I see that the usual complaints about how HDB prices are "unaffordable" have surfaced again. Whenever I come across such a debate, I will always look back at the time, sometime in 1999 where I finally realized how the workhorse macroeconomics model, the overlapping generations model, can help one person understand the HDB issue. Paul Krugman was talking about the US social security crisis.  It was the reading of Paul Krugman's article, especially this part, that got me excited:

"The answer - which I guess isn't that obvious - is that it goes to pay a hidden debt. When the pay-as-you-go system starts up, there is a generation of retirees who receive benefits without having made contributions. (What this corresponds to in the real world is the very high rate of return received on contributions by early recipients of Social Security.) That debt - equal in this example to $1 per worker - is never paid off; instead, the earnings from each worker's contribution are in effect used to pay the interest on that debt. And that's where the money goes."

Now, back to the main point, how are these 2 matters related?  Well, our current high HDB prices basically came about when, sometime, in the 1980s, CPF was allowed to be used for the purchase of these flats.  Before that, prices used to be quite closely linked to the cost of production, a 5 room flat would basically cost about $50,000 or so.  In the same way as the US social security system, the surge in the HDB prices after that resulted in a winfall gain for everyone who purchased HDB flats before the CPF was liberalized.  Thus, the same result happens, everyone of us current generation who bought HDB flats after basically have to pay off the previous generation who also bought them at sky high prices.  The only gainers, other than the government, are the original group of Singaporeans who were fortunate enough to purchase flats before the CPF rules change.

The next question you might ask is, "Why doesn't the govt just charge a lower price?"  Well, she cannot because doing that would mean that whoever bought HDB flats at the sky high prices immediately loses, although this system would benefit all the young generation, as well as the future unborn generations.  The politics of voting, where the losers are the people with the power to vote but the gainers are those who usually cannot vote, being the young and the unborn generations, would mean a huge political loss to the PAP government. 

When I talk about this point, it always brings into mind the famous song, "Summertime blues", where the lyrics goes:

I'm gonna take my problem to the United Nations
Well I called my congressman and he said Quote:
"I'd like to help you son but you're too young to vote"


It was in 1987 when I watched the movie La Bamba and this part really epitomized the problem of all young Singaporeans when they are thinking of buying a HDB flat.  So I hope this simple application of the overlapping generations model allows us to see the powerful insight why HDB prices are so high now and why the prices will not go down. 

Introduction: Potential ability

Everytime you see people get promoted in their jobs, some of whom may even be faster than you, you have to ask yourself, "What should I do then?  Should I also work harder so as to be promoted?" 

In macroeconomics, we learnt what is potential growth and actual growth. Potential growth is limited by growth in quantity as well as in the quality of the factors of production. While the government could stimulate actual growth by increasing aggregate demand, once you hit the limit determined by the potential, you cannot stimulate growth anymore.

In the Chinese culture, there is also this strong belief that everyone is also limited by a certain potential.  That is why in the Singapore civil service, there is such a term called "Career ending point".  It basically tells your boss where your maximum potential will be in your career. 

Wuxia theme: Potential ability measured as inner strength

This is also seen most clearly in the many wuxia novels of the famous Jin Yong.  In all the novels, a person with vast amount of "inner strength", or "nei-gong", will often be the hero in the entire novel.  For example, in the book "Demigod and Semidevils" or Tian Long Ba Bu, all the three heroes in that novel exhibit high inner strength. With Xiao Feng, he was blessed with tremendous inner strength while Xu Zhu was given immense inner strength from the Xiao Yao elder. As for Duan Yu, he started off as a weak scholar but he basically sucked inner strength from everyone with his Beiming Shengong until, by the time he absorbed that Tibetian monk Jiumozhi, he could unleash his 6 meridian swords at will. 

It is obvious one of the important themes is that inner strength determines a person's potential.  Once you have enough inner strength, anything else can be done.  By definition, the hero of the novel must have the highest inner strength. Once he acquire this inner strength, he will pick up the rest of the awesome skills, which all need huge inner strength, and every girl he meets will somehow also fall for him hehe.

This theme is also brought forth clearly in the Condor trilogy. In Legends of the Condor Heroes, Guojing could not learn any decent skills from his original 7 masters until he learn how to cultivate his inner strength taught by the Quanzhen priest Ma Yu.  Once he finally learnt the 18 Dragon subduing palms by a chance meeting with the Northern Begger, which also need huge inner strength as a pre-requsite, Guojing basically became a superman.  Every good thing just somehow happen to him after that, including the discovery of the Jiuyin ZhenJing.  Of course, in Return of the Condor Heroes, Yang Guo achieved the same legendary hero status once he met the condor that made him eat snake bladders, which blessed him with tremendous strength, allowing him to be a superhero even after losing an arm hehe.

