What is your interest in zero interest rate regimes?

Depositors of a bankrupt finance company staging a protest. (File photo)

By Jayasri Priyalal-June 23, 2020, 9:02 pm

A distressed customer of The Finance Company told the media recently that he had worked hard in West Asia and earned some money for his retirement and deposited it in the hope that he would not be a burden on anyone in his old age, but he had lost all his savings. He was among many people who queued up to collect whatever they could. Their hard-earned money is in bankrupt businesses; moreover, the interest rates are plummeting, placing millions of pensioners in a dilemma.

This essay is to highlight the trends of the current monetary policy debacles and the state of the economies struggling to swim or sink in oceans of debt. Money is what money does; interest rates are the price of money, in short. Quite contrary to what the Scotsman economist Adams Smith said, the general belief is that money is the invisible hand that drives productivity and growth. Mythical belief in markets, and the neo-liberal dogma, was the driving ideology embraced by policymakers until the 2008 financial crisis which sent all leading economies into a tailspin.

Many politicians still believe that by pumping and dumping money they can solve most socio-economic problems instantaneously. The North American and European policymakers came up with the unconventional monetary policy tool known as Quantitative Easing (QE). They rejoice the achievements as the capital markets rejuvenated sending all market indices up, enabling few to feel the fake prosperity for a short time. And now comes the unprecedented COVID-19 crisis a new turning point in human civilization. The fact remains that money will never increase personal satisfaction it will only reduce dissatisfaction for a moment. That is it. Coronavirus showed the entire world that most precious resources to sustain human life were fresh air and freshwater and not money and wealth.

Quantity vs Quality: Need for a New Financial Architecture

Generally, in banks, we find two types of customers, the first group who spend time to save money – depositors- the other who spend money to save time-borrowers. Money is a peculiar commodity currently traded in banks, and unlike others, money does not demand a quality except quantity. Hence the quantitative easing (QE) has been chosen as an unconventional monitory policy tool to stabilize financial markets by many crises hit countries.

When money circulation and credit disbursements were under the sole control of the Central Banks, the Keynesian monetary policy tools worked effectively. Today, the plastic money and digital trading platforms call the shots and dominate the trade. If an economist still believes that the credit creation ability is only vested with the banks, he or she is sadly mistaken. Digital currencies are already in the pipeline once that is in, banks will have no commodity to trade, and Central Banks will have no role to print money.

A new financial architecture is needed to replace the outdated financial intermediation system, the first industrial revolution era performance and productivity measuring indicators such as Returns on Equity – ROE. In capital markets those who speculate, when cheap money circulates at zero interest, or negative rates, make a quick return at the expense of millions of depositors who have saved money sacrificing their current consumptions for their future needs. All their savings become worthless and many depositors find themselves in a hopeless situation. So, it is not difficult to realise that QE is an option that subsidies the economically stable segments instead of the real actors the producers and consumers who stimulate economic activities. Theoretically, the cheap money is released to the economy to increase liquidity in the financial markets. When state subsidies are extended to farmers and vulnerable groups in communities to support livelihoods, they lead to market distortions. Policymakers are quite happy to print money and postpone the agonies, bloating the balance sheets of the Central Banks with toxic assets.

Digital disruptions are the order of the day; e-commerce activities are becoming popular and will eventually lead to a cashless economy. Socially responsible investors are drifting away from the traditional capital and financial markets to crowdfunding and investing their monies for greater sustainability of the habitable eco-systems for the prosperity of all living beings with better returns. Blockchain technology will challenge the survival of the current capital markets linked to stock and bond exchanges.

Economics not a natural science

High debt levels were typical during the post-war periods (1945-1970), and it worked well, and national debt levels decreased with the increased productivities in all war-torn economies. Moreover, the inflationary trends too reduced the debt burdens adversely impacting the federal fiscal positions. But since 2009, there has been cheap money in high circulations, but the inflationary trends have not picked up, challenging the conventional theory of Economics. A valuable argument to prove the point that economics is not a natural science, where the solutions could be first tested in a laboratory to determine the impact of the remedies; instead, it is just another form of a prediction. Advance technology supported with substantial databases can support decision making with timely facts, as such now the economist predict only for yesterday and not for tomorrow.

The post-COVID 19-pandemic situations will undoubtedly worsen the economies across the globe as the growth forecast is already in deep negative territories. The only lifeline for survival is to continue with the negative interest rate or zero interest rate unconventional monetary policies, which will undoubtedly erode the trust element in the financial systems. This trend will be disastrous for those who are struggling to meet their ends by earning an interest income by placing their hard-earned savings in banks. The segment of the vulnerable groups who spend time to save money to support their life’s by earning interest on their savings. Vulture funds and money lenders will flourish if they are not regulated and controlled.

Regulatory Capture- Role of Central Banks

Deficiencies in the regulatory systems of the monetary authorities were badly exposed during the financial crisis in 2008. Validity and effectiveness of the BASLE guidelines were undue competitive advantage formulas for banks originating from the OECD group of countries. The Central Bank of Sri Lanka has failed in its regulatory function in the recent past. There were numerous occasions where bank failures occurred, Pramuka Bank fiasco being a case in point. Has the Central Bank or the judicialsystem delivered justice to the victims or punished the culprits? Thereafter, several non-banking financial institutions collapsed and among them are Golden Key and now ETI and The Finance Company.

People also lost their savings due to the collapse of Rural Cooperative Banks, and private businesses of Sakvithi and Danduwam Mudalali. However, the Central Bank timely intervened and took the management control of Seylan Bank and revived the bank successfully. The regulators should be adequately empowered to exercise the prudential functions proactively to maintain the financial stability in the country. Their role is not limited to monitoring the licensed institutions. Their vigilance on the unethical lending and deposit mobilization and credit growth activities emerging in the economy needs extra focus. Monitoring the shadow banking activities and unlicensed operations should be curbed in advance before they get into trouble and people lose their money. The Monetary Authority of Singapore has introduced a scheme to raise the financial literacy of the people. By this way, the Central Bank can control the credit disbursements to the productive segment in the real economy instead of allowing a few financial institutions to profit by channelling credits at exorbitant interest rates to speculative unproductive sectors.

Regain the lost independence and Professionalism

Public administration in the country has lost its vitality since the introduction of the executive Presidential systems in the country. The Central Bank is no exception. It is good to review the competencies of the ministers who held the finance portfolio in the past few decades, and the number of frauds they are involved. They always prefer to have a henchman at decision-making levels so that their political interests are served. Appointment of Governors with questionable integrity and defending them when they get involved in crimes cannot be justified.

The ageing population will become a sizeable segment in Sri Lanka. So, the governments need to act proactively to come up with viable and sustainable social security systems enabling the retiree and all seniors to live their life to the fullest potential in dignity.

A pension scheme for all employees in the state and private sector is a must. Aside, the interest of the employees in the informal sector is also an area that needs attention, as they are going to be the driving force in the future.

First things first, bring all those who robbed the EPF and other financial institution to justice and recover the ill-gotten money. Considering the future interest rate regimes – negative or zero – Sri Lanka too needs to introduce a Universal Basic Income model to help those vulnerable groups. To make this happen, action should be taken to prevent the Central Bank and state-owned banks being robbed from inside. Moreover, undue influence should not be brought to bear on the financial industry professionals to meet the political agendas or to grant licences for opening banks.

(Writer is the Regional Director for Finance Sector Activities attached to UNI Asia & Pacific Regional Organization in Singapore, jayasripriyalal59@gmail.com)