2009 LECTURE :
It started small, then it went global. Now this financial crisis is forcing the entire world into deep recession which is also threatening to develop into a depression. This last prospect is sending jitters into the spine of everyone. Nobody is looking forward to it. It is a phenomenon which was last experienced between 1929 and 1933. It was economically and socially, devastating. But we have not reached that ugly situation yet. We are currently in a state of deep recession. This is one step better than a depression.
Recession occurs more often and has a pattern which policy makers
recognize and learn to manage as it occurs periodically. Therefore, if that is the case, then why should the current recession cause so much panic reactions which we are witnessing all around the world? The answer lies in the fact that this recession was caused by the systematic breaking down of the world financial system thereby shaking things abruptly up. Economists and bankers are calling the process ‘financial meltdown’; whatever is the outcome of this process, the financial world will never be the same again. The recession, when it ends, will throw up a challenge behind it for a new and hopefully a stronger and a more purposeful system than what we have at the moment But how did this crisis all begin and from where? It all began in the United States of America and therefore can be correctly labeled “MADE IN AMERICA” wherever and whenever its effects are felt around the globe. The adage that when America sneezes the rest of the world catches cold is, on this occasion, demonstratively and painfully correct; much as we dislike the idea.
It was America which invented and developed what it called “Assets-
It has to be understood that the American economy is largely resting on its four key sectors, namely:
If there is any trouble in any of these sectors, the effect will translate
negatively in the overall growth of the GDP of the country. It is in this light that we should understand the concern of the American policymakers when the housing sector started experiencing trouble through mortgage defaults by the end of 2005 and the beginning of 2006. But even at that time, not many people could imagine the trouble to be of crisis proportion and in fact a global “wild fire. There was however a little difference between the situation obtained in the U .S.A. and the situation existing elsewhere. This is with respect to the fact that there was no privatization exercise to be undertaken there. Most economic projects and business were already in the hands of the private sector. The main area of decision therefore, was for the Reagan administration to determine the role of his government in the smooth operation of these strictly private enterprises by their own operators.
Like his counterpart in the U.K., Mr. Reagan, as said earlier, believed in the strict non-interference in the activities of the private sector both of
his country and the world at large. As a result of this attitude, the Wall Street financial operators were left alone with only the derelict regulations which were in no way abreast with the changing items. Nor were they adequate in providing the necessary restraints on the operators.
Over the last eight years, for example, the American federal government’s budgets have gone through annual deficits on an average of $450 billion. In fact, the present 2008/2009 budget will incur a deficit of approximately $ 1.2 trillion. The reason for this significant increase in fiscal recklessness is not far to find. The American government under President Bush has plunged the country into two costly wars, one in Iraq and the other in Mghanistan. The Iraqi war alone has so far cost America S1.02 trillion. We have not yet seen the end of these two wars. Maybe the new president, Mr. Barrack Obama, will have to be financed, as in fact they do, through borrowings from both internal and external sources. America today is the world’s largest borrower with a total national debt profile of well over $9 trillion. China alone is claiming $500 billion from this total debt. And yet the world did not seem to be worried, not to speak of expressing anger over this matter until now when it realized the nature of the disaster which these reckless actions would lead us into.
The American people also cannot be free from this blame. Even though
they constitute only 5% of the total world population, and contributing only 22% of the global economy, yet they consume about 67% of the world’s total economic output. It therefore adds up to the fact that America today siphons up most of the world’s total savings to address its various problems which include wars and its insatiable level of consumption. In so doings it leads the world into serious drought in the availability of loanable funds for productive business.
From these accounts therefore, one could see that the failure of the mortgage banks in America only triggered the already simmering crisis of the finance and banking sectors into explosion. When it did last year, it took everybody unawares and unprepared. The policy makers were very reluctant to admit the serious nature of the problem.
When Fannie Mae and Freddie Mac, two of the US mortgage banks, declared themselves insolvent, most operators at the Wall Street did not pay much attention to the issue until after the giant financial institutions like Lehman Brothers, Merrill Lynch, AIG (American International Group), Goldman Sachs, CitiGroup, Wells Fargo Bank etc. started on one-by-one basis to declare the same insolvency position that these operators and the rest of America began to panic. The White House at first played down the serious nature of the problem. Mr. Bush would not want to expose the already broken down scenario at the Wall Street After all, it is part of his failure and the failure of his party’s philosophy too.