In Heaven Sword and Dragon Sabre, the final story in the condor trilogy, this theme was brought forth most clearly.  Zhang Wuji was dying from the coldness of Xuanming Shen Zang.  By some great miracle, he found the Jiu Yang Zhen Jing wrapped in the gorilla.  That Jiuyang Zhen Jing manual is a secret to tremendous inner strength.  After learning that, learning the Ming sect ultimate skill, Qiankun Da Nuoyi became a piece of cake.  The famous quote that Wuji told Xiaozhao sums this theme up very well:

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Zhang WuJi stood up and began to wipe his sweat with his sleeves, not really knowing what happened, He had completed level five of this kung fu. This Qian Kun Da Nuo Yi really is simply a cunning way of utilizing one’s power. The basic theory lies in one’s natural ability. Everyone has a huge amount of innate strength. However, most of the time, you’ll never use it. Yet when there’s an emergency, like when you’re saving someone’s life, a weak person maybe able to lift a thousand pounds. Zhang WuJi, after learning Jiu Yang Shen Gong, has more natural ability than anyone else in the world. It’s just that he never received advice from experts, and therefore cannot utilize most of his abilities. This time as he learns Qian Kun Da Nuo Yi, his innate power finally released.

This particular kung fu is very difficult to learn. A single mistake can lead to fire deviation. This is due to the inner power requirement for utilizing the technique. For if you ask a young child to lift a hundred pound hammer, he’ll fail, end up hurting himself no matter how well he grabs and lifts it. But if you ask a weightlifter to do the same, he’ll accomplish it easily. The idea is easy in theory, but does not work if you don’t have the means. Every older leader of the Ming sect knows this, but they all felt that if they try hard enough, they would eventually succeed. This is why Zhang WuJi could learn the skill so fast, while many people smarter than he fail
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Singapore's educational system and the civil service

Once you truly understand this important theme that everyone has their potential and their ultimate achievement in life is limited by the potential, you will understand how our Singapore civil service and our educational system work hand in hand.  As I have said many times before, the primary aim of our educational system is to identify a few 18 year old A level students with the highest potential.  Once these 18 year old Singaporean kids are identified and given the scholarship to study abroad, this is akin in Wuxia as meeting the right master, like Yang Guo meeting the condor, or, like Zhang Wuji, finding the Jiu Yang Zhen Jing manual. 

Just as Zhang Wuji spent a number of years self-studying the Jiu Yang Zhen Jing and emerge from his "studies" as one with the highest level of inner strength, for these overseas scholars, once they return from their overseas studies after a number of years, by definition, they will emerge as Singaporeans with the highest potential and thus given a very high CEP or career ending point.  Unless they have major screwups, their promotion in the civil service would be much faster than non-scholars.  Of course, down the "bell curve", all the other civil servants will line up according to their potential and be promoted at the speed according to their CEP.

Conclusion

So what can I say after all this rambling?  If you follow this strictly, then you can try to work harder to try to get noticed but it would be useful to take into account your potential.  Forget about CEP, if you know in your heart that your potential is limited in some ways, maybe you are not as charismatic or not as meticulous, maybe you could accept that your potential is limited.  There can only be one Duan Yu, Guojing or Wuji in this world.

If you cannot be one of them, you can be one of the many minor characters in the wuxia world hehe.  Some of your peers will always have a higher potential and you may "fire deviate" if you try to exceed your potential hahaha. Even Jin Yong gave us a perfect example of a wuxia character who did all he could to exceed his "potential" and in the end, he lost everything. This is none other than Murong Fu of Demigod and Semidevils. Don't end up like Murong Fu haha.

But if you no longer have that money, who does? The fat cats on Wall Street? Some oil baron in Saudi Arabia? The government of China?

Or is it just — gone?

If you're looking to track down your missing money — figure out who has it now, maybe ask to have it back — you might be disappointed to learn that is was never really money in the first place.

Robert Shiller, an economist at Yale, puts it bluntly: The notion that you lose a pile of money whenever the stock market tanks is a "fallacy." He says the price of a stock has never been the same thing as money — it's simply the "best guess" of what the stock is worth.

