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Tuesday, April 21, 2009

The Crisis Response!

The International Monetary Fund released in April their "Global Financial Stability Report" (GFSR), which examined the state of global credit crisis on economic activity and banking institutions.

The extent of the report was based on the issues involving the systemic risk that the world and in particular, the emerging market economies were exposed to as a result of this crisis and how, in particular, credit flows from the developed countries have dried up to those smaller markets.

The IMF GFSR reports that cross-border bank lending from major markets to emerging markets have begun to contract. In another unrelated IMF press release in March, the IMF states that global activity is now projected to contract by 1/2 to 1 percent in 2009 on an annual average basis—the first such fall in 60 years.

The US Federal Reserve published their consumer credit report on April 7, 2009, stating that consumer credit decreased at an annual rate of 3-1/2 percent in February 2009 with revolving credit decreasing at an annual rate of 9-3/4 percent, and non revolving credit increasing at an annual rate of 1/4 percent.

The Bank of England's latest "Trends in Lending Report" for the month of February, 2009, on the other hand, reports that repayments of unsecured lending, were greater than gross lending flows, so that the stock of unsecured lending contracted for the first time since their monthly series started recording the data in April of 1993.

The premise is that if credit within both of the largest economies has decreased to even their domestic consumers and backs up the overall credit contraction scenario in the April GFSR, without doubt this will impact credit to persons outside of their markets.

Consumer credit in democratically, mature and free market oriented societies, are a keen barometer for measuring overall net lending.

Consumer credit, serves as the engine that aids the purchasing of consumer goods and services. If there is less access to credit for average consumers, there is no need for production of goods and no need for persons to render services, which in turn causes cut-backs in production and is when a credit squeeze, can become a full scale economic recession and depression.

While most of the Caribbean has warm cross-border relations with both of those English speaking developed countries, both diplomatic and commercial, this has, on the other hand, affected our ability to do business with other larger non-English speaking developed countries and emerging markets. This has also left Anglophone Caribbean countries, handicapped due to language and cultural barriers in regards to the ability to attract foreign direct investment. Also, Caribbean countries are left over-exposed to US and the UK’s economic and political shocks and contraction more than they need be.

It’s fair to say that the Caribbean is not immune to economic contraction from the major markets. In fact, we are more vulnerable to these credit contractions than that of Asian and other Eastern European countries because we have less, on scale, economic viability as well as exhibit differences in cultural values which dictates our level of competition, dependence and value on skill levels.

There have been, however, policy maneuvers by different developed and emerging markets to combat the effects of this crisis. One of the obvious responses has been to borrow money from international banks like the World Bank and the IMF.

Of course, borrowing increases public debt. Public debt, raises a whole host of other issues about concerns on how do to pay back the money borrowed, where do we spend the money and under what premise does one expect strong returns from our investment in order to pay back money borrowed.

Countries like Brazil, India and Argentina are either currently loan recipients, or in negotiations for loan assistance from either the IMF or World Bank. Even now Russia is currently in negotiations with the IMF for a multi-million dollar loan- could be in the billions by the end of negotiations.

The first course for public spending from borrowed money is to invest it in public projects and government infrastructure. While economists can debate the merits of Keynesianism and its relation to the scourge of increasing government borrowing and spending, the salience of this argument- at least for the developed countries- has engendered a sense of nostalgia as to how it was back in the old days and how John Maynard Keynes saved the world. Or so it seems!

Another response has been to allow central banks to cut key interest rates. And, for that matter, for central banks, as they have- especially in the developed countries like the US Federal Reserve, the Bank of England and the European Central Bank- become more nuanced and pro-active in their interventions.

Central bank involvement is one of the more viable options, as central banks have powers to supply and contract the money supply, through interest rate manipulation, quantitative easing methods and, if they are in sync with the private sector and public sector agencies, coordinated market targeted activities as well as lobbying for pro and counter-cyclical service charge flexibility for government revenue posts.

This week the Bank of India cut its central rate 25 bps as well as other emerging markets, already having cut their prime rates since October of last year with Russia, about to begin the ‘trend of rate cuts’ by the end of this fiscal quarter.

Yet another response- although one that has not been very salient- is to simply print more money. The US has been printing money for quite some time now. While it has not been employed to a large extent and in fact anathema to most modern economists globally, printing money, considering that the middle class depend on services to keep their standard of living and to keep them off of the poverty threshold, is not a farfetched idea as it may have been considering the circumstances.

What makes a middle class is their access to key services and their ability to afford niche goods. Services like decent health care, affordable education and in some cases, security services, home care as well as items like the weekly cup of designer coffee for $5.00, or that brand new washing machine for mom or brand new set of 22' rims for her son to replace the ones he got two years ago, are items that we have used to demarcate the middle class from the poorer classes.

In fact, on the flip side, about 80% of all production in the Caribbean can be pegged to services and service related activities like merchant services and sales.

Of course there's a down side to just printing money. Least of which is set in the conservative mindset that a country should earn its way to prosperity. I happen to think that investment to prosperity happens just the same.

Investment engenders the concept of assistance. Assistance whether it is financial, philanthropic, sharing information in intellect or time.

There is also a risk of devaluing the currency and inflation. But, I posit, if an economy is primarily service based, that economy- as slightly different with one that manufactures- is valued on the merit of the services it renders. In the market place, there are cases of imperfect pricing on goods as it is with services. In fact, imperfect pricing and other related inflated pricing issues, is one of the key issues which led the US to drag everyone down into the abyss of a recession.

In this case, putting priority on the value of the services, not only creates positive returns in regards to countries allowing citizens to purchase the necessary goods such as food and other amenities from abroad. But also, it, in a competitive and in some cases glutted service economy, can also boost skill levels if all levels of top tier training are made available in a coordinated meritocratic promotion path.

Investment targeted inflation as well as making aware the realization that all means of production are valued more productively, is a good thing.

Can the Caribbean bolster its service economy and protect it with an artificial injection of liquidity, in light of this credit and economic disaster, as the major markets did with its financial services sector?

Perhaps to some extent the Caribbean should find a way to protect its service economy from a development aspect of things.

That's an issue that needs to be seriously discussed.
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