Wilberne Persaud, Financial Gleaner Columnist

Persaud

I have a confession to make. When you become tired of talking about a subject, it is perhaps time to leave it alone.

This is exactly the way I feel about the Jamaican indigenous financial sector meltdown.

I write this purely because of responses I have got. Questions abound. Apart from one cussing me as a PNP/Omar apologist and spin doctor, others - happily, the majority - claim a better understanding of the issues as a result of my columns.

In discourse with David Wong-Ken on the radio Wednesday morning, October 17, he expressed the opinion that the mid-1990s financial difficulties Jamaica faced should not be called a 'meltdown'. For him, the term severely misrepresents what happened.

He feels government's high interest rate policy was the major factor causing the collapse. To speak of a meltdown of the indigenous financial sector is, therefore, misleading. I hope I do not misrepresent his view, better still, I hope I do represent his view faithfully. I would hate to do differently. Anyone with as fine a sense of humour as Wong-Ken should be given a keen listening ear.

Plain facts

Words are interesting. Suppose we look at plain facts nobody disputes.

1. Locally owned banks and all but one insurance company became insolvent.

2. Confidence dissipated and led to runs on two indigenous banks.

3. Foreign banks kept on doing profitable business.

An insolvent entity's liabilities exceed assets. It cannot meet debt obligations. So insurance companies could not cover claims or pay people who invested in their deposit investment schemes and locally owned banks could not honour savings and other deposits held.

These entities were a big slice of Jamaica's financial sector. Their failure directly affected almost the entire population.

They held a large proportion of total deposit funds, pension holdings under management and insurance contracts.

The distressed insurance companies for instance held policies for half a million persons or about half Jamaica's employed labour force, a little more than quarter the population over 14 years old.

The combined sum assured was about $341 billion. The banks had innumerable certificates of deposit for pensioners and returned residents particularly from the United Kingdom. The fallout was undeniably huge.

Several names

Historically such events have been given several names. They have been referred to as a bubble that burst, crash that occurred, default or ruin that is widespread.

Commentators have tried to capture the environment of euphoria in which everyone is upbeat, spending lavishly, investing bullishly and the ultimate collapse as prices fall to the floor.

Bubble and crash metaphor work well.

More recently, a much better, more accurately descriptive, more picturesque metaphor has come into the language. The word 'meltdown' has become popular and widespread in its use to describe such events. Why? Meltdown owes its modern usage to the nuclear power generation industry.

The core of a reactor generates unimaginable heat which must be cooled. If the cooling apparatus fails, meltdown occurs. The core literally becomes so hot it melts. There is no nuclear explosion but an explosion of steam and radioactive gases and other material are expelled.

Pretty cheap power, improperly managed leads to meltdown and disaster. I don't lay claim to first use of the term. I don't even know to whom this must be attributed and couldn't care less. It is simply an almost perfect metaphor for the situation it describes.

I would like to think that the events of mid 1996, given the population it affected, the value, volume and depth of the financial losses, do merit the term meltdown.

Crisis not isolated

Wong-Ken is of the view that the crisis should neither be located nor isolated in the area of finance or the monetary as opposed to the real economy. People borrowed money to produce goods and services.

They failed because repayment was made impossible by government's raising interest rates such that people who would normally have been completely capable of meeting their obligations were forced into default as rates broke through the roof.

This view is partly - a very small partly - correct. But this is merely a proximate cause of the crash. You press the accelerator and the car goes. But without an engine, gas, and other components, the accelerator merely exercises your ankle.

An economy encompasses diverse activities engaged in by hordes of people with all sorts of similar, competing, conflicting goals and attitudes governing the decisions they take. These economic actors operate in two parts of the economy - the real sector and the financial sector.

In the real sector we have a multiplicity of rules applied by diverse agencies - Her Majesty's Customs, the Income Tax Department, the Titles Office and many more.

Two umpires

In financial services the umpire for the game resides in the regulatory agency. At the time of the crash they were two: Bank of Jamaica and the Superintendent of Insurance. Both were unbelievably inadequate to the task they were expected to execute. For two reasons, powers needed to supervise some of the institutions did not exist and personnel to carry out these tasks were not in place.

Indigenous financial groups overreached themselves and government was unable to apply regulatory discipline.

The United States subprime mortgage market is an entirely similar occurrence today. So my friend the artist from Trinidad with no knowledge of finance, on passing through New Kingston at th of the construction asked: "But where is the economic action that pays for this?"

So yes, high finance appears to some like the 'three card' man at the fair; to others like a cacophony of voices in Pocomania trance experiencing the spirit; to yet others it is described as simply the means by which the 'big man' legally extorts his pound of flesh.

Interest rates are a price. Prices respond to demand and supply. If everyone wants loanable funds to build, buy, speculate in and otherwise own stocks and real estate, the cost of those funds will rise.

Government does not simply increase interest rates whimsically. It is in competition for funds that these rates move. If euphoria exists, rising prices fuel further price increases and so on.

When the first investor/speculator cashes in and takes his winnings the price spiral slows. As that sentiment grabs the throng, the spiral literally stops and melts down. The result is similar to the reactor's cooling system failure.

Debate shall continue and more might be discussed. My main views are published though they have yet evolved. I think I have said enough on this subject for the time being.

wilbe65@yahoo.com