometimes no freedom after speech!

An Espionage Act exists. Whistleblowers are prosecuted. Under the Obama administration, six prosecutions under this Act were all directed against journalists exposing government wrongdoing.

At the Food and Drug Administration, they spy on their own employees’ email. At the Department of Defence any soldier who speaks about government lies in Afghanistan or Iraq is jailed. Twenty-seven laws exist to monitor social media content.

The State Department blocks Wikileaks with its firewall. The founder of Wikileaks is being hounded.

European record is even more reflective of double standards. Public order laws are used regularly in Britain and Germany to criminalise “politically incorrect” expressions or pro-Nazi ideas and to punish any comment, research or analysis that departs from the officially sanctioned version of the holocaust.

In February 2006, Austria jailed British historian David Irving for three years for denying the holocaust.

Overt and covert censorship is very much part of Western societies. Only that it is more refined; it is non-governmental; it is de-centralised. Its perpetrators are publishing houses, financiers, advertisers, interest groups, editors, publishers and other controllers of the means of communication.

Obviously free speech in the USA and Europe is not absolute save when it demonises, dehumanises and denigrates Islam and Muslims. Then it is part of the new abode of the sacred.

COMMENT
By PROF SHAD SALEEM FARUQI

Shad Saleem Faruqi is Emeritus Professor of Law at UiTM

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Fearful of China's rise?

PETALING JAYA: China may overtake the United States as the biggest economic power in the next four to six years but this does not mean that it will instantly become the world's superpower, says a leading expert on China.

Dr Martin Jacques, 67, author of the global bestseller When China Rules the World: the End of the Western World and the Birth of a New Global Order, said it would take several decades, from between 2030 and 2040, before it could even achieve developed state status.

“It'd be a long way to go as a superpower,” he said at a talk on “China As Global Superpower: What It Means For Asia and The World”, hosted by the Asian Centre for Media Studies, based in Menara Star.

The second edition of his book was released recently and 40% of its content was new.

“This includes an extensive chapter analysing events after the 2008 financial crisis,” he said.

Expert on China: Dr Jacques presenting a talk hosted by the Asian Centre for Media Studies at Menara Star.

 

His first was shortlisted for two major literary awards.

Dr Jacques said Westerners were fearful of China's rise due to scant knowledge and understanding of China and that it was a communist country.

They fear the country might throw its weight and its military power around.

However, Dr Jacques pointed out that China had no major interest in developing military power after Deng Xiaoping took over the country from the late 1970s to 1990s.

On fears that a communist country was not democratic, he argued that being democratic had not stopped Europeans from conquering others.

“Although China has a lot of problems now, it doesn't mean that it can't be humane and more democratic,” said Dr Jacques.

“Maybe, it will develop universal suffrage without following the Western way.”

Dr Jacques pointed out that the China Development Bank and China Export-Import Bank gave loans of more than US$110bil (RM338.415bil) to other developing countries in 2009 and 2010 while the World Bank only made loan commitments of US$100.3bil (RM307.65bil).

Dr Jacques, a Senior Visiting Research Fellow at the London School of Economics (University of London), visiting professor at Tsinghua University, Beijing, and Fellow at the Transatlantic Academy, Washington DC, was the former editor of Marxism Today, deputy editor of The Independent and a co-founder of the think tank Demos.

Fresh insight on China

PETALING JAYA: China continues to grab world headlines and dominate international news for many reasons. The world's second largest economy is now expected to be the biggest in only a few years, with many far-reaching implications to follow.

World-renowned author and academic Dr Martin Jacques (pic) will be presenting a fresh look at the new China in a talk at Menara Star in Petaling Jaya at 2pm on Thursday.

His talk titled “China As Global Superpower: What It Means For Asia and The World” is hosted by the Asian Center for Media Studies, based at Star Publications (M) Bhd.

Dr Jacques is the author of the global bestseller When China Rules the World: The End of the Western World and the Birth of a New Global Order, which has been translated into 11 languages, shortlisted for two major literary awards and described as the best book on China in many years.

To keep track of the rapid changes in China, Dr Jacques has just released the second edition of his book, incorporating the latest data and an extended analysis which includes a new section.

The discussant for the talk will be Dr Lee Poh Ping, a Senior Research Fellow in the Institute of China Studies at Universiti Malaya.

Dr Lee has written and published extensively on East Asian affairs and presented university seminars on Dr Jacques' work.

The talk will be moderated by The Star's associate editor Bunn Nagara.

The event at the Cybertorium in Menara Star is open to the public free of charge, with no registration required

 The Star/Asia News Network

Pussy Riot and Malaysian foreign-funded NGOs

Bizarre as it seems, two prominent Malaysian NGOs have something in common with Pussy Riot – the support of the US National Endowment for Democracy.

WHO loves Pussy Riot? Paul McCartney, Red Hot Chili Peppers and Sting are in the long list of celebrities supporting the so-called Russian feminist punk rock outfit.



But Madonna appears to have made the biggest impact with her brazen display of endorsement.

Midway through her 1984 hit Like a Virgin during a concert in Moscow last month, she stripped to exhibit the words “Pussy Riot” written across her back.

Her show did little to prevent three members of the group – Maria Alyokhina, Nadezhda Tolokonnikova and Yekaterina Samutsevich – from being jailed for two years.

They were found guilty of hooliganism and inciting religious hatred in an orthodox Moscow cathedral.

There has been much global media frenzy over their perceived persecution.The international condemnation has come from Amnesty International, the White House, the European Union, the British and German governments and an assortment of human rights groups.

Among the latest to join the chorus are Yoko Ono, wife of ex-Beatle John Lennon, and Myanmar opposition leader Aung San Suu Kyi.

The story as being spun by the mainstream global media is that of three young innocent women who were merely expressing their freedom being jailed by the dissent-silencing president Vladimir Putin (ex-KGB, remember?) and as such, need the support from all the outraged freedom-loving, justice-seeking and human rights-embracing people of the world.

After presenting the Lennon Ono Grant for Peace award to Tolokonnikova’s husband, Ono said: “I thank Pussy Riot in standing firmly in their belief for freedom of expression and making all women of the world proud to be women.”

Oh yeah? Let’s look at what they did to earn such an honour. On Feb 21, they stormed the altar of Cathedral of Christ the Saviour wearing balaclavas and bright outfits to “perform” what has been reported as a “punk prayer to the Virgin Mary”.

In reality, it was a grossly blasphemous parody of a Latin hymn, the English lyrics of which read: Holy, Holy, Holy, Lord God of Hosts 


Heaven and earth are full of your glory. Hosanna in the highest, Blessed is he who comes in the name of the Lord. Hosanna in the highest

What they yelled during their “performance” was this:

Holy s***, s***, Lord’s s***! Holy s***, s***, Lord’s s***! St Maria, Virgin, become a feminist ...*Patriarch Gundyaev believes in Putin *(The Russian Orthodox Church’s Patriarch Kirill of Moscow and All Russia, whose secular name is Vladimir Gundyaev)
 B****, you better believe in God!

