|Honor your commitment|
Published: Jun 27, 2012
You cannot bring about prosperity by discouraging thrift. You cannot strengthen the weak by weakening the strong. You cannot help the wage earner by pulling down the wage payer. You cannot further the brotherhood of man by encouraging class hatred. You cannot help the poor by destroying the rich. You cannot keep out of trouble by spending more than you earn. You cannot build character and courage by taking away man’s initiative and independence. You cannot help men permanently by doing for them what they could and should do for themselves.
– Abraham Lincoln
The problems facing the Bahamian economy are daunting especially when it comes to issues of government spending and the current deficit. Across the world over, we continue to see countries downgraded by rating agencies due principally to two things: first, ever increasing debt; and secondly, no coherent plan to grow the economy. The most recent country cited by the agencies was Spain which was downgraded three notches to BBB from A. We saw recently again where Spain had to seek a bailout of $125 billion for its banks.
We are reminded in the Bible in the book of Proverbs that the borrower is slave to the lender. We read this time and time again and few of us ever stop to ponder the truth in this statement.
Like our government, the majority of Bahamians have the same challenges with high spending and high debt. In the case of the government, there are limited options available to correct the situation due to high unemployment and a continuing weak jobless economy.
We have repeated time and time again the need to save and plan for a rainy day. Regrettably, few Bahamians either save or plan for the proverbial rainy day. Today, those who are retired and have planned are being penalized with low interest rates on their savings. It is important that government seriously considers the implementation of a mandatory savings or retirement plan to assist the ever growing needs of an aging population and to minimize the impact on National Insurance.
As we move forward, it will no longer be an issue only of the “haves” and “have nots”. It will be between the generations (the generation gap) as we live longer and have more needs that have to be met and a younger generation which is jobless and does not and cannot contribute to the tax base.
This minority, who save, place their funds in financial institutions with a promise of a fair return on their deposit. The bank then lends the money to a number of interested groups including, the government, businesses, private citizens et al. The end use of the funds are for the purchase of government bonds; the expansion of businesses; employed as working capital; home mortgages; car and furniture purchases; or any number of acquisitions of goods and services by the public.
It is not good public policy to punish savings. Industrious savers are adversely affected and punished by reduced interest rates on deposits. Moreover, the financial institutions whose job it is to protect and preserve the value of those savings are often vilified, mostly and ironically, by those who spend beyond their means, or those who defraud the government by not paying National Insurance and other government taxes.
Savings is a virtue that is seldom recognized and often goes unappreciated. Instead, we show a preference for persons participating in any scheme that can deliver the easy money. No need to save, and we assume that the good days will go on forever. The Christian nation has forgotten the biblical promise of seven good and seven lean years. Perhaps the time has come for us to prepare for the inevitable seven lean years.
Our present situation
As you listen to the various radio shows, none of us are prepared to take the blame for our present predicament. Instead, we blame our financial institutions; they are the main culprits, according to some pundits and by nearly all persons who took out mortgages they could not afford, who now discover that the property is now worth less than they paid for it. It is often overlooked that these financial institutions never forced anyone to buy or borrow. Admittedly, some institutions made it extremely easy with no or minimal down payment requirements which were supported by inflated appraised values by the realtors; both with the knowledge that should one person lose their job in a household they could no longer honor their commitment.
The sad and more egregious situations are those property owners who could afford to pay, but decided to renege on their obligations anyway because they needed the monies to support their extravagant lifestyles. Those persons who abandon their commitments know they are behaving disreputably and tend to justify their actions by blaming someone else while the politician and the media blame the financial institutions.
For the most part, the financial institutions lend in good faith, thus enabling citizens to buy homes and acquire other assets. To be sure, there was some reckless lending and some reckless borrowing and once brought together, the merry-go-round was started.
The Bahamas is at a stage in its economic life where there is a need to step back and objectively and dispassionately review the tenets of a market-based system and what is needed to make that system work.
On the micro-level, it is understandable and easy to feel sympathy for the homeowner evicted or about to be foreclosed on. We feel the pain and we see the misery. On the macro-level, however, we must recall that our society was built on the sanctity of civil contracts. If borrowers are allowed to abrogate their responsibilities without consequence, then the system unravels. If that happens we all suffer. As we have written before, the first casualty is that credit disappears which can have serious implications for re-starting our economy. This leads to bankruptcies, further increases in unemployment and ultimately, a declining GDP. Precisely the opposite of what we need today to fix our economy.
The most recent debate on the economy speaks to the government needing to borrow some $500 million. It’s our opinion that it would be substantially more than that (we will write on this at a later date) but it is likely that after shifting some things around the public won’t see exactly how bad things really are.
We must keep in mind that a number of companies are seeking to raise several hundred million for any number of projects in addition to the government’s need for funding. It is the confidence in the local financial system that determines whether private or public projects could proceed. Expected return on capital is what drives the system. If investors don’t think they will be repaid, they would not lend to anyone including to the government. We need only look at the Eurozone for examples of this.
Finding our way
At the heart of capitalism is deferred gratification. We seem to have lost our way and need to urgently re-examine our priorities. We have been living off our children’s future for far too long. It must stop and it must stop now. We seem to live in a “I want it now universe” – a “want” that must be satisfied irrespective of what the government or companies can afford. The recent demands by some unions and other non-organized groups are good examples of that attitude.
We should never forget the fundamental economic principles upon which our economy is based. Investments are made on the premise that they would yield a good return over the long term. If institutions are not assured of getting paid, they would hoard cash and require insane amounts of security.
If that happens, businesses can’t expand, new jobs cannot be created and young people cannot obtain financing for a home. It is a business of trust. Once that trust is broken, the system would freeze up and we all will suffer the dire consequences of a dysfunctional economy. We must work diligently to prevent this outcome; we need to honor our obligations or at the very minimum, work collaboratively with our financial institutions to design and honor an appropriate re-worked financing plan.
• CFAL is a sister company of The Nassau Guardian under the AF Holdings Ltd. umbrella. CFAL provides investment management, research, brokerage and pension services. For comments, please contact CFAL at: email@example.com.