Introduction:
We must all offer our congratulations to finance minister Chris Sinckler for having the bravery to change his mind about the management of the economy. One can only imagine the amount of pressure that was on him, mainly from the DLP’s private economic advisers and the central bank governor, to continue down the policy cul de sac of a stubborn rush for growth at the end of which was national destitution and even more street crime. His decision to launch a Bds$600m economic stimulus is brave, and right, even if it has come a little too late. However, it is better to be late than never.
The challenge now for the minister and his senior advisers is how are they going to source this $600m that is now urgently needed and, once it has been found, how is it going to be spent. He must not resort to posturing or rhetoric and doing dodgy arithmetic to arrive at the numbers. Of course, as I am often reminded, the government is not in need of economic advice from me, nor am I offering it; but, instead of borrowing from external agencies, and incurring even more debt, the minister should dig in to the $1.2bn in foreign reserves which is money left idle, similar to old ladies putting their life savings under the mattress. This would be a much better and prudent strategy than robbing future generations of pensioners by taking it from the national insurance scheme.
The truth is, the Barbados economy is far worse than many people think, and than the government and central bank will admit. Part of this new thinking must be a rejection of the recent Financial Stability Report from the central bank, which is error prone and methodologically suspect.
Quantitative Easing:
A plausible economic strategy must accompany the QE, and this must include a new economic model, based around major infrastructure projects, and not just digging up the roads and willing them in. The driving principle must be job creation, targeting the 16-24 year cohort, the group that poses the greatest social threat to society. However, one of the major unintended consequences of a job creation programme is that, if focused on this important cohort, the group largely responsible for most anti-social behaviour and irritating crime, it will reduce the huge economic costs of criminal behaviour – police, courts, probation service, prisons, private security guards, etc.
If government decides to invest in infrastructure, there are two important points: do not spend Bds$50m of taxpayers’ money unnecessarily developing roads in Warrens, when that money could be better spent building new homes in some of the ancient slums in Bridgetown; second, and very, very important, any construction contracts that accompany the projects must have strict conditionality: that the employers must provide the vast majority of jobs for Barbadians, which is the purpose of the stimulus, and that government’s decision in allocating contracts must make provision for small sub-contractors and the decision will be final. In other words, the fat cat contractors who traditionally milk the public cow cannot rub their hands and expect to make millions from this development without putting much back in society. The strategic thinking is that once the economic crisis is over, and it will not last forever, improvements in the environment will lead to greater real prosperity and all round improvements in lifestyles.
Banking and Financialisation:
There is a view which is common in the central bank, that Barbados is better off without a locally domiciled retail bank, which is further implicit in the Financial Stability Report 2012. Here is not the place to give an extended analysis of this wrong-headed view, but allow me a few words to repudiate it. The report claims it is an analysis of a range of “financial stability indicators for banks and other financial institutions as well as the balance sheet and income and expenditure trends. “For the banking system, financial forecasts are used to project expectations for capital adequacy and the quality of credit. Progressive stress tests ar e also used to test for possible contagion among banks, and from banks’ exposures to financial institutions abroad.”
First, financial regulation is about risk perception and risk management, which is not as simple as the central bank appears to be making. In his evidence to the US Senate inquiry on the banking crisis, when asked why the US government allowed Bear Stearns and Lehman Brothers, which at the time had assets exceeding US$600bn, to go to the wall, Hank Paulson, then Treasury secretary and former head of Goldman Sachs, said basically they did not have a clue. Trying to predict future trends is not a science, but with good actuarial and analytical skills good policymakers could get it fairly right, with good scenario planning, or What-ifs? Central Bank analysts seem to ignore this basic fact.
What if an epidemic were to hit Barbados today? What if there was a cyber attack by hackers from China, or Russia, or even Trinidad? What if the banks’ technology broke down for a number of working days, how would the system work? What if a tsunami were to hit Barbados? These and many more hard questions must be asked when stress testing an organisation. It also involves the management of the enterprise, the policy for lending, who they lend to, rogue borrowers, underperforming loans, etc. None of these are made clear in the Financial Stability Report, nor is there even a proper recognition of the economic situation in Barbados, both households and corporates. Take for example, the obvious one: population growth, which always lags economic growth. Can Barbados cope with a population of over 400000 by 2050, or even 350000 by 2020? The FSR does not say. Yet, according to the Electoral Commission, over 247000 people are on the electoral register, those are people aged 18 and over ; and, according to the CIA Factbook, there are about 53979 aged under 15; excluding those aged under 18 in the 15-24 cohort, that gives a conservative population of over 300000.