The group is an offshoot of another known as “Voina”, or “War” in Russian, which has since 2008 staged several offensively shocking events in the name of “performance art”, including painting a mural of a penis on a bridge, having group sex in a museum, throwing live cats at workers of a McDonald’s outlet, overturning of police cars and firebombing buildings. They also stole a chicken from a supermarket and performed a lewd act with it.

It’s highly doubtful that the information would be revealed by the Western media when the case comes up for appeal on Oct 1.

Imagine the repercussions if such a group entered a mosque, church, or a Hindu or Buddhist temple in Malaysia to similarly “express their freedom”.

People who commit such acts in the US or in most European countries would also be arrested, charged and jailed, so what’s the big deal about these women?

For one thing, they seem to have powerful backers, in the form of the US National Endowment for Democracy.

Yes, the same entity supporting Bersih and Suaram, which is now being probed over its sources of foreign funding.

According to conspirazzi.com, Pussy Riot and Voina have open links to the NED through Oksana Chelysheva, who is deputy executive director of the Russian-Chechen Friendship Society funded by the NED and George Soros-funded outfits.

The NED was created in 1983, seemingly as a non-profit-making organisation to promote human rights and democracy but as its first president Allen Weinstein admitted to The Washington Post in 1991, a lot of what it does overtly used to be done covertly by the CIA.

In the words of ex-CIA officer Ralph McGeehee, it subsidises and influences elections, political parties, think tanks, academia, publishers, media and labour, religious, women’s and youth groups.

Russia has since introduced a new Bill to label NGOs that get foreign funds and are involved in politics as “foreign agents”, with their accounts subject to public scrutiny.

Paul Craig Roberts, a former Assistant Secretary of the Treasury, says the US, too, has laws which require foreign interests to register as foreign agents but this does not always apply to all Israeli lobby groups.

“There are no political parties in the US that are funded by foreign interests. No such thing would be permitted. It would be regarded as high treason,” he was quoted as saying by Pravda.

So, if outsiders are not allowed to fund and interfere in US politics, why should we allow its agencies to meddle in ours?

ALONG THE WATCHTOWER
By M. VEERA PANDIYAN

> Associate Editor M. Veera Pandiyan sees the wisdom in this quote from Danish philosopher Soren Kierkegaard: People demand freedom of speech as a compensation for the freedom of thought which they seldom use.

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Foreign funding for political purposes in Malaysia

Sep 22, 2012

New global currency wars warning!

The recent money-pumping measure by the United States has been criticised by Brazil as a protectionist move which will adversely affect developing countries.

THE recent announcement by US Federal Reserve chief Ben Bernanke that the United States would be renewing its pumping of money into the banking system has been acclaimed by some parties as a move to revive its faltering economy.

But the Fed’s measure to revive “quantitative easing” is not being welcomed by all. It has instead caused anxiety in some developing countries.

Their fear is that a large part of the massive amounts of money being unleashed into the financial markets may fail to boost the US economy but will find its way as unwanted capital flows into some developing countries.

Bernanke announced that the Fed would purchase US$40bil (RM124bil) per month of mortgage-linked assets from the market, and do so continuously until the jobs situation improves.

The hope is that cheap and abundant money will encourage entrepreneurs and consumers to spend more and spark a recovery.

However, previous rounds of such quantitative easing did not do much for the US economy.

A large part of the extra funds were placed by investors not in new US production but as speculative funds in emerging markets or in the commodity markets, in search of higher returns.

In developing countries that received the funds, adverse effects included an inflation of prices of property and other assets, as well as appreciation of their currencies which made their exports less competitive.

On the other hand, the US dollar depreciated because of the increased supply of US dollars and the reduced interest rates, making US exports more competitive.

Brazil has been in the forefront of developing countries that are critical of the US money pumping. Last week, the Brazilian finance minister Guido Mantega called the US Fed measure a “protectionist” move that would re-ignite global currency wars.

Mantega told the Financial Times that the third round of quantitative easing would only have a marginal benefit in the United States as the already high liquidity in the United States is not going into production.

Instead, it is really aimed at depressing the dollar and boosting US exports.

Japan has also decided to expand its own quantitative easing programme in response to the US move, and this is evidence of tensions and a currency war, said Mantega.

In previous rounds of liquidity expansion in recent years, Brazil has been one of the developing countries adversely affected by sharp currency appreciation, which reduced its export competitiveness and facilitated import increases.

Recently, Brazil’s currency, the real, has weakened from the high of 1.52 real to the dollar to the present two real, which has improved its competitiveness.

But the new liquidity expansion in the United States may again cause a flood of funds to enter Brazil and reverse the currency trend.

In such a situation, Brazil may be forced to take measures to stop the real from appreciating, said the minister.

Previously, the country had taken capital controls to discourage inflows of foreign funds.

What has irritated Brazil even more is an accusation by the US Trade Representative Ron Kirk that Brazil has become protectionist in raising some tariffs, even though the Brazilian measures were within its rights in the WTO framework.

Brazil’s Foreign Minister Antonio Patriota last week wrote to Kirk pointing out the unfairness of a protectionist US accusing Brazil of protectionism.

“The world has witnessed massive monetary expansion and the bailout of banks and industrial companies on an unprecedented scale, implemented by the United States and other developed countries,” said Patriota.

“As a result, Brazil has had to cope with an artificial appreciation of its currency and with a flood of imported goods at artificially low prices.”

He pointed out that the United States was a major beneficiary, as it almost doubled its exports to Brazil from US$18.7bil (RM58bil) to US$34bil (RM105bil) from 2007 to 2011.

“While you refer to WTO-consistent measures adopted by Brazil, we, on our side, worry about the prospect of continued illegal subsidisation of farm products by the United States, which impact Brazil and other developing countries, including some of the poorest countries in Africa.

“The US has managed in a short period to remarkably increase its exports to Brazil and continues to reap the benefits of our expanding market. But it would be fairer if those increases took place in an environment not distorted by exchange rate misalignments and blatant Government support”.

As the quantitative easing from the United States and Japan is only going to take effect in future, it remains to be seen whether history will repeat itself – it will have minimal effect on the United States and Japanese economic recovery but will cause problems for developing countries – or whether it will be different this time.

GLOBAL TRENDS By MARTIN KHOR

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Japan should drop its sense of superiority and tricks over China, Asia

Sept. 18 - Eighty-one years have passed since the Japanese invasion of China's northeast. But now, it is time for Japan to drop its sense of superiority regarding China and Asia in general.

