LETTER OF THE DAY - Why did the institutions fail?
Published: Friday | December 11, 2009
The Editor, Sir:
On the premise that those who ignore the past are doomed to repeat it, the FINSAC enquiry is appropriate. However, the enquiry appears, so far, to have devoted considerable time attempting to examine why FINSAC was set up in the manner it was in the first place and its handling of the accounts acquired from the failed institutions.
Whether FINSAC acted negligently, fairly, reasonably and/or completely above board in relation to its handling of the accounts it acquired is important. But this is of lesser value from my humble perch than unearthing the cause of the systemic failure of a long list of institutions - one of them in existence for over 130 years.
So while the basis for the establishment of FINSAC and the manner of its operation are of some interest, it seems to me that the first issue, which to date appears to have been skirted and given scant regard, is: 'What were the economic policies leading into the financial debacle?' and/or (if so found), 'what was the nature of the conduct and actions on the part of businessmen and financial institutions which caused or contributed to the systemic failure?'
Why were these systemic failures occurring in Jamaica in the face of the worldwide economic boom and expansion at the time? Understanding this requires an informed analysis of the relevant economic statistics, unsuited, perhaps, to an enquiry by a tribunal focused, perforce, on oral questions and the limited answers that can be elicited in this format.
Econometric analysis of the relationship between economic variables can provide statistically significant explanations of the cause and effect of economic policies and could offer a measurable and unbiased explanation of the cause of the debacle, but this seems not to be forthcoming. At the very least, we should analyse these issues anecdotally.
What caused systemic failure?
Was the systemic failure related to sudden increases in money supply in 1992 and 1993? Was this, in fact, the case, as I seem to recall, and, if so, what was the policy behind this sudden increase in money supply? Was the failure related to the resulting high levels of inflation (80 per cent) which followed on this increase, the subsequent attempts at mopping up liquidity to protect the hallowed exchange rate, the premature liberalisation of the foreign-exchange market or the long-term astronomically high-interest rate policy?
Was the refusal to prop up Century National Bank, the first of the major banks to fail, ultimately more costly to the nation by causing contagion of other banks already weakened by the policies in place, which banks were ultimately bailed out at substantial costs? Or, was it, as is so often posited, alleged wrongdoing on the part of bankers who either lent depositors' money to themselves with inadequate security or embarked on risky non-core business investments? What precisely are the explanations for the collapse of so many businesses and institutions?
If we do not accomplish that understanding, we would have learnt very little from the experience and this exercise.
I am, etc.,