Studying the debates that currently wrack most developed countries on post-recession financial regulations, led by Britain and the US, the arguments suggest that this frontier could be the next big fight in economic policy if not monetary theory.
In case you haven’t followed, the issues provide interesting analogies with Kenya’s perennial banking problems in which we have operated behind the curve, lacking traction with monetary policy and effective strategies to pilot economic recovery. Taking the US, one would be forgiven today for thinking that in his regular approaches to complex economic issues, President Obama was addressing policies in his native Kenya.
Let us start with Britain. As a lead global financial services centre it faced high stakes in the recession, and dropped nearly 5 per cent of GDP. It earns a relatively high percentage of GDP from the financial sector and led in bailing out banks as well as in tightening regulatory oversight, with substantial leadership in ideas from Chancellor of the Exchequer Alistair Darling and Prime Minister Gordon Brown.
In the US, Obama led the intellectual and critical thinking on monetary/fiscal policy from the top, steering the economy to recovery and gathering the best economists.
Having had the Federal Reserve raise credit and lower interest rates to virtually zero and having bailed out collapsing banks while guaranteeing others through the Troubled Assets Relief Program (TARP), he combined this with allocation of a two-year stimulus package of $800 billion.
A third went to tax cuts (to stimulate consumer spending); a third to roads, schools, power, and other infrastructure; and a third to federal transfers to state and local governments for health care, unemployment insurance, school salaries, etc. The main thrust on the fiscal side was a two-punch impetus on consumer and investment spending.
On Monday December 14 with major banks and again this week with community banks, Obama checked figuratively whether his bananas had ripened. They were still raw. Just as is the case in Kenya where the CBK’s lowering of the cash ratio from 6 per cent to 5 per cent last December pumped about Sh10 billion into the economy, the US Fed’s billions in TARP are hardly traceable.
Productive lending that can create jobs (in agriculture, industry, tourism) or the expansionary stance intended remain weak in both countries. Note the differences.
While the US and Kenya’s financial systems are awash with liquidity, the US enjoys low rates as the Fed intended. Kenya’s high rates defy CBK influence. Banks keep more than twice their minimum required liquidity ratio of 20 per cent in their coffers, lending mainly to government in domestic debt.
US banks used TARP to re-capitalise what they could of their losses. They began to make profits partly from a surge in government borrowing. But non-financial private borrowing plunged. Where did the money go?
In an offsetting development, some financial players are exploiting monetary policy by borrowing cheap money short-term, and using it to buy long-term bonds-, the so-called ‘carry trade’. But as if taking a cue from Kenya, US banks are not lending to productive private sector borrowers where jobs and growth can be revitalized.
Economists define Kenya’s case as a liquidity trap where monetary policy becomes powerless to influence interest rates and thus can do little to deliver loans to investment. Of course, this derives from the profit-making strategy of the leading Kenyan banks.
In contrast, the US problem is that of perverse incentives that persist in the financial sector. They lead to a composition of lending that snubs non-financial lending. In his high-profile plea to banks to support the fledgling economic recovery by opening their wallets to productive private sector borrowers, Obama was unusually candid on December 14. He termed the banks ‘fat cats’ that ‘still don’t get it’
What is ‘it’ that they don’t get? It is the seething anger and calls for reform by an American public bamboozled by banks through a chain that began with greed in mortgage lending, collapse and bailout of major banks with public tax dollars (in TARP), and a recession.
With many out of work and homeless from housing foreclosures, a staggering 8 million jobs disappeared. Unemployment figures still rise while some 100,000 jobs are needed just to keep up with population growth.
Source:businessdailyafrica.com/
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