Japan has to recognize that China is no longer weak and poor as it was in the 1930s, when it suffered great disasters brought by Japanese militarism. The balance of power between the two countries has drastically changed.

Sept. 18, 1931 is a day of disgrace in Chinese history, as it marks the day Japan launched an invasion of China's northeast and occupied the whole region four months later. The incident was followed by Japan's invasion of Pacific Asia in 1941, leading to one of the greatest disasters in the region.

The anniversary this year is quite different from before, as it coincides with Japan's "purchase" of part of the Diaoyu Islands, triggering fierce anti-Japan sentiment in China.

Japan's arrogance and provocation regarding the Diaoyu Islands is in line with its complex formed over one century ago, when it proclaimed superiority over China and Asia.

The two countries became rivals over the last 500 years, with Japan catching up with and defeating China in the late 19th century. Even its defeat in World War II could not break its sense of superiority, as Japan considered China's victory to be a present from the United States and the Soviet Union, turning a blind eye to the Chinese people's heroic resistance.

Japan has been heavily influenced by China and learned a great deal from Chinese culture. China enjoyed comprehensive superiority over its neighbor in all fields, including military strength, at that time.

However, China experienced decline since the late Qing Dynasty (1644-1911), while Japan rose as a world power in the late 1860's, when the country completely reformed its political and social structure by using European powers as models.

During the Meiji Restoration, Japan adopted a policy of breaking away from Asia and merging with Europe. It viewed China at that time as an antiquated and decaying country.

Its fear of China died with Japan's overwhelming victory in the First Sino-Japanese War (1894-1895). The defeat also obliterated China's first attempt to modernize.

Japan subsequently established its superiority over China, both in actual strength and in mentality, as it no longer viewed China as a teacher.

During its expansion, Japan forced China to cede Taiwan in 1895 and annexed the Korean Peninsula in 1910. In the early 1940s, Japanese aggression saw little resistance in Asia and reached its peak after the attack on Pearl Harbor in December 1941.

Japanese militarists called for a "Greater East Asia Co-Prosperity Sphere" in the 1930s, attempting to create a bloc led by the Japanese and free of Western powers.

Although Japanese militarists and war criminals' pipe dreams ended with the country's unconditional surrender to Allied powers, Japan's sense of superiority continued due to the U.S. desire to contain the Soviet Union and China.

But 60 years after World War II, the situation has completely changed. China has maintained rapid economic development and in 2010 surpassed Japan to become the world's second-largest economy. The strength of China's national defense has grown accordingly.

Japan is now suffering from a long-term economic downturn, along with an aging population.

China's rise has touched the nerves of some Japanese, who have resorted to tricks to disturb China's peaceful development. This may be the cause of the tension experienced after a short friendly period in the 1980s.

The present China is not the same as the China of years past. Japan should face the situation, drop its obsolete sense of superiority and take a constructive attitude to solve disputes.

This is the only way to achieve common development in both countries and Asia as a whole.

 By Xinhua writer Ren Ke

Baying for blood, again

Nobody wants to have a war with Iran except Israeli premier Binyamin Netanyahu, so it could still happen.

IF a deeply troubling international situation suddenly looks too good to be true, it usually is just that – and so desperately bad as to need looking good.

And so it is with the positions of the permanent members of the UN Security Council (UNSC) over Israel’s push to attack Iran, a situation that can soon become much more desperate.

China and Russia have long resisted the Israel-United States axis’ efforts to recreate West Asia in its own image, or at least to its own preference. The point was driven home when, under cover of “protecting innocents” through a ceasefire and no-fly zone in Libya last year, Western countries openly attacked government forces.

Now that Saddam Hussein’s Iraq and Muammar Gaddafi’s Libya are gone, the only Muslim nation capable of standing up to the axis is Iran. But how to fashion a case against Iran that looks at least half-credible internationally?

On attack mode: If the United States still insists on staying away, without even red lines or deadlines for Iran to conform to, Israel may well go it alone and attack Iran. — EPA

 

Israel, the only nuclear-armed country in the region, does not pretend it has evidence of Iranian plans for nuclear bombs. So its best pretext is that Iran may one day have them, despite Teheran’s repeated assurances that its nuclear energy production and medical research are not a prelude to nuclear armaments.

China and Russia have no desire to see a nuclear-armed Iran either, in fact quite the reverse. Their intelligence services report that there are no grounds to assume that Iran has or even wants to have nuclear weapons.

The conclusion is shared by US and Israeli intelligence, and cited by no less than Israel’s military chief, among others. But that is “only” the pure outlook of professionals and technocrats before getting tweaked by politicians.

Israeli Prime Minister Binyamin Netanyahu seems bent on creating an imploding situation, pushing and pulling to make it want to explode and involve other countries in supporting roles. Chinese and Russian diplomats have consistently kept well clear of it all.

Sensing that Obama’s Washington had lately also been keeping its distance, Netanyahu piled on the pressure for days on end. Then his ultimatum was delivered on Tuesday: that if the US still insists on staying away, without even red lines or deadlines for Iran to conform to, Israel may well go it alone and attack Iran.

And if that happened, Washington could be made to look bad in failing to live up to its God-given mission of protecting the free world. In an election season, those kinds of terms can make a difference, and they did.

News then came the next day that Beijing and Moscow had at last “agreed” to add their weight to Western-Israeli condemnation of Iran’s attitude, if not its actions or policies. That may seem like the hitherto elusive consensus among the UNSC’s permanent five, except that it never was.

After Israel’s quiet ultimatum following long days of hard lobbying, its bottom line finally made Washington scramble – not the fighter jets, but UN diplomats in persuading Beijing and Moscow to swing their support behind an alternative approach pre-empting Israel’s further war cries.

At any rate, the resolution at the IAEA (UN nuclear watchdog) on Thursday would have no binding effect. If diplomatic declarations are mere symbols of policy intentions, then the proposed resolution is the most symbolic of all.

Yet at the most superficial of official levels, Israel also agrees that diplomacy should still be the first option before military action. But there is no denying that Netanyahu is gung-ho on another attack on another Muslim nation, preferably with other countries rather than Israel doing the work.

Walking the tightrope

Iran has no plan or policy for nuclear weapons, much less those weapons themselves. For Netanyahu’s campaign to target Teheran it needed to spread fear and vilification, while official texts could refer only to Iran’s attitude and posturing.

Yet despite all his huffing and puffing, or rather because of them, he is making matters worse for the entire region. Anyone in a less emotional state can see the thin tightrope he is treading.

By seeking to force Iran, a country justly proud of its history and culture, to bow to unreasonable demands, Netanyahu is only making a rebuff from Teheran inevitable. That would in turn force Israel to plummet into war, since it would also not want to lose face.

