Leadership (Abuja)
Jerry Uwah
14 October 2008
opinion
Nancy Pelosi, speaker of the US House of Representatives, summed up the cause of the current global credit crunch in a very few words during her opening speech to flag off debate on the $700 billion bailout package for the financial industry sent to Congress by embattled President George W. Bush.
She blamed the crisis on the carefree attitude of the regulators of America's financial system. That, in effect, sums up the cause of the pains and agony that billions of depositors, shareholders and employees are going through today. The regulators of America's financial system were derelict in the guise of free market principles. It is, however, reassuring to note that when the crisis threatened to envelop the globe, they dropped their free market toga and went for Keynesian intervention as panacea.
The US economy and that of Nigeria are worlds apart. The American economy is a credit economy. You consume today and pay tomorrow. And if by tomorrow when you are supposed to pay the bills of what you have consumed your economy crumbles, then, your creditor takes the blame for miscalculating his risk. In the US, one can walk into a car showroom and drive away a limousine without paying a dime. In some instances, the system allows you as much as one year moratorium before the loan repayment commences. The American credit system is built on trust. There are very few cases of people eloping with the cars given to them on hire purchase. They always pay back.
The Nigerian system, on the other hand, is a cash-and-carry economy. Very few are trusted by operators of the financial system. Every transaction is, therefore, by cash. Even as the banking consolidation has enormously enhanced liquidity in the banking system and forced the operators to resurrect consumer banking, the facility is operated on very strict and rigid rules so as to avoid stupid risks.
What is happening in America today, and by extension Europe and Asia, has happened before. In the years before the Great Depression of 1929, Americans enjoyed lots of credit facilities which they used to obtain consumer items they could ordinarily not afford if they were offered on cash-and-carry basis. People bought cars, radio and all other available consumer items in excess. Then, the day of reckoning came. There were massive loan defaults which brought down 65 per cent of the nation's banks.
Depositors and shareholders lost their funds while employees lost their jobs in the collapsing banks and the companies that went down with them. The ensuing credit crunch depleted 92 per cent of the prices of stocks in the capital market, thus plunging the economy into deep recession, which an inept management on the part of the Federal Reserve Board allowed to antagonise the nation for almost 10 years.
Unlike the current crisis in which the US government promptly abandoned its free market posture to intervene decisively to stem cash squeeze, America's Central Bank, during the Great Depression, allowed 65 per cent of the nation's banks to die. It stupidly maintained a tight fist on liquidity as the collapsed banks rendered millions of citizens cashless.
The cause of the current credit squeeze is almost similar to that of 1929. There has been a free flow of credit in the American system in the past few years to the extent that even people who are not creditworthy were extended the facility. The banking crisis started when most of those who benefited from the recklessly over-extended mortgage facilities defaulted in loans repayments. The banks were then forced to make huge loans loss provisions, which eroded their ability to extend credits. Tumbling property values in America's troubled mortgage industry worsened the situation. In a country where everything revolves around credit facilities, it was a matter of days before the entire economy started creaking under the weight of non-performing loans. All the 10 big banks in the world were involved.
The global financial market is in turmoil and may be heading for harder times. The financial meltdown in the American banking system has infected capital markets in developed economies all over the globe.
The US government had, a few weeks ago, bailed out Fannie Mae and Freddie Mac, the two ailing giants in the country's mortgage industry, not only to save its own capital market but that of Japan and China. The Chinese government holds more than $300 billion worth of bonds issued by America's two ailing mortgage giants, while the Japanese government's investments in the two troubled mortgage firms amount to about $260 billion.
Just as the US government was battling to stabilise the ailing mortgage giants, Lehman Brothers, a leading investment bank crashed like a pack of cards. Before the collapse of Lehman, taxpayers had to cough out about $83 billion to save American International Group (AIG), the country's largest insurance company, while Bank of America was compelled to buy out tottering Merrill Lynch.
Last week, central banks across the Atlantic and Pacific fought back with collaborated cuts in interest rates after America's $700 billion bailout package failed to ease the merciless grip on global credit facilities. The US government and that of the UK have decided to pump money directly into the capital market by buying shares of banks to shore up tottering investor confidence which wiped out $2.4 trillion dollars in the American capital market last week.
Oil prices are heading south, as do share prices in most of the markets. The global financial meltdown is to blame for all that. Demand for oil is on the decline as gas-guzzling economies like the US and China are already in recession or are threatened by it.
The Nigerian banking system is shielded from the global financial meltdown because foreign investment in them is very insignificant. Besides, no Nigerian bank has considerable exposure to any of the quaking financial institutions in the US, Europe or Asia .
However, the Nigerian economy would take considerable pounding from the financial crisis rocking the globe. The US economy constitutes more that 20 per cent of the global gross domestic product (GDP). It guzzles more than 20 per cent of global oil supply. With the US economy contracting, there is bound to be considerable drop in demand for oil which would impact negatively on prices.
China's double-digit economic growth had, in the last four years, exerted enormous demand pressure on the oil market which translated to higher prices. Ironically, China has considerable exposure to America's quaking financial institutions and would almost certainly suffer an economic slowdown, though it may not go into recession. Besides, 60 per cent of the consumer goods in US retail shops are made in China by subsidiaries of American companies. With the US economy already in recession, China is bound to suffer massive production cuts which would affect its demand for oil. Every economic indicator in the globe points to oil prices heading south.
The planners of Nigeria's budget are already jittery over the development. Besides, the global credit crunch would almost certainly restrict the flow of foreign investment into the Nigerian economy. In times like this, foreign investors look very well before they leap. The situation is even worsened by decaying infrastructure and heightening insecurity in the land. With more stable emerging markets backed by dependable infrastructure begging for foreign investment, Nigeria would find it extremely difficult to compete for scarce foreign investment inflow.
The Nigerian capital market is already suffering the impact of the global credit squeeze. Foreign portfolio investors in the market fled even before the global financial crisis became pronounced. The mass exodus of foreign portfolio investors is at the root of the persistent share-price depreciation of the last six months. It is not likely to abate as even high net worth local investors are still skeptical of the market.
In the final analysis, the days of lower oil prices may be back. Unfortunately, Nigeria did not invest the oil windfall of the last four years in its decaying infrastructure. The irony of it is that when the going was good, it was the politicians and top civil servants in strategic positions who enjoyed the oil boom. However, if oil prices hit the bottom, many more that are struggling at the grassroots level would join the 70 million Nigerians already below poverty line. Good or bad, those at the lower rung of the social strata remain the prime losers.
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