Global financial crisis and government bailouts

Automated Teller Machine

Lest I am accused of trumpeting a certain socio-political ideology that no longer seems to be in active vogue in our part of the world where the international Monetary Fund (IMF) and the World Bank are the joint kings that rule our lives, let me say that I am only a layman trying to put some meaning on what is happening around us.

You tune your radio to a foreign station or read any reputable newspaper and you feel the whole world is crushing on the affluent world and you wonder why. I, for one, have listened and read for long hours but I am none the wiser. Whatever the reasons are, I feel like others of my ilk that think it has nothing to do with us in our poor corner. Really?

Our mindset is this: Let the advanced nations stew in their own blood. They have brought this crisis on themselves through conspicuous and indecent consumption. Their philosophy of running an economy is to entice the people to continue buying.

You may not have the cash but you can continue living and eating like a king or a queen. A financial institution will always guarantee your purchase of a big house with the latest fittings or a big car and pay for your lifestyle holiday in the Bahamas. Credit is the name of the system.

Now remember that the institution guaranteeing your purchases is able to do so with money deposited by businessmen, ordinary workers, taxi drivers and pension fund managers. If we consider a situation where there is a considerable slowdown of business activities and the borrower is out of employment he is unable to keep up with his payment schedule to the lending institution.

At the same time, depositors also fear that they are going to lose their money when they see stock values plummeting. They will want to withdraw their money to prevent further loss of value. There is panic all over the world.

People are just not buying and the banks too have dried up, no liquidity, so they are no longer lending.

The bank or lending institution files for bankruptcy. When the above misery occurs in one major market it spreads a "virus" because these institutions are entangled by dealing amongst themselves and many businessmen deal with banks across the world. This is exactly what is happening, again, according to my layman's understanding of it.

Faced with a situation of financial turmoil governments have reacted quickly, though in the US it took some wrangling that was not unrelated to politics and capitalist chicanery, to agree to 5700 billion bailout for the distressed institutions.

The UK Government has also announced a $87 billion rescue plan for the banks and a promise to inject further 200 billion pound sterling into the economy. The Japanese Government is reported to be injecting daily nearly $20 billion into the banks for 10 straight days. All these governments are carrying out these interventions to recapitalise the banks, assure the depositors and stock owners that their money is safe and to enable the banks to continue lending business does not grind to a halt.

The governments have issued some cautions: They have seen excessive executive payouts as one of the reasons why some financial institutions have been lending money to improve their turnover and therefore the bonuses of the managers. They have tended to lend foolishly due to avarice. Yes, gravy trains again!

Governments have advised the banks to exercise forbearance with the customers. 'In other words, a debtor is entitled to his daily bread. There is even a broad hint here which affords me a mischievous smile. Some governments may nationalise banks to make sure that they serve the people according to the welfare agenda of their vision.

I call this creative socialism and I want to be credited with the invention of that term. This being an electioneering year when we may be tempted to condemn ideologies and their adjunct economic systems, let us be warned that socialism still works even in America, the UK, Japan and wherever a government feels that unbridled capitalism will not solve her problems.

I have listened to a few of our local financial advisers claim, and I thought so initially, that the financial crisis will not get to our shores. Sure? What happens to that chunk of our budget that depends on donor funding when the donors are in financial crisis?

What happens to the businesses of our local banks that have correspondence banks in the US, UK and elsewhere? What happens to all the Nigerian banks in Ghana that have invested in those markets? In case these foreign banks that operate in our economy are in need of a bailout in the fashion of what the European and American governments have done or are contemplating to do who takes the action, Ghana or Nigeria? Somebody, educate us.

Source: Joe Frazier -Daily Graphic