Then by making clear that the push for war “has to come now” rather than later when Iran may possess nuclear weapons, Netanyahu is confirming to Teheran that nuclear weapons work as a deterrent against foreign attacks. Even if Iran never wanted nuclear weapons before, it would be sorely tempted to seek them now.

One result is that Israeli leaders themselves are divided over an attack on Iran. Its military leaders, President Shimon Peres and Netanyahu’s own Deputy Prime Minister Dan Meridor (in charge of intelligence and nuclear affairs) are among those who disagree with him on the need to attack Iran.

Meanwhile, a top-level US report bearing the seal of more than 30 retired diplomats, admirals, generals and security chiefs advise that a war with Iran will be more painful and costly than the Iraq and Afghan invasions combined.

Previous estimates had found that an attack on Iran would only delay its nuclear programme by several months. This latest report says that a full-scale attack involving aerial bombardment, ground troops, cyberwarfare and a military occupation, among other requirements, would only delay a nuclear programme by several years, not stop it.

However, the likes of Netanyahu are determined to press on regardless. He seems to have calculated that a US election season can give him an edge by pressuring incumbent Obama to lend him unambiguous support.

Iran may also be hoping that public anxieties in the US over jobs and a faltering economy can, in an election season, constrain the urge of US hawks to join Israel. So far Teheran appears to not want to relent by appeasing the doubters.

Nonetheless, the prospect of war is still closer than anyone other than Netanyahu would wish. There are at least five reasons for this.

First, by pushing the option of a military attack to the maximum, Israeli policymakers would be loath to effect a turnaround short of a major Iranian concession. And that would be highly unlikely.

Second, Netanyahu’s primary aim is not the destruction of Iran but key surgical strikes against suspected nuclear sites. He and his advisers may well see this as “doable”, even though the consequences can easily and quickly become unmanageable.

Third, Iran is likely to retaliate in more ways than one, including through forms of asymmetrical warfare. Israel has launched “spot attacks” on Iraq’s and Syria’s installations before and got away with it, but it has never engaged a country as large and powerful as Iran.

Fourth, an attack by Israel, or jointly by Israel and the US, would immediately invite endless rounds of counter-attacks by militant Muslim groups and individuals around the world. These are just some of the consequences that are not clearly foreseeable or controllable.

Fifth, when push comes to shove, both Democratic and Republican candidates in the US presidential election are likely to side with Israel.

Once Netanyahu as Prime Minister sets the country on a war footing, even the naysayers in his own administration will feel the need to acquiesce in the national decision.

Behind The Headlines By Bunn Nagara

Anti-American world-wide stirred up by US film 'Innocence of Muslims'

Tara Todras-Whitehill for The New York Times

Egyptian protesters threw stones at riot police officers during clashes near Tahrir Square in downtown Cairo on Friday.







Anti-American rage that began this week over a video insult to Islam spread to nearly 20 countries across the Middle East and beyond on Friday, with violent and sometimes deadly protests that convulsed the birthplaces of the Arab Spring revolutions, breached two more United States Embassies and targeted diplomatic properties of Germany and Britain.

The broadening of the protests appeared to reflect a pent-up resentment of Western powers in general, and defied pleas for restraint from world leaders, including the new Islamist president of Egypt, Mohamed Morsi, whose country was the instigator of the demonstrations that erupted three days earlier on the anniversary of the Sept. 11, 2001, attacks.

The anger stretched from North Africa to South Asia and Indonesia and in some cases was surprisingly destructive. In Tunis, an American-run school that was untouched during the revolution nearly two years ago was completely ransacked. In eastern Afghanistan, protesters burned an effigy of President Obama, who had made an outreach to Muslims a thematic pillar of his first year in office.

The State Department confirmed that protesters had penetrated the perimeters of the American Embassies in the Tunisian and Sudanese capitals, and said that 65 embassies or consulates around the world had issued emergency messages about threats of violence, and that those facilities in Islamic countries were curtailing diplomatic activity. The Pentagon said it sent Marines to protect embassies in Yemen and Sudan.

The wave of unrest not only increased concern in the West but raised new questions about political instability in Egypt, Tunisia and other Middle East countries where newfound freedoms, once suppressed by autocratic leaders, have given way to an absence of authority. The protests also seemed to highlight the unintended consequences of America’s support of movements to overthrow those autocrats, which have empowered Islamist groups that remain implacably hostile to the West.

“We have, throughout the Arab world, a young, unemployed, alienated and radicalized group of people, mainly men, who have found a vehicle to express themselves,” Rob Malley, the Middle East-North African program director for the International Crisis Group, a consulting firm, said in a telephone interview from Tripoli, Libya.

In a number of these countries, particularly Egypt and Tunisia, he said, “the state has lost a lot of its capacity to govern effectively. Paradoxically, that has made it more likely that events like the video will make people take to the streets and act in the way they did.

Some of the most serious violence targeted the compound housing the German and British Embassies in Khartoum, the Sudanese capital, causing minor damage to the British property but major fire damage to the German one. The foreign ministers of both countries strongly protested the assault, which The Associated Press said had been instigated by a prominent sheik exhorting protesters to storm the German Embassy to avenge what he called anti-Muslim graffiti on Berlin mosques.

The police fired tear gas to repulse attacks in Khartoum, where about 5,000 demonstrators had massed, news reports said, before they moved on to the United States Embassy on the outskirts of the capital.

In Tunis, the United States Embassy was assaulted at midday by protesters who smashed windows and set fires before security forces routed them in violent clashes that left at least 3 dead and 28 hurt. Witnesses and officials said no Americans were hurt and most had left earlier.

The worst damage was inflicted on the American Cooperative School of Tunis, a highly regarded institution that, despite its name, catered mostly to the children of non-American expatriates, nearly half of whom work for the African Development Bank. School officials, who had sent the 650 students home early, said a few protesters scaled the fence and dismantled monitoring cameras, followed by 300 to 400 others, some of them local residents, who looted everything including 700 laptop computers, musical instruments and the safe in the director’s office, and then set the building on fire.

“It’s ransacked,” the director, Allan Bredy, said in a telephone interview. “We were thinking it was something the Tunisia government would keep under control. We had no idea they would allow things to go as wildly as they did.”

The school’s director of security, David Santiago, said a group of staff members formed a posse armed with baseball bats to chase lingering looters away hours after the assault. “Our elementary school library is burning as we speak,” he said angrily as he and his colleagues sought to assess the damage. “It’s complete chaos.

Thousands of Palestinians joined demonstrations after Friday Prayer in the Gaza Strip. Since there is no American diplomatic representation in Gaza, the main gathering took place in Gaza City, outside the Parliament building, where American and Israeli flags were placed on the ground for the crowds to stomp. Palestinians also clashed with Israeli security forces in Jerusalem and held protests in the West Bank.

