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Omar Davies, Guest Columnist
I have decided to submit the following statement to the Financial Sector Adjustment Company (FINSAC) commission of enquiry, mainly because of the spate of false allegations which have been, and are being, allowed to go unchallenged during the hearings.
It is seldom noted that I testified before the commission of enquiry over a three-day period in November/December 2009. Over those three days, I was questioned by the three commissioners themselves, by lawyers representing various clients, as well as by private citizens, who were allowed to do so by the chairman.
Since giving evidence, I have maintained my silence, treating the commission of enquiry like a court hearing. Furthermore, arising from the way in which the commission of enquiry was handled in the initial period, I am part of an action which is currently before the courts. While in this article I will still refrain from discussing certain related matters, I have decided to go public at this time for two main reasons.
The first is that there are just too many half-truths, or full-blown lies, which are being publicised with no rebuttal. Related to that is the fact that the commission of enquiry is being manipulated for political gain. The most blatant evidence of this is the fact that FINSAC has had no legal representation at the hearings for more than 18 months, thus allowing persons to make the wildest charges against the institution without being cross-examined.
The minister of finance's claim that he was unaware that FINSAC had no legal representation stretches credibility. Unfortunately, any remedial action at this stage can do nothing to reverse the images conveyed during the period when FINSAC had no legal representation.
FINSAC was not the cause of the crisis; rather, FINSAC was established in order to deal with a crisis which had developed in some private-sector banks, insurance companies and building societies. FINSAC never made a loan, never issued a mortgage or insurance policy and never operated a pension fund. Acceptance of this fact in any discussion of the matter is fundamental!
Cause of the Crisis
The sound bite phrasing is that the cause of the crisis was the Government's "high interest-rate policy". The response to this charge is twofold. First, similar financial crises have occurred worldwide, and in many countries and regions, e.g., Scandinavia, Japan and the United States, they have occurred during periods characterised by low interest rates. Objective analyses of the causes of such crises invariably point to bad operational practices in the institutions and the failure of the regulatory system either to detect such practices, or to act quickly once they are detected.
Closer home, Trinidad and Tobago is still grappling with a resolution to the collapse of the CLICO group. The International Monetary Fund (IMF) Country Report (March 2011) for Trinidad and Tobago analyses that collapse and references the crisis in Jamaica in the 1990s. In analysing the causes of our crisis, the IMF highlights the bad operational practices of the failed institutions. There is no mention of high interest rates!
A second point is that although there was a period where interest rates were high, the use of this lever of macroeconomic policy cannot be taken out of context. Many persons who assert that high interest rates represented the fundamental cause of the crisis fail to take into consideration, either deliberately or unwittingly, the context in which these rates were applied.
What is this context? It is a fact that the first half of the 1990s was characterised by high levels of inflation and instability in the foreign-exchange market. As regards inflation, Jamaica experienced inflation in excess of 100 per cent in fiscal year 1993-94. For some years following the liberalisation of the foreign-exchange system, the market demonstrated extreme instability. The cry at that time, from all sectors, was for inflation to be controlled and stability to be imposed on the foreign-exchange market. With few policy tools available to the authorities, liquidity was tightened in order to make it more costly for currency speculators to buy speculative holdings of US dollars, a practice which had been artificially driving up the exchange rate and inflation.
There is the legitimate question as to whether the policy ought to have been pursued as aggressively, and for as long, as it was. The reality is that during that period, attempts to move 'gingerly' had borne very limited results. The twin challenges of rapid devaluation and high inflation had sown the seeds of an impending social explosion.
In the present discussion, this background to the decision to tighten liquidity has been conveniently forgotten. Nevertheless, the question of the pace and extent of increase in interest rates is one on which reasonable people may differ.
I have decided to submit the following statement to the Financial Sector Adjustment Company (FINSAC) commission of enquiry, mainly because of the spate of false allegations which have been, and are being, allowed to go unchallenged during the hearings.
It is seldom noted that I testified before the commission of enquiry over a three-day period in November/December 2009. Over those three days, I was questioned by the three commissioners themselves, by lawyers representing various clients, as well as by private citizens, who were allowed to do so by the chairman.
Since giving evidence, I have maintained my silence, treating the commission of enquiry like a court hearing. Furthermore, arising from the way in which the commission of enquiry was handled in the initial period, I am part of an action which is currently before the courts. While in this article I will still refrain from discussing certain related matters, I have decided to go public at this time for two main reasons.
The first is that there are just too many half-truths, or full-blown lies, which are being publicised with no rebuttal. Related to that is the fact that the commission of enquiry is being manipulated for political gain. The most blatant evidence of this is the fact that FINSAC has had no legal representation at the hearings for more than 18 months, thus allowing persons to make the wildest charges against the institution without being cross-examined.
The minister of finance's claim that he was unaware that FINSAC had no legal representation stretches credibility. Unfortunately, any remedial action at this stage can do nothing to reverse the images conveyed during the period when FINSAC had no legal representation.
FINSAC was not the cause of the crisis; rather, FINSAC was established in order to deal with a crisis which had developed in some private-sector banks, insurance companies and building societies. FINSAC never made a loan, never issued a mortgage or insurance policy and never operated a pension fund. Acceptance of this fact in any discussion of the matter is fundamental!
Cause of the Crisis
The sound bite phrasing is that the cause of the crisis was the Government's "high interest-rate policy". The response to this charge is twofold. First, similar financial crises have occurred worldwide, and in many countries and regions, e.g., Scandinavia, Japan and the United States, they have occurred during periods characterised by low interest rates. Objective analyses of the causes of such crises invariably point to bad operational practices in the institutions and the failure of the regulatory system either to detect such practices, or to act quickly once they are detected.
Closer home, Trinidad and Tobago is still grappling with a resolution to the collapse of the CLICO group. The International Monetary Fund (IMF) Country Report (March 2011) for Trinidad and Tobago analyses that collapse and references the crisis in Jamaica in the 1990s. In analysing the causes of our crisis, the IMF highlights the bad operational practices of the failed institutions. There is no mention of high interest rates!
A second point is that although there was a period where interest rates were high, the use of this lever of macroeconomic policy cannot be taken out of context. Many persons who assert that high interest rates represented the fundamental cause of the crisis fail to take into consideration, either deliberately or unwittingly, the context in which these rates were applied.
What is this context? It is a fact that the first half of the 1990s was characterised by high levels of inflation and instability in the foreign-exchange market. As regards inflation, Jamaica experienced inflation in excess of 100 per cent in fiscal year 1993-94. For some years following the liberalisation of the foreign-exchange system, the market demonstrated extreme instability. The cry at that time, from all sectors, was for inflation to be controlled and stability to be imposed on the foreign-exchange market. With few policy tools available to the authorities, liquidity was tightened in order to make it more costly for currency speculators to buy speculative holdings of US dollars, a practice which had been artificially driving up the exchange rate and inflation.
There is the legitimate question as to whether the policy ought to have been pursued as aggressively, and for as long, as it was. The reality is that during that period, attempts to move 'gingerly' had borne very limited results. The twin challenges of rapid devaluation and high inflation had sown the seeds of an impending social explosion.
In the present discussion, this background to the decision to tighten liquidity has been conveniently forgotten. Nevertheless, the question of the pace and extent of increase in interest rates is one on which reasonable people may differ.
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