The world is now a global village. Banks and other financial institutions now establish links with each other across the globe. Whatever happens in the U. S.A has direct bearing on the rest of the world. The global banking and finance systems are now a single entity and they are seriously breaking down. When the crisis surfaced in Europe, it was in Great Britain that it first appeared. Northern Rock, a once thriving mortgage bank, declared itself in distress. There was a run on its operations. The operators of the financial district in the city of London were practically left alone with few or no adequate regulation to help the government in providing them with effective supervision. As a result, banks were unintentionally allowed inordinate leeway to extend credit to weak or
even undeserving borrowers. The net result was naturally heavy defaults which ultimately rendered the banks themselves insolvent. The aggregate of these insolvencies was to usher in the general nationwide credit crunch which the government is now, in later years, trying to solve through bailouts with funds from the public treasury.
In the United States of America, the situation was the same. In fact, it was from there that the deregulation of free market philosophy originated and was exported across to Europe (principally Great Britain, France and Germany), to south-east Asia and to the Far East, principally to Japan and South Korea. The main proponents of this philosophy were of course, Milton Friedman, the economic advisor to Mrs. Thatcher and Alan Greenspan, the former chairman of the US Federa1 Reserve Board.
B. THE GENESIS
This was as a result of the earlier government policies which encouraged higher risk sub-prime lending practices. There was also already an additional incentive like that of easy initial terms which also encouraged borrowers to get more and more involved in the venture until when in
the long run the interest rates began to rise and until housing prices started to fall. The borrowers began to default as a result. Foreclosures increased dramatically because the initial easy terms have expired. To make matters worse, the home prices still refused to go up because of glut. Foreclosures therefore accelerated. This was what triggered the world. By 2007, nearly 1.3 million housings in the country were up for foreclosures. That was 79% of the total. For the rest of the financial world, the total collapse of the MBS had resulted in the colossal loss of approximately $435 billion (four hundred and thirty five billion dollars) by the middle of July 2008. This was the clear indication that all was not well in our financial world. It signaled the commencement of the global financial crisis which led us to our present recession which most countries in Europe and North America were reluctant to admit until lately.
THE DEVELOPMENT AND THE IMPLICATIONS ON THE
However, it is clear that these governments have a long way to go because the crisis is very deep and very widespread. It would take a lot more effort and time before any positive turn around of the world economy could be achieved. Nevertheless, it must be admitted that the initial responses of these governments that have the problem required some urgent action. They must have also realized by now that the crisis is imposing the greatest challenge to the world since the end of the period of the Great Depression, between 1920 and 1933. The recent convening of meeting of the leaders of the industrially advanced countries, the now G20, so urgently attested to this realization.
However, it is very simplistic to suppose that the main cause of the crisis was just the mortgage payment defaults in the housing market in the United States of America. At best, it could be described as only a trigger to a disaster waiting to happen. To understand the roots and the origin of this potential disaster, one should go back to the early nineteen-eighties when Mr. Ronald Reagan was the President of the United States of America and Mrs. Margaret Thatcher was the Prime Minister of the United Kingdom. Both of these leaders strongly shared the same belief. They believed that the less the governments interfered in the private-sector activities the better for such activities to grow and prosper.
Nobody in a free democratic environment with a free market economy would argue against this belief. However, this environment must be strictly controlled with adequate regulations to ensure that the operators of this free market do not act against the necessary norms because of greed and selfishness. If that is allowed to happen their entire society suffers.
They included HSBC, Standard Bank, Lloyds Banking Group and few others. Even the Royal Bank of Scotland did not escape the crisis. It was after this declaration that the people of Britain came to the grip of what was really happening. It was really a global financial breakdown and it was then that the government started treating it in that manner. It decided to vote some 48 billion pounds sterling as bailout money to several of these financial institutions.
Back in the U.SA, President Bush went to Congress and secured bailout
money of $700 billion. This was also to be distributed to these financial
institutions to keep them in operation. He was however able to distribute only $350 billion before he left office.
The big question however is the manner in which to treat this bailout
money. While Britain wanted to use it to buy equities with loans in these institutions, the American government preferred to use it as short to medium term loans. It would however consider buying equities (35%) on a very few occasions. And even at that it would be in a form of preference shares.