Witnesses in Cairo said protests that first flared Tuesday grew in scope on Friday, with demonstrators throwing rocks and gasoline bombs near the American Embassy and the police firing tear gas. The Egyptian news media said more than 220 people had been injured in clashes so far.

In the eastern Libyan city of Benghazi, where J. Christopher Stevens, the American ambassador, and three other Americans were killed Tuesday, militias fired rockets at what they thought were American drones overhead, prompting the government to temporarily close the airport as a precaution. The bodies of Mr. Stevens and the others killed in the Libya attack were returned to the United States on Friday.

In Lebanon, where Pope Benedict XVI was visiting, one person was killed and 25 were injured as protesters attacked restaurants. There was also turmoil in Yemen, Bangladesh, Qatar, Kuwait, Bahrain, India, Pakistan and Iraq, and demonstrations in Malaysia. In Nigeria, troops fired into the air to disperse protesters marching on the city of Jos, Reuters reported. In Syria, about 200 protesters chanted anti-American slogans outside the long-closed American Embassy in Damascus, news reports said.

In the Egyptian Sinai, a group of Bedouins stormed an international peacekeepers’ camp and set fire to an observation tower, according to Al Ahram Online, a state-owned, English-language Web site. Three people, two Colombians and one Egyptian, were injured in the ensuing clashes.

In Yemen, baton-wielding security forces backed by water cannons blocked streets near the American Embassy a day after protesters breached the outer security perimeter there, and officials said two people were killed in clashes with the police. Still, a group of several dozen protesters gathered near the diplomatic post, carrying placards and shouting slogans.

In Iraq, where the heavily fortified American Embassy sits on the banks of the Tigris River inside Baghdad’s Green Zone and is out of reach to most Iraqis, thousands protested after Friday Prayer in Sunni and Shiite cities alike.

Raising banners with Islamic slogans and denouncing the United States and Israel, Iraqis called for the expulsion of American diplomats from the country and demanded that the American government apologize for the incendiary film and take legal action against its creators.

In Egypt, in particular, leaders scrambled to repair deep strains with Washington provoked by their initial response to attacks on the American Embassy on Tuesday, tacitly acknowledging that they erred in their response by focusing far more on anti-American domestic opinion than on condemning the violence.

The attacks squeezed Mr. Morsi and the Muslim Brotherhood between conflicting pressures from Washington and their Islamic constituency at home, a senior Brotherhood official acknowledged. During a 20-minute phone call Wednesday night, Mr. Obama warned Mr. Morsi that relations would be jeopardized if the authorities in Cairo failed to protect American diplomats and stand more firmly against anti-American attacks

On Friday, Mr. Morsi, on a scheduled state visit to Rome, called attacks on foreign embassies “absolutely unacceptable.”

By RICK GLADSTONE

Reducing income tax

I BELIEVE that the path to economic recovery in Europe and for the rest of the world will be a very long journey this time.

It needs all sorts of new ideas to test and try, as old ideas used previously to boost the economy may not work this time, as you still hear some countries considering another round of quantitative easing and financial bailouts.

Perhaps certain administrative policies of these countries may have to be tweaked but they have not done so.

One aspect that I wish to discuss here is the taxation policy, which Malaysia can reap benefits from and put itself on a level playing field with Singapore and Hong Kong.

The taxation policy of a government can impact the level of disposable income of households (i.e. after-tax income).

A tax increase will reduce household income, as it takes more money out of household.

A tax decrease, on the contrary, will increase disposable income, because it leaves households with more money.

Disposable income is the main factor driving consumer demand and thereafter, pull a sluggish economy out of recession.

Despite this knowledge, some countries in Europe had begun raising tax rates, especially on value added tax/sales tax on products and services.

Recently, I read that France is planning to increase the top tax rate for individual income tax to 75%. That is to say, the more you earn there, the less money you can take home after paying your taxes.

Individuals are also consumers. As consumers have less money to spend (since most of the money is used to pay tax), they are likely to cut down on spending.

As a result of “careful” consumer spending, businesses (which are also paying taxes) will derive lesser income and thereafter, pay lesser tax.

This is because the income that is subject to tax is less, therefore, the tax amount will also be less.

So, instead of the intended effect of higher tax revenue from tax hikes, the tax revenue will go down instead.

So, what is the solution?

The answer – major reduction of individual income tax rates.

Let people pay less tax and have higher take-home pay (after tax) and encourage them to spend more.

In the case of Malaysia, a major reduction in individual income tax rates should slow down the effect of brain-drain of our talented individuals to overseas countries and help the country to retain the “tax base” or “tax-paying individuals”.

KEVIN TEO Singapore

Related post:

Time to reform Malaysia's tax system?

Time to reform Malaysia's tax system?

Comprehensive review timely as Malaysia is driving its transformation programme

RECENT developments in parts of Europe have sparked a debate in the eurozone on austerity and growth. Those who argue for austerity or “fiscal prudence” claim that debt management is key to restoring investor confidence and, therefore, long-term prosperity.

Borrowing more is not an acceptable response to a crisis caused by over-borrowing and over-spending. In contrast, those who prefer greater stimulus claim that, without further investment, growth will simply not return, and without some Government stimulus, no economy can pull itself out of recession to achieve long-term stability and growth.

Whilst there is no clear “right” answer, there is one aspect of Government policy that is absolutely central to this taxation. Governments must ensure a balanced system of taxation that provides the right incentives to business and citizens, while enabling the Government to meet its debt and spending obligations. Getting this balance right can drive increased confidence among the investor community and stimulate economic activity, international competitiveness and long-term growth.

A new approach

In the past, many countries have relied on the support of international bodies and other inter-governmental assistance to begin the process of tax reform in respect of designing the tax system itself and in improving the ability to collect taxes. In the post “credit-crunch” world, it has become apparent that the operational ability to increase tax revenues is somewhat limited. A new hands-on approach is required to assist the public sector, generating increased tax revenues and driving corporate activity without raising taxes or damaging international competitiveness.

Malaysia has never had a comprehensive review of its tax system

 

Like any business, a Government has costs and it has revenues. A framework is required to help Governments optimise their tax revenue and balancing this need with the creation of the right incentives for citizens and businesses to stimulate the economy. To achieve this, our experience in working with Governments is typically structured around three core work streams:

● Tax reform design - Modeling the economy and designing a new system of taxation appropriate for the jurisdiction, with the emphasis on simplicity, fairness, participation and economic stimulus;

● Tax compliance - Building the taxpayer base to ensure all taxpayers have paid the correct amount of tax under the law and will continue to do so and;

● Tax operational improvements - underpinning both streams, identifying and delivering detailed operational improvements, ensuring transparency of data and processes within the tax administration, across Government departments and with taxpayers.