Add to this the number of illegals, those who failed to register for whatever reason, those in prison, and the free movement of Caricom citizens, expatriates who have no interest in voting, then we are fast approach the 320000 mark. This, I suggest, is a central issue for any risk projections for financial stability.
Two other important issues: banks are the principal institutions for funding households and small enterprises, yet, with over 12 per cent unemployment, restaurants and hotels in deep trouble, the FSR claims that the problem with financialisation is not enough demand. Can someone within ear shot tell them that the problem in Barbados is on the supply side, banks are not lending to households and small businesses; since they are still in business, then they must be lending to a select group of customers. Clearly, if they are not funding the key drivers of the economy, then they are obstacles and alternative funding must be found for the good of the economy – shadow banks, hedge funds, credit unions, cooperatives, private equity etc. The great implicit risk from banking, however, is the consensus belief that savers, and a number of investors, are underwritten by government. There is also an implicit subsidy of foreign-owned banks, if only as far as customers are local people. So, in the real world of banking regulation, Barbadian taxpayers are underwriting foreign-owned banks, something, of course, which the central bank says it approves of.
In business terms, the tax benefits also allowed on business debt have the risk-bearing on taxpayers. What is also not clear is if the local subsidiaries and branches are ring-fenced as stand-alone Barbadian companies. This must be made clear. By saying it is keeping a close eye on rogue debtors, as it recently did, the central bank is in fact giving a vote of no-confidence in many Barbadian businesses and households.
This aside, a central part of stress testing banks is to examine their capacity to absorb losses, their overall resilience.
However, the fundamental moral hazard in the belief that foreign-owned banks are in themselves preferable to locally domiciled ones is that if there is any weakness in the bank’s capacity to absorb serious exposure to defaults, instead of the regulatory inspectors moving in and taking control, the banks can easily fob them off by claiming the parent company would cover any losses. This is highly dangerous since the parent company would not be under the jurisdiction of the local regulator, and its home regulator would not provide business-threatening information on capital adequacy to a foreign regulator. In any case, what little information we do have about the central bank’s regulation of local subsidiaries and branches does not give us any real confidence. For example, was there a business case for the Republic Bank taking full control of Barbados National Bank, or was the take-over a clever device to hide gathering storms on its balance sheets? I am not convinced. In any case what happened to the market, allowing BNB shares to reach a market price? Is banking regulation in Barbados protecting an oligopoly or do we really believe in fair competition? Did the stress testing carried out by the central bank include a stress analysis of the inter-bank loan and payment schemes? In short, how safe is our money? One advantage of a new locally domiciled bank, providing finance for households and small businesses is that it would not have any legacy problems, therefore it could have lower capital requirements.
This is one reason why Bds$50m of the $600m quantitative easing pot could be used to fund the launch of a post office bank with a national distribution network already in place, operating on the principle of deposit-funded balance sheet lending and barred by law from involvement in the wholesale markets, securitisation or credit default swaps and any such instruments.
Analysis and Conclusion:
In any case, the omens look good for an economic recovery unless Sinckler retreats to political juvenilia by making silly party political points. He must rise above that and remember the demographics of financial stimulation are just as important as the policy itself. If money is pumped in to the wrong organisation or demographics we will find that it will fail to oil the parts of the economy that the policy is intended to.
For example, in the late 1990s, when the Japan government introduced a stimulus in the form of cash to consumers, the national culture of savings was so powerful that households just put the money in the bank, defeating the very purpose for which it was intended. Similarly, the Bank of England pumped £375bn in to buying gilts from banks, insurance companies and other major financial institutions, but the banks used the money to reduce their balance sheet debt rather than pass it on to small businesses and mortgage borrowers as was intended.
The final act in this drama is to decouple the Barbadian dollar from the Greenback, stopping Ben Bernanke from running our monetary policy from a distance, fixing it with a basket of essential currencies and commodities, ie our major trading partners and the products that compromise the basket of goods for the measurement of the retail prices index, and allow the currency to float against all other major currencies. The Barbados dollar is over-priced. It would be economic suicide if Sinckler were to use the nation’s hard-earned $600m to recapitalise foreign-owned financial institutions; the Trinidadians and Canadians would be laughing all the way to the bank, pardon the pun. He must use this opportunity to put right what Arthur did wrong for 14 years and Thompson/Stuart for the last five, got rid of our only bank and major insurance company and failed to put in place a proper economic strategy.
This time, however, he must make sure that the management is sound and that it does not try to punch above its weight, by sticking to balance sheet lending and not engaging in any off balance sheet activities or dealing in credit default swaps or any other form of derivatives. The fact is that it took the US government 25 years, after the 1929 Wall Street collapse, to recover and the global economy is still resetting.
We do not have that time.
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