"It's in people's minds," Shiller explains. "We're just recording a measure of what people think the stock market is worth. What the people who are willing to trade today — who are very, very few people — are actually trading at. So we're just extrapolating that and thinking, well, maybe that's what everyone thinks it's worth."

Shiller uses the example of an appraiser who values a house at $350,000, a week after saying it was worth $400,000.

"In a sense, $50,000 just disappeared when he said that," he said. "But it's all in the mind."

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Economists has coined this term "shadow prices", indicating the true value of the stock.  Paul Samuelson was probably one of the pioneers of this concept with his interestingly titled article "Proof That Properly Anticipated Prices Fluctuate Randomly".

So combining Shiller and the concept of shadow prices, the simple answer for Tan Kin Lian is this, no one can compensate you because the missing money is not in anyone's pocket to be taken and returned to you.  Through this stock market correction, we are realizing that actual prices far exceeded the shadow prices.  When we use our money to buy these minibonds, the reason they can give us a 5% return is because they are investing your money in the stock market in the hope that, in the future, someone will value that stock at a higher price than what we have paid for it initially, the difference becomes our profit.

This current American financial crisis has certainly affected the whole world.  Even in Singapore, the fallout from the DBS High Notes 5 as well as the minibonds have transformed many Singapore investors into risk averse people.  Personally, I have also seen my unit trusts investment in my CPF account losing money and I was telling myself that I am not going to trust any 3rd party agent to handle my money from now on.  Thus, I can certainly understand the basic danger of such crisis from the economic perspective, reinforced by Diamond et al in their AWSJ article here

As we see it, the real concern about the financial sector is that it is undercapitalized, both because of the losses it has sustained and because of the growing risk aversion of lenders. Undercapitalized financial institutions are forced to try to reduce their assets, and, of course, this means they will make fewer loans, even to the healthy portions of the economy. The credit crunch that inevitably will occur implies lower corporate investment, less commercial and residential construction, fewer students getting college degrees, and in general, a much slower pace of economic growth.

To put the above context from the economics perspective, banks serve as institutions to transform savings into investment.  For savers, we would like to earn as high a return as possible from our savings decisions.  We happily put our savings into banks like DBS, Citibank or Maybank under the belief that there is no way these banks can ever fail.  These banks can only give us that high return if they could earn a higher return by lending our savings to people who desires to borrow. 

However, if it turns out that the borrowers are constantly defaulting in loan payments, there is a chance that banks may eventually fail, leading to the standard Diamond-Dybvig bank runs that many of us studied. 

The minibonds episode has served to awaken Singaporeans everywhere that default risk is becoming less and less rare in our world now. I was reading the minibonds and the DBS High 5 notes episode with much interest. While I understand there might have been a case of imperfect information in the sense that many aunties/uncles/ah-peks thought the various relationship managers (henceforth RMs) were selling them fixed deposits equivalent, I think it is clearly unfair to lay the blame on the RMs entirely.

After all, the concept of "default risk" is common knowledge to every investor. Whenever we buy a bond, we should always understand that, if the company went bankrupt, we might lose our entire principal sum. Even if we were to open a savings account in any of the banks, it is understood that, if the bank were to "default", as in close down, we are only insured up till $20 000 in deposit, which I definitely believe should be increased. I guess the main problem is that we all believe that there is no way major banks can fail, an assumption that is clearly questionable at this present time. Remember, even Lehman Bros was given a credit rating of AA just a few months ago, who would have expected them to file for bankruptcy?

Perhaps I can illustrate with an example. Imagine if I were to offer you a bond that gives your 5% return on the condition that none of the major local banks in Singapore, that is DBS, OCBC and UOB would fail.  If any of the 3 banks were to fail, you might lose your entire principal amount.  Would you buy that bond?

Even at this time, I am sure there will be more than 50% of Singaporeans who will take up the offer.  After all, how many of us would seriously consider that possibility that any of those banks would fail?  I guess most of us would reason that there is no way our government will let that happen.  I am saying that the same reasoning probably also applied to our views towards Lehman Brothers. 

Okay enough of my own commentary.  Here is what I thought to be a very enlightening piece of commentary by Robert Shimer on the current American financial crisis.  Basically, its the classic problem of asymmetric information.  After careful reading through the "wall of text", I have added subheadings to make it easier to understand how the various paragraphs connect to one another.  Thanks to Greg Mankiw for the original pointer
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