Malaysia has never had a comprehensive review of its tax system. The setting up of a Tax Review Panel a few years ago basically focussed on the proposed Goods & Services Tax and has done some good work in this area but the focus on income taxes was limited and too restrictive. A comprehensive review is now timely given that Malaysia is aggressively driving its transformation programme towards achieving developed nation status by 2020.

Tax reform design

A tax system is at its best when it is at its simplest, levying the minimal number of taxes, thus making compliance easy for taxpayers and the tax authorities. Headline rates should be minimised, often in exchange for the removal of reliefs or deductions. In addition, it is essential to improve the quality of the taxpayer base. Finally, international trends are to shift the burden of taxation towards indirect taxes to ensure participation in the tax system, improve the reliability of collections and increase fairness.

An effective communications strategy is critical to the success of any tax reform project. To succeed, these projects require a proactive approach to ensure that stakeholders are aware of their progress.

Tax reform projects should have four key phases:

Understand - Work closely with the Government and external bodies to gather and verify data. Quickly establish a detailed understanding of the current tax system and understand the issues from a number of different perspectives. At the same time, model the economy and current tax collections, benchmarking them against other jurisdictions.

Model - Develop an outline model for the proposed tax system, meeting regularly with stakeholders to develop and test ideas and model alternative taxation methods. Produce a detailed proposal for the new tax system, including clear legislative and operational proposals, for political approval.

Implement - Bring the approved model to life. This can include taking a lead drafting new legislation and guidance. A highly operational approach, working to ensure systems, processes and controls are best-in-class and fit-for-purpose is essential at this stage.

Roll-out - Roll out the new system to the various groups of taxpayers and stakeholders and train the Tax Administration teams, including training on tax technical and operational / systems issues.

Tax compliance

In many developing economies, the incidence of tax evasion is certainly not small. Broadening the taxpayer base and ensuring current taxpayers are paying the correct amount of tax under the law helps keep taxes low. Economic and forensic analysis must be applied to identify areas of the economy requiring particular attention. A range of techniques is typically required to provide a complete picture of the tax-paying community.

To deliver real change for the tax administration, forming a single team to identify taxpayers, initiating assessments, managing taxpayer responses and building IT databases is key. Enhancements to processes and systems also drive improved service levels to taxpayers (whether this be speed or quality), which is vital to gain support for the tax system and for improving participation.

Tax operational improvements

Real operational improvements are essential to the successful delivery of any tax reform project. This may include improvements to existing IT systems to automate processes and controls and improve the way data is managed. This applies both to the tax administration's systems and the way it interacts with other Government departments. For example, the tax administration should automatically be informed whenever a new business registers with the Companies Commission.

On a practical basis, it is essential to ensure new tax documents and forms are produced where required, both in paper and electronic form. It makes sense to consider these as part of a wider programme of improving taxpayer interaction, for example, with the implementation of a new website or the ability to file tax returns online. Key to the success of any new document is simplicity both for the tax administration to review and process and for the taxpayer to understand.

Conclusion

The post credit-crunch world has generated a renewed focus on how a Government raises its revenue the right balance of fiscal prudence and stimulus is difficult to achieve. However, with a clear view on what taxes are levied, who pays them and how they are administrated, jurisdictions can drive real improvements in tax collections, real efficiency gains and, in doing so, drive the participation of the taxpaying community. This, in turn, can provide assurance for the investor community, enable the Government to meet its obligations and drive long-term growth for the wider economy, its businesses and citizens.

It is timely that Malaysia announces a comprehensive fiscal reform which is wide-based and wide-ranging and puts into place a long-term plan to mould a world class tax system that will be comparable to the leading developed nations in the world. It is time to let go of the ad-hoc approach of tinkering with the tax system let us get on with it!

By Dr Veerinderjeet Singh and Andrew Burman

● Dr Veerinderjeet is chairman of Taxand Malaysia and Andrew Burman is senior director at Alvarez and Marsal Taxand in the United Kingdom. Both entities are part of the Taxand Global Organisation. They can be contacted at vs@taxand.com.my and aburman@alvarezandmarsal.com respectively.

World Competitive Rankings defy logic

The WEF may have its own method of measuring the competitiveness of each country but its rankings defy the stark reality of what is going on in the world.

BANGKOK: The World Economic Forum (WEF) has just issued its Global Competitiveness Index 2012-2013 rankings.

Thailand’s competitiveness ranking has improved slightly to 38th spot this year, while Switzerland has edged out Singapore to become the most competitive nation on earth.

The WEF has its own formula in ranking the competitiveness of each country. However, the WEF’s ranking does raise some eyebrows.

According to the WEF, Spain is more competitive than Thailand because its overall ranking is 36th. This ranking is questionable.

Spain is planning to seek a full bailout from the European Union. The European Central Bank is about to monetise its debt. It has received €100bil (RM393.7bil) in bailout funds already. Some €75bil (RM295.3bil) in deposits have fled the Spanish banking system.

Spain is in a similar situation to Thailand in the first part of 1997 before Thailand sought a bailout from the International Monetary Fund. By this measure, Spain should not get a ranking higher than Thailand.

Switzerland, ranked No.1, will not enjoy its position as an oasis of peace and prosperity in Europe for too long in the event of a euro implosion. Swiss banks’ assets, which are tied to the European banking crisis, are more than 300% of the country’s GDP.

The United States has slipped to 7th in the rankings. The US economy is in big trouble. Some 46 million Americans are on food stamps. There are 10 million Americans unemployed, including another 12 million who are doing odd jobs.

Some 18 million American households are having a tough time making ends meet. The banking system is in shambles. The US national debt has hit US$16tril (RM49.7tril), or about 100% of the GDP. The budget deficit is chronic. The country is years away, if ever, from being able to balance its budget.

Most important, the Federal Open Market Committee will meet on Sept 12 to determine whether it will go ahead with a bond-buying programme, or QE3, to further prop up the financial system. US finances are in very bad shape indeed.

Japan is ranked in 10th spot. Does it deserve this position? The whole world knows that Japan has the world’s largest public debt at more than US$12tril (RM37.3tril), or 230% of its GDP. Japan’s debt is largely financed by domestic bonds. But with an ageing society, Japan will face higher interest costs from its borrowing, which will put the health of its finances into further question.

The Japanese economy is far from recovering from its crisis of the 1990s. Japan is facing sluggish growth and also high energy costs in the aftermath of the Fukushima nuclear plant disaster.

Its export sector is feeling the pinch from the strong yen. If the consumer markets in Europe or US were to slacken even more, Japan’s export machines will wobble. Foreign exchange earnings will plunge, while domestic demand has been in a weak state all along.

Saudi Arabia, ranked at 18th, is the world’s largest oil exporter. But a Citibank report issued last week said Saudi Arabia might have to import energy by 2030 if the current pace of domestic consumption and exports continues.

