Sunday, January 21, 2018

$20 billion to eliminate poverty


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I have observed with great interest the developments in the CL Financial issue and recent statements that to date $20 billion of state funds have been spent in dealing with the supposed fall-out from the difficulties which CL Financial had encountered. Since all citizens have been affected we must call on the economists (in the Government and in other places) to explain why the bail-out was necessary and if the expenditures by Government will be recovered. I am particularly encouraged to do so after viewing a video on the Internet in which there was comment on President Obama's bail out of financial institutions in the United States.

In that video comment was to the effect that when poor people are lectured on their financial state they are told that they must pull themselves up by their bootstraps. However when financial institutions, like sections of CL Financial, get into difficulty it is to the state (with funds owned by citizens-including the poor) that they turn to for bail out.

Consider two aspects of this country's situation for which $20 billion could be used: (1) eradicating poverty by creating new industries and new jobs (Government alone or in partnership with the private sector); (2) upgrading the education system so that there are no citizens who do not have a basic education ensuring that all are capable of pulling themselves up by their bootstraps.

But to have used the $20 billion in that way would have meant not bailing out CL Financial. I must acknowledge that I have sympathy for those who put funds into the CL Financial institutions, particularly those of modest financial means, and who have had to suffer the uncertainty for some considerable period of time as to whether they would recover any of their investment. But this sympathy is tempered by the knowledge that there are others who resisted the temptation to obtain high interest rates that could have been viewed as not being sustainable. These latter persons opted to forego the high interest rates but now have to endure that state funds in which they are part owners are being used for the rescue of persons who enjoyed the high interest rates!

Earlier in this article I suggested that our economists should be called upon to explain the consequences of Government not injecting $20 billion into CL Financial. If our economy were to a large extent dependent on financial institutions I could understand the necessity for this bailout but our main source of income is from petroleum.

What would have been the effect of the collapse of CL Financial? Would there have been a loss of confidence in our financial institutions and a run on such institutions including the banks? Would the loss of jobs from such a result not be more that equally compensated for by the creation of jobs by investment of $20 billion in other aspects of the economy? As citizens are we not entitled to a review of the various alternatives? Is the lobby representing the investors in CL Financial so strong that the bail-out had to happen no matter what the loss to other citizens?

I am concerned by reports that parts of CL Financial are being sold. If the whole edifice were worth saving surely the state should now retain ownership (or what part thereof $20 billion would entitle it to) until the total sum is repaid. I had admired that citizens of this country could build such an international enterprise as CL Financial and it was with great sadness that I learned that it had collapsed.

Business in this country is risk averse operating in the main in trading and manufacturing for a safe CARICOM market and so it was heartening to see the growth of CL Financial. The fact that it failed will no doubt make our local business people even more risk averse.

Those reviewing for citizens the alternatives that would have been available on the CL Financial issue should explain in detail why the entity failed. Perhaps this may have to await the report of the Commission of Enquiry into the failure of CL Financial (and the Hindu Credit Union). Let us hope that the report will be made public.

Was the sum of $20 billon obtained in a process approved by Parliament? In the United States (See "What Exactly Was the Bank Bailout Bill?" by Kimberly Amadeo-in the website) a bill was passed–the Troubled Assets Recovery Program (TARP)-which required the president to develop a plan to recoup state expenditure. As I understood the situation in this country the injection of funds into CL Financial was done by a Memorandum of Understanding-not by Parliament. Did Government acquire shares in CL Financial and has the bail-out resulted in the recovery of the company-now or in the foreseeable future-so that the state can recover the $20 billion?

The answers to some of these questions are in the public domain. A comprehensive assessment of the public documents has been made by the Caribbean Centre for Money and Finance, entitled "The CL Financial debacle-four years later on" in Newsletter Volume 6 No. 1, January 2013. However this assessment does not answer the question of alternative actions to the bail-out as it has been carried out. However there are points recorded in the Centre article which are pertinent to some of the issues raised; the article states that among action identified by the Minister of Finance to be implemented in 2013 is the following: a claim has to be made to CL Financial for money spent by the Government. Unless CL Financial can meet the claim, the Government has room to negotiate an extension to the memorandum agreement.

Does the CL Financial issue raise the necessity for including in discussions on constitutional reform the control by Parliament of financial commitments and/or expenditure approved by Cabinet?

• John Spence is professor emeritus, UWI. He also served as an independent senator.