September 5, 2009

Before we crucify the bank MDs

By Okechukwu Onwuka

“Our society is now based on consumption .. 70 per cent of the GDP. This is more than we produce. So to pay our bills, we use funny money invented in 1913 with the creation of the Federal Reserve and the fiat dollar based on credit (debt).. the fractional reserve system.

In 1930’s you bought what you could afford. You saved up to buy your home. The easy credit of the 90’s has destroyed the country. Now you borrow what you can’t afford .. and the nation’s done the same.”

“Phantom dollars, printed out of thin air, backed by nothing … and producing next to nothing … defines the ‘Bailout Bubble.’ Just as with the other bubbles, so too will this one burst. But unlike Dot-com and Real Estate, when the “Bailout Bubble” pops, neither the President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another.” “This is much bigger than the Dot-com and Real Estate bubbles which hit speculators, investors and financiers the hardest. However destructive the effects of these busts on employment, savings and productivity, the Free Market Capitalist framework were left intact. But when the ‘Bailout Bubble’ explodes, the system goes with it.

THE above are extracted statements made on the US and world economy by Gerald Celente, the head of the Trends Research Institute, a top trend-forecasting agency in the world. He had predicted accurately a number of previous events such as the 1987 stock market crash, the 1998 Russian economic collapse, the 2000 Dot-Com bubble burst, the 2001 recession, the US housing market collapse of 2008, among others. You may be wondering what this has got to do with the Nigerian banks and their MDS. The answer is a lot. In the current world economy, a bank will typically extend credit to borrowers in excess of the fund reserve it carries at any point in time in a practice known as fractional reserve banking.

By doing so, banks effectively increases the total money supply in the system above that of the total amount of fiat money in existence. Fiat money is a term used to define money that is not backed by reserves of another commodity such as gold, silver, or other tangible mineral or asset. The reality of this practice is that a bank will not have access to sufficient cash (fiat money) to meet all the obligations it has to depositors if they all decide to withdraw the balance of their accounts or deposits. Fiat money is usually given value by the government. The United States switched indefinitely to fiat money in 1971, with many developed countries’ currencies fixed relative to the US dollar. Our banking system is not home grown. Our financial theories and economic systems are largely wholesale adoption of western systems.

The migration to fiat money system created limitless opportunities for all sorts of sophisticated financial instruments. The elaborate banking schemes had one common framework: work with institutional investors to drive prices upwards. This trend is quite noticeable in real estate, stock, oil and other trades that yield heavy returns over a short period. It is inevitable that such practices must accompany a financial system that is not hedged against commodity or real production. The manipulated upward price movements  become replacements for traditional commodities or real production in a reliable Risk Management System. Governments, central banks, institutional investors and banks become allies in the paper money, credit and debt systems supported by weak foundations. The United States bail out money comes from printed money backed by nothing as the Trends Report indicates. The N400b bank rescue fund is also printed (Fiat) money. The ultimate consequence is uncontrolled inflation. One would ask some of these questions concerning the Nigerian scenario
Is the CBN interested in saving depositors funds or saving the face-value of the depositor’s funds while over 80 per cent of the value (purchasing power) is lost? With widespread corruption of the financial system in many western countries, how do we develop a transparent home grown system given our long history of corruption? When current corrupt bank MDs and board members are removed, how do the replacements function in a predominantly lazy and corrupt environment? Can we rely on foreign risk management ‘experts’ to rescue us when they have failed in their countries? True risk management will never violate time tested values.

As the bank executives     are punished, how do we punish the many in the society who steal or embezzle in many forms? Politicians who steal the people’s money, workers who award inflated contracts to cronies for bribes and settlements, lecturers who award marks for cash, mechanics who damage vehicles for quick gain, workers who cheat employers by habitual lateness or absence, customs officials who cheat the government, school proprietors who buy exam papers for students to give a false impression of excellence, lecturers who embark on a strike for wage increase in a downturn economy, the man or woman who exchanges his vote for cash during elections, the policeman who collects bribes to free guilty criminals,..?

If the US is suffering the pangs of failure of the financial system with their level of production, how do we, in Nigeria survive when we consume everything, import everything and produce almost nothing? We better brace up for the hard reality. We’ll be extremely lucky if it is just 5 banks. Dominant societal values inform dominant behaviour of people at work, home, and social circles. There are no short cuts. We either work, work and work our way to growth or we all pay the price. There is no cheating the natural laws of the universe.