Israel is ranked 26th, though it is facing off against Iran in the Middle East. A war could break out between the two countries at any time, given the tensions between their leaders.

China is ranked 29th, although it is the richest country in terms of foreign exchange reserves. Its reserves stand at US$3tril (RM9.3tril). China is the world’s production factory. Its economy is the world’s second largest after the United States. It is improving fast in technology and innovations.

Moreover, China is also building up its military and has nuclear weapons in store. Apparently, China does not deserve this relatively low ranking.

This also applies to other Brics countries such as Russia (67th), Brazil (48th) and India (59th). How is it possible that the Philippines musters at 65th, two notches higher than Russia, which is still a superpower, rich with resources? The Philippines is vulnerable to food price increases and also to natural disasters.

The WEF may have its own method of measuring the competitiveness of each country. But its rankings defy common sense and the stark reality of what is going on in the world.

From a group of leading Asian newspapers working towards improving coverage of Asian affairs
http://www.asianewsnet.net/

China, Russia sound alarm on world economy at APEC summit

By Timothy Heritage

VLADIVOSTOK, Russia

(Reuters) - China and Russia sounded the alarm about the state of the global economy and urged Asian-Pacific countries at a summit on Saturday to protect themselves by forging deeper regional economic ties.

Chinese President Hu Jintao said Beijing would do all it could to strengthen the 21-member Asia-Pacific Economic Cooperation (APEC) by rebalancing its economy, Asia's biggest, to improve the chances of a global economic recovery.

Russian President Vladimir Putin said trade barriers must be smashed down as he opened the APEC summit which he is hosting on a small island linked to the Pacific port of Vladivostok by a spectacular new bridge that symbolizes Moscow's pivotal turn to Asia away from debt-stricken Europe.

"It's important to build bridges, not walls. We must continue striving for greater integration," Putin told the APEC leaders, seated at a round table in a room with a view of the $1 billion cable-stayed bridge, the largest of its kind.

"The global economic recovery is faltering. We can overcome the negative trends only by increasing the volume of trade in goods and services and enhancing the flow of capital."

Hu told business leaders before the summit the world economy was being hampered by "destabilizing factors and uncertainties" and the crisis that hit in 2008-09 was far from over. China would play its role, he said, in strengthening the recovery.

"We will work to maintain the balance between keeping steady and robust growth, adjusting the economic structure and managing inflation expectations. We will boost domestic demand and maintain steady and robust growth as well as basic price stability," he said.

Hu spelled out plans for China, whose economic growth has slowed as Europe's debt crisis worsened, to pump $157 billion into infrastructure investment in agriculture, energy, railways and roads.

Hu steps down as China's leader in the autumn after a Communist Party congress, but he promised continuity and stability for the economy.

Putin, who has just begun a new six-year term as president, said on Friday Russia would be a stable energy supplier and a gateway to Europe for Asian countries, and also pledged to develop his country's transport network.

RUSSIA LOOKS EAST

The relative strength of China's economy, by far the largest in Asia and second in the world to the United States, is key to Russia's decision to look eastwards as it seeks to develop its economy and Europe battles economic problems.

APEC, which includes the United States, Japan, South Korea, Indonesia and Canada, groups countries around the Pacific Rim which account for 40 percent of the world's population, 54 percent of its economic output and 44 percent of trade.

APEC members are broadly showing relatively strong growth, but boosting trade and growth is vital for the group as it tries to remove the trade barriers that hinder investment.

The European Union has been at odds with both China and Russia over trade practices it regards as limiting free competition. Cooperation in APEC is also hindered by territorial and other disputes among some of the members.

Putin, 59, limped slightly as he greeted leaders at the summit. Aides said he had merely pulled a muscle. Underlining Putin's good health, a spokesman said he had a "very active lifestyle."

Discussions at the two-day meeting will focus on food security and trade liberalization. An agreement was reached before the summit to slash import duties on technologies that can promote economic growth without endangering the environment.

Breakthroughs are not expected on other trade issues at the meeting, which U.S. President Barack Obama is missing. He has been attending the Democratic Party convention and Washington is being represented by Secretary of State Hillary Clinton.

U.S. officials say Clinton's trip is partly intended to assess Russia's push to expand engagement in Asia, which parallels Washington's own turn towards the Asia-Pacific region.

Also missing the summit was Australian Prime Minister Julia Gillard. Putin said she had dropped out because her father had died.

(Additional reporting by Gleb Bryanski, Andrew Quinn, Katya Golubkova, Douglas Busvine, Denis Pinchuk and Andrey Ostroukh; Editing by Janet Lawrence)

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The Libor fuss!

The story behind the Libor scandal

Logos of 16 Banks Involved in Libor Scandal - YouTube

SINCE the outbreak of the Libor scandal, readers' reaction has ranged from the very basic: What's this Libor? to the more mundane: How does it affect me?

Some friends have raised more critical questions: Barclays appears to have manipulated Libor to lower it; isn't that good? The problem first arose in early 2008; why isn't it resolved by now? By popular demand to demystify this very everydayness at which banks fix this far-reaching key rate, today's column will be devoted to going behind the scandal starting from the very basics about the mechanics of fixing the rate, to what really happened (why Barclays paid the huge fines in settlement), to its impact and how to fix the problem.

What's Libor

The London Inter-Bank Offered Rate (Libor) was first conceived in the 1980s as a trusty yardstick to measure the cost (interest rate) of short-term funds which highly-rated banks borrow from one another. Each day at 11am in London, the setting process at the British Bankers' Association (BBA) gets moving, recording submissions by a select group of global banks (including three large US banks) estimates of the perceived rates they would pay to borrow unsecured in “reasonable market size” for various currencies and for different maturities.

Libor is then calculated using a “trimmed” average, excluding the highest and lowest 25% of the submissions. Within minutes, the benchmark rates flash on to thousands and thousands of traders' screens around the world, and ripple onto the prices of loans, derivatives contracts and other financial instruments worth many, many times the global GDP. Indeed, it has been estimated that the Libor-based financial market is worth US$800 trillion, affecting the prices that you and me and corporations around the world pay for loans or receive for their savings.

A file photo showing a pedestrian passing a Barclays bank branch in London. Barclays has been fined £290mil (US$450mil) by UK and US regulators for manipulating Libor. — EPA

Indeed, anyone with a credit card, mortgage or car loan, or fixed deposit should care about their rate being manipulated by the banks that set them. In the end, it is used as a benchmark to determine payments on the global flow of financial instruments. Unfortunately, it turns out to have been flawed, bearing in mind Libor is not an interest rate controlled or even regulated directly by the central bank. It is an average set by BBA, a private trade body.

