Wilberne Persaud, Financial Gleaner Columnist
Persaud
Today marks the twentieth anniversary of the 1987 financial crisis in the United States.
A bad day for Wall Street, stocks fell over 20 per cent.
Influential commentators, investors and market analysts find too many similarities between then and now.
Indeed differences suggest today's problems are more acute and potentially more harmful.
In the crisis of '87, the major impact was, essentially, isolated in the stock market. It had rather little effect on economic growth. Typical of a stock market event the culmination of decisions made by a multitude, it was concentrated, immediate and time specific.
Today's recently averted crisis has more troubling differences. First, it is larger. Second, it may be reflective of a failure of oversight in face of too great reliance on, and celebration of, unconcealed opulence and greed.
The gap between everyday wages and CEO take home pay in the US has reverted to pre-New Deal levels in the 1920s.
The fast growing, unregulated hedge funds business in the financial services arena has seen CEOs routinely walk away with US$50 million in one year.
This is made up of something like 2.0 per cent of total funds under management and 20 per cent of profits from fund placement.
Influential conservative professionals
Influential conservative professionals, a former Securities and Exchange Commission chief, former Council of Economic Advisors staffer Paul Krugman, the liberal Princeton economist, among others, all see cause for concern.
Even though firmly believing ideology ought not to have a seat at this table, I cite the latter diversity of persuasion to show how concerns arc their way across the ideological spectrum. Of course, money matters being what they are, unease is trumpeted neither too loudly nor too far and wide.
But their views are obvious: to afford such pay packages, rates of return must be high. If the compensation package is so structured something should be obvious - conflict of interest - and big returns mean higher stakes and risk.
If this is an underlying problem, some of the thinking looks at the cause of the sub-prime mortgage fallout and inappropriate responses from the authorities.
Indeed, perhaps for the first time, at least publicly, Alan Greenspan's wisdom in his tenure as Federal Reserve chief is being questioned. It is argued that whenever there was a credit crunch he opened the money spigot solving one problem but creating another.
It is being asked now, what of plain old regulation? Could the sub-prime mortgage market fallout have occurred if regulators had done their job: creating and supervising standards for loan origination?
Loans were packaged and sold to investors relying on rating agencies that vouched for questionable mortgaged-backed funds.
Originating lenders did not exercise sufficient due diligence because loans were pushed down the chain. Yet chickens have a way of coming home to roost - hence Northern Rock as far away as Britain.
True globalisation - goods and labour markets are not fully globalised - which today exists only in world financial and capital markets, mandates that ripples have ceased being localised.
Cheap credit forces real estate prices and high-risk debt to increase and gains from both cause prices to rise even further.
Once realisable market prices begin falling, more and more assets are liquidated. The former robust investment market for sub-prime packages dries up. Moral hazard is ubiquitous.
There's one unadulterated good thing: solution efforts recognise this.
Citigroup, Bank of America and JPMorgan Chase have agreed to create a fund called a conduit, of about US$75 billion to US$100 billion high class bonds and other debt from what are now being called 'structured investment vehicles' or SIVs.
This is the fancy name for vehicles that purchased and now hold mortgage-backed bonds and other securities, which they have been unable to finance readily, in the last quarter. This fund will rely on sale of commercial paper, something like government treasuries except that they are issued by banks, corporations and investment vehicles - the private sector.
Other international banks are expected to join in this arrangement.
Rescue operation
These big three are not in the business of philanthropy. This is a rescue operation without the name.
It is the result of negotiations at the highest level between the banks and government finance officials. It has a great chance of success. Timing is good.
It will avoid disorderly sell off of assets and precipitous rise in costs of mortgages and other loans as SIVs attempt to unload securities maturing in the current situation of unease.
Can Jamaica learn lessons from this set of developments? Well of course. In the late 1980s and early 1990s we maintained our rules governing companies' ability to invest in foreign assets and securities
Our eggs were all in one Jamaican basket.
As we raise money abroad, it does seem that foreigners who buy our debt are not that foreign after all. Firmly at home, we still have a large group of poorly or under-housed families in the population while the National Housing Trust (NHT) builds up a reserve that will appear ever more tempting to a government strapped for cash.
Can we create mortgage-backed securities that bear a Jamaican 'Triple A' rating? Can we expand this to the wider Caribbean? Of course, but only if borrowers are more or less guaranteed to repay the loans they take.
The buildup of NHT funds, for instance, signals a market incapable of providing effective demand for mortgages as contributions continue to accumulate.
Our income is neither growing rapidly enough, nor are sufficient people emerging into the class of income earners capable of the participation rates required for uptake of these funds. We face a 'nice' problem here. With the solution not immediately obvious the objective must be: 'first do no harm'.
wilbe65@yahoo.com
