Discipline: Social Science, Finance
psychology or what underlies those that can be seen. This paper distills the forerunner of the crisis from its roots in the early years of the 1990 decade when the US eased its monetary policy as a response to the dotcom bubble and the 9-11 terrorist attacks. The unfolding story starts in the boom in mortgages brought about by low interest rates and a liberal loan policy, which by themselves would not have brought great financial distress if the rules of the credit market have taken effect. What turned this risky behavior into the present crisis was the bundling of mortgages by financial institutions into complex securities, such as collaterized debt obligations that were largely left unregulated. Beneath the surface is the underpinning of the crisis, the underlying market psychology characterized by greed, ignorance, herd mentality, disregard for or misuse of information, exuberance, and irrationality. Though not immune to the global financial slowdown, the Philippines has buffers that can serve it in good stead during this challenging period. Domestic demand is a major growth contributor; inflationary pressures are easing; there is policy space for fiscal stimulus; external payments position is manageable; the banking system is well-capitalized; and there is low exposure to financial strains. Still, the effects of the crisis have just reached the country and have just begun to be felt. In expectation of tougher challenges that will be faced by the real and external sectors, the country's central bank has laid out its policy thrusts for 2009. These include sustaining its primary mandate of price stability; maintaining the soundness of the financial system through greater risk management among others; and strengthening engagements with its regional peers for more collaborative action.
ISSN 0119-8386 (Print)
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