In practice, for working purposes, Libor rates are set essentially for 10 currencies and for 15 maturities. The most important of these relates to the 3-month US dollar, i.e. what a bank would pay to borrow US dollar for 3 months from other banks. It is set by a panel of 18 banks with the top 4 and bottom 4 estimates being discarded. Libor is the simple average (arithmetic mean) of what is left. All submissions are disclosed, along with the day's Libor fix. Its European counterpart, Euro Interbank Offered Rate (Euribor), is similarly fixed in Brussels. However, Euribor banks are not asked (as in Libor) to provide estimates of what they think they could have to pay to borrow; merely estimates of what the borrowing rate between two “prime” banks should be. In practice, “prime” now refers to German banks. This simply means there is in the market a disconnect between the actual borrowing costs by banks across Europe and the benchmark. Today, Euribor is less than 1%, but Italian banks (say) have to pay 350-40 basis points above it. Around the world, there would similarly be Tibor (Tokyo Inter-Bank Offered Rate); Sibor and its related SOR (Swap-Offered Rate) in Singapore; Klibor in Kuala Lumpur; etc.

What's wrong with Libor?

Theoretically, if banks played by the rules, Libor will reflect what it's supposed to a reliable yardstick to measure what it cost banks to borrow from one another. The flaw is that, in practice, the system can be rigged. First, it is based on estimates, not actual prices at which banks have lent to or borrowed from one another. They are not transactions based, an omission that widens the scope for manipulation. Second, the bank's estimate is supposed to be ring-fenced from other parts of the bank. But unfortunately walls have “holes” often incentivised by vested-interest in profit making by the interest-rate derivatives trading arm of the business. The total market in such derivatives has been estimated at US$554 trillion in 2011. So, even small changes can imply big profits. Indeed, it has been reported that each basis point (0.01%) movement in Libor could reap a net profit of “a couple of million US dollar.”

The lack of transparency in the Libor setting mechanism has tended to exacerbate this urge to cheat. Since the scandal, damning evidence has emerged from probes by regulators in the UK and US, including whistle blowing by employees in a number of banks covering a past period of at least five years. More are likely to emerge from investigations in other nations, including Canada, Japan, EU and Switzerland. The probes cover some of the largest banks, including reportedly Citigroup, JP Morgan Chase, UBS, HSBC and Deutsche Bank.

Why Barclays?

Based on what was since disclosed, the Libor scandal has set the stage for lawsuits and demands for more effective regulation the world over. It has led to renewed banker bashing and dented the reputation of the city of London. Barclays, a 300-year old British bank, is in the spotlight simply because it is the first bank to co-operate fully with regulators. It's just the beginning a matter of time before others will be put on the dock. The disclosures and evidence appear damaging. They reveal unacceptable behaviour at Barclays. Two sorts of motivation are discernible.

First, there is manipulation of Libor to trap higher profits in trading. Its traders very brazenly pushed its own money market dealers to manipulate their submissions for fixing Libor, including colluding with counter-parties at other banks. Evidence point to cartel-like association with others to fiddle Libor, with the view to profiteering (or reduce losses) on their derivative exposures. The upshot is that the bank profited from this bad behaviour. Even Bob Diamond, the outgoing Barclays CEO, admitted this doctoring of Libor in favour of the bank's trading positions was “reprehensible.”

Second, there is the rigging of Libor by submitting “lowered” rates at the onset of the credit crunch in 2007 when the authorities were perceived to be keen to bolster confidence in banks (to avoid bailouts) and keep credit flowing; while “higher” (but more realistic) rates submission would be regarded as a sign of its own financial weakness. It would appear in this context as some have argued that a “public good” of sorts was involved. In times of systemic banking crisis, regulators do have a clear motive for wanting a lower Libor. The rationale behind this approach was categorically invalidated by the Bank of England. Like it or not, Barclays has since been fined £290mil (US$450mil) by UK and US regulators for manipulating Libor (£60mil fine by the UK Financial Services Authority is the highest ever imposed even after a 30% discount because it co-operated).

Efforts at reform

Be that as it may, Libor is something of an anachronism, a throwback to a time long past when trust was more important than contract. Concern over Libor goes way back to the early 2008 when reform of the way it is determined was first mooted. BBA's system is akin to an auction. After all, auctions are commonly used to find prices where none exist. It has many variants: from the “English” auction used to sell rare paintings to the on-line auction (as in e-Bay). In the end, every action aims to elicit committed price data from bidders.

As I see it, a more credible Libor fixing system would need four key changes: (i) use of actual lending rates; (ii) outlaw (penalise) false bidding bidders need to be committed to their price; (iii) encourage non-banks also to join in the process to avoid collusion and cartelisation; and (iv) intrusively monitor the process by an outside regulator to ensure tougher oversight.

However, there are many practical challenges to the realisation of a new and improved Libor. Millions of contracts that are Libor-linked may have to be rewritten. This will be difficult and a herculean exercise in the face of lawsuits and ongoing investigations. Critical to well-intentioned reform is the will to change. But with lawsuits and prosecutions gathering pace, the BBA and banking fraternity have little choice but to rework Libor now. As I understand it, because gathering real data can often pose real problems especially at times of financial stress, the most likely solution could be a hybrid. Here, banks would continue to submit estimated cost, but would be required to back them with as many actuals as feasible. To be transparent, they might need to be audited ex-post. Such blending could offer a practical way out.

Like it or not, the global banking industry possibly faces what the Economist has since dubbed as its “tobacco moment,” referring to litigation and settlement that cost the US tobacco industry more than US$200bil in 1988. Sure, actions representing a wide-range of plaintiffs have been launched. But, the legal machinery will grind slowly. Among the claimants are savers in bonds and other instruments linked to Libor (or its equivalent), especially those dealing directly with banks involved in setting the rate. The legal process will prove complicated, where proof of “harm” can get very involved. For the banks face asymmetric risk because they act most of the time as intermediaries those who have “lost” will sue, but banks will be unable to claim from others who “gained.” Much also depends on whether the regulator “press” them to pay compensation; or in the event legal settlements get so large as to require new bailouts (for those too big to fail), to protect them. What a mess.

What, then, are we to do?

Eighty years ago banker JP Morgan jr was reported to have remarked in the midst of the Great Depression: “Since we have not more power of knowing the future than any other men, we have made many mistakes (who has not during the past five years?), but our mistakes have been errors of judgement and not of principle.” Indeed, bankers have since gone overboard and made some serious mistakes, from crimes against time honoured principles to downright fraud. Manipulating Libor is unacceptable. So much so bankers have since lost the public trust. It's about time to rebuild a robust but gentlemanly culture, based on the very best time-tested traditions of banking. They need to start right now.

WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who speaks, writes and consults on economic and financial issues. Feedback is most welcome; email: starbizweek@thestar.com.my. 

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