All these measures appear to be steps in the right direction. Banks and other financial institutions must be assisted to survive and operate in a healthy situation. The first step therefore is to make sure that they have adequate capital base and adequate liquidity to function satisfactorily.
But there is a far more serious work to be done in both the medium and long term period in order to ensure their permanent survival.
While the government should encourage private sector participation and even helping it to take a leading role in most instances of business activities, it should at the same time exert upon it proper supervision based on up-to-date laws and regulations. In this respect however, the government must emphasize harmony in all its dealings with the private sector. More will be said on this issue later on in this paper.
In whatever form the bailout money was given to these strictly private
enterprises, the message is now clear. It is that the days when the individual governments (whether in the countries of Europe, Asia, Africa or America) will stay away from private sector business activities are
now over. This is not however to say that the days of capitalism are also now over. However, what led us to this sorry situation was our absolute trust that the private sector could operate independently, free from the overbearing supervision of the government and expect it to contribute meaningfully to the economic growth and development of their individual nations. In short, we expected them to operate in a completely deregulated environment as envisaged by Mrs. Thatcher and Mr. Reagan. The development from the early nineteen eighties to the present day has however shown that these two leaders as well as their economic advisors were absolutely wrong. The capital market operators at the Wall Street in New York, the operators in the city of London as well as those operating in Tokyo, Zurich and in few other market centers around the world (including Lagos) have found out that the freedom to operate freely and unsupervised was a license to misbehave and manipulate the practice to their own greedy inclinations. The end result is what we now see around us; a total breakdown of the system leading to a deep recession the like of which was last seen since seventy odd years ago.
The present financial crisis should therefore be seen as an opportunity for us to take a second look at capitalism again with a view to making it more acceptable to all of us in our future endeavours. The end of this recession will show us the way to reach there.
Meanwhile, the second area of assistance is the stimulus plan which
perhaps requires more money and whose full impact will be felt only in the long run. It will, hopefully, help to take the economy out of the recession into normal growth. The Obama administration understands the importance of this scheme that it is sparing no effort to get the Congress
to approve adequate funds necessary for its execution. So far, the following monies have been lined up:
Details of the plan have not been released but President Obama has indicated that the scheme will principally cover new projects in the transportation, education and health sectors. Nothing more was revealed apart from this short statement It is evident that the President, with the assistance of his aides, is working at the details pending the final execution.
By so doing, many unemployed people will go back to work and earn income. This in turn will induce them to spend on goods which will have to be supplied by the manufacturers who will naturally bring back their industrial plants into operation again.
This multiplier effect is the surest process which will most likely revive
the economy. It is the process which the Obama administration is apparently going to adopt to get the American economy working again; and by extension, the rest of the world also. It remains to be seen.
D. THE NIGERIA CONNECTION
There is no foreign bank in Nigeria today, neither do we have many joint ownerships between foreign and the indigenous interests in our local banks. The question of foreign bank withdrawing its participation in order to consolidate at home does not therefore seriously arise. The amount of money owned by foreign banks in the custody of the Nigerian banks is not very significant as to affect the business life of Nigerians in the event of withdrawal. This is not however to say that the interconnection between the Nigerian and the foreign banks are not affected. In fact there are evidences showing that they are really affected because this crisis is a global phenomenon. The foreign partner banks are bound to
experience business slow down which is sure to affect their relationship with Nigeria’s partner banks during the downturn. But all the same, it has to be admitted that Nigeria’s bank linkages with the rest of the world are limited.
The recent banking consolidation has left banks in Nigeria with a much stronger balance sheet than they have ever been. First of all, the banks’ capital adequacy of 18.8% is much higher than their peers elsewhere. Also, the total banks’ non-performing loans have drastically come down to only 7.7%. Even at the height of the consolidation exercise in 2006, Nigerian bankers have avoided borrowing from the Organization of Economic Cooperation and Development (OECD) to fund growth. They mostly raise capital domestically.
In short, the consolidation exercise has strengthened their basic foundations. If any local bank is showing any sign of crisis then it has nothing to do with the global financial melt-down. Rather, it has everything to do with the internal management incompetence or lack of integrity thereof. The global economic slowdown has, on the other hand, affected the overall foreign currency receipts into the country. This has affected the exchange rate of the naira from its stable position of N116 to the dollar to the current rate of N165. Private foreign currency receipts have virtually dried up leaving the CBN as the only main provider of foreign currencies. The measure so far taken by the apex bank seems to arrest a further deterioration of the local Currency, it remains to be seen whether it will hold on or even go up to at least N125 to the dollar. This is the best that could be expected in the presented circumstances.
