Government should show economic leadership

| 22/12/2008

On Tuesday, 16 December, the United States Federal Reserve gave up on the banks and began to act boldly to stem what all indicators are now predicting will be a deep and prolonged US recession.

The US Federal Reserve (Fed) cut its target for the overnight funds rate to a range of zero to 0.25 percent and brought the United States to the zero-rate policies that Japan used for many years in its own fight against deflation.

In effect, the Fed stepped in as a substitute for banks and other lenders and are now acting more like a bank itself (at least in the US financial context). The Fed said it would employ all available tools to promote the resumption of sustainable economic growth. The Fed boldly pushed banks which have remained sadly stuck in the doldrums of no credit, or frozen credit to the curve, and said that it would print as much money as necessary to revive the frozen credit markets and fight what is shaping up as the nation’s worst economic downturn since World War II.

The United States Federal Reserve has stated it will go to any length and take whatever actions it deems necessary to revive its own economy and ensure the survivability of its citizens.

But again I ask, what are we doing in Cayman to simulate our own economic activity? When will our political leaders act to ensure low interest rates? When will we have access to the many hundreds of millions of dollars of our local Pension Funds that are now sitting idle in New York earning zero percent interest when these same funds could be employed here in Grand Cayman to ensure a robust free market system, coupled with vast sums of guaranteed funds to outward lending to our many qualified Caymanians to purchase property, build a home, attend to needy home repairs or expansion and a host of other areas, which would drive good economic growth into the foreseeable future?

I do notwrite this letter blindly either. The Cayman Islands Government has a real conflict of interest when it comes to being able to monitor and manage its fiscal policy. As I write, the Cayman Islands Credit Union operates with a policy that runs contrary to the normal accepted banking procedures. It uses its CI$100 million in member savings to pay an interest rate of some 5 percent (called dividends) which has no reflection as to real global market realities and then also on-lends these same member savings at a spread of between 5 and 6 percentage points. How can government be expected to lead in addressing the abnormalities of which I have so often written about in regards to forcing the local banking institutions to lower their lending rates when they themselves are driving an instrument which writes its own rules and creates a false source of wealth transfer?

Is this perhaps why each successive government in these Cayman Islands has been hamstrung and unable to act to allow the wider Caymanian consumer to also enjoy these same wealth returns?

I shall leave it to the good reader of this article to be the judge.

In closing I list some general thoughts that should now be explored in regards to providing a source of economic stimulus for the Caymanian consumer:

Amend the Pension Law to mandate that all new inward payments be earmarked and retained in the Cayman Islands banking system and be used to provide local lending at fixed interest rates.

Take action to bring all Government entities, inclusive of the local Cayman Credit Union, in line with standard interest rate realities.

Empower the Cayman Islands Monetary Authority (CIMA) to be able to set local minimum lending rates, based solely on empirical proof as to real “cost of funds”.
Allow and encourage all local banking lending institutions to provide long term fixed rates loans.

These are but a quick few ideas, but I have many others and with the right Leadership they can and will be enacted one day to benefit the wider Caymanian community and the borrowing public.

 

 

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Comments (8)

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  1. No More Heroes Anymore says:

    We could distribute the $600,000 wasted by the PPM on Heroes Day to the poor.  (By that I meant he 2009 budget for this pathetic piece of flag waving). How could the spend over half a mllion dollars on this event?  Shame on them!

    Given that recent reports indicated a 1000 or so families living in extreme poverty, I am sure these families would rather see $500 each than see it wasted on red white and blue decorations and political egoes being puffed up.

    • Anonymous says:

      $600,000 spent in trying to nurture our national consciousness and give us a sense of identity is money well-spent and is a paltry sum compared to the tens of millions wasted by the UDP, for example Boatswain Beach to the tune of US$56 million.   Did you forget about the poor then? If you are Caymanian and feel this way about Heroes Day it says a lot more about you than it does about the event.  

  2. Anonymous says:

    The CICSA Cooperative Credit Union is a financial institution which was founded in year 1976 by Mr. Louis Moncrieffe and a small group of Cayman Islands Government Civil Servants.

    The CICSA Cooperative Credit Union is not a public/commercial banking facility, but operates as a ‘co-operative organization’ to serve it’s members exclusively. These members are effectively shareholders by means of a ‘Shares System’ who utilize many banking products and services provided by this institution which are similar to commercial banking facilities.

  3. Anonymous says:

    Not sure why George is picking on the Credit Union which does not lend to the public at large but instead only to its own members. The Credit Union’s narrow spread between lending rates and dividends helps its members. There is no proper comparison between the rates of a commercial bank (where the spread is huge) and a credit union. 

    The local bank lending rates do fall when the US Federal Reserve lowers rates since its cost is lowered.   

    • Anonymous says:

      On the NY Prime rate, I am not sure why it is even used here as a yard-stick to guage local lending interest rates. Are you? Why should the US Fed set our local loan rates? Are the local banks actually borrowing from the Fed funds window?

      If they are paying zero (0%) on most of our local investments, why lend at a spread of 7% above?

      ..just wondering…perhaps you can research and let us all know the answer..

  4. Anonymous says:

    this is amazing! is the credit union really offering 5% dividends even in these times? if so it should offer a smaller dividend and instead make loans available at cheaper rates to help people in these hard economic times. so much for good economic management..

  5. Anonymous says:

    don’t agree with the idea of controlling interest rates via CIMA. But agree that the situation with the creidt union which is ultimately governed by the Government, has ridiculous interest rates on its loans. As a creidt union we would expect it to be a bit more conservative, but how can the government claim to be dealing with the crisis in the economy while allowing such high interest rates to be charged by the credit union to people that already suffering?

  6. Anonymous says:

    I have worked in the financial industry for over 32 years and I have never seen a change done in such a way that seems offensive to the stakeholders in the financial services sector. When are governments in the Cayman Islands going to understand that industry input and consultation is a complement to their efforts and not harmful?