Our foreign reserve is now about $45 billion. It had at one time risen to
over $60 billion, but it systematically fell to the present level. It may fall
further down because of the serious instability in our finance and banking world. Foreign reserve is like any other money saved. It is an income not spent.
It is used to give confidence to our trading and investing partners that we have the money to meet our obligations in any event. We also have the money to allow for the repatriation of the investor in the event of a take-over of his initial investment. In short, we are a viable nation.
With the present reserve of $45 billion it is generally believed that $20
Again, as every stakeholder knows, the behaviour of these operators of
the two institutions of the Nigerian capital market is anything but ethical. The banks, the shareholders and the potential shareholders connive together with the operators of these powerful institutions to manipulate the otherwise orderly and transparent process of buying and selling legitimate stocks, bonds and shares in the market, all because of their greed and selfishness. Their manipulations of share prices to go up and down in unethical manner are very much well-known. It is not surprising therefore that when the financial “meltdown” arrived at our shores the foreign stakeholders decided to dump their millions of shares.
The first one is that the system has been creaking under the weight of the world’s modem demand. It has now become a global village sewn together by easy telecommunications and other well established technological advancements. Financial products are now traded across the borders on-line. A good example is how the Mortgage Backed Securities (MBS) on the American housing market move across to Europe and Asia thus enabling the Europeans and the Asians to participate in the market without any apparent hindrance. This easy movement, as we have seen, is what contributed to making this crisis a global affair. Certainly, the present world financial system was not really designed to cope with this kind of demand, hence its systematic breaking down.
The other causative factor is the general misbehaviour of the operators of the capital markets, in America, Europe and Asia. The philosophy of free market deregulation has virtually removed the governments’ supervisory powers from the market thereby allowing these operators to behave in an outlaw fashion so as to satisfy their selfish and greedy instinct; and in so doing plunged the world into this financial meltdown. All of these issues will have to be addressed by the world leaders and experts who must fashion out a new system which will reflect the demand of the twenty - first century.
Mr. Bush knew perfectly well that this particular problem was beyond the ability of the G8 to tackle and solve all by themselves alone with the rest of the world trailing along and accepting whatever decision they have taken. The centers of the world economic powers are now more in number and scattered all over the globe. It is now no longer the affairs of Europe and North America as was the case in say, 1948 No economic decision could for example be enduring without the active participation of such major countries as China, India, Brazil, and few others outside the G8 nations; hence his decision to cast his net wider to include more nations to what isnowG20.
Mr. Bush is also aware that no final decision could be taken through one session alone. In fact, the November meeting was simply to identify the problem and set the agenda for tackling it through series of future sessions at different date. The next meeting was therefore set to take place in April, 2009. This meeting took place in London on schedule and it was well attended. Most of the leaders of the G 20 were present. It was clear that the main items on the agenda were those connected with the world’s economic recovery rather than on what measures to be taken in order to usher in a new financial system to replace current failed ones. Perhaps they were putting that assignment aside until after the end of the current recession.
It was the opinion of everyone at the meeting that it was a resounding
success. Everyone was satisfied with the decisions taken and was of the firm belief that, if properly implemented, the approved measures could hasten the realization of the eagerly awaited world economic recovery. For example, it was decided among other decisions, that, the developed world should in aggregate contribute no less than $3.3 trillion to the bailout fund across the globe. It was also agreed that the Bretton Woods institutions i.e. the IMF and World Bank should receive at least $25 billion to assist in the simulation of the world trade and investment especially in the developing countries. It was also agreed that leaders should revise their laws governing the operations of the capital markets in their respective countries in order to improve on their general supervision.
By and large, these decisions are being faithfully implemented and already the impact is now clearly noticeable by this June; two months after the historic meeting. There is now much optimism that the recession could end by the end of this year and that full recovery could start by the beginning of the year 2010.
F. THE LAST WORD
Even though technology has made the world a small place with information so easily obtained, we tend to forget about the human negative instinct which renders all else unimportant. The result is now serious financial problem which is threatening to destroy all our gains of many years and to throw us into deep misery. God forbid.
Thank you and God bless.