Wilberne Persaud, Columnist

Persau

It has been a year of quite interesting developments in our financial sector. The dust kicked up has not yet settled, but there are still some interesting developments to reach final resolution in 2008.

There seem to be some rather strongly held views on the pros and cons of the new investment schemes with respect to their potential impact on individuals, government's economic policy, the financial services sector, and the economy in general.

A quote from Adam Smith's Wealth of Nations touches upon many of the issues that are still with us today; these matters are all embracing and apparently never-ending.

Smith says in Book II under the heading 'Of Money Considered as a Particular Branch of the General Stock of the Society' that if bankers "are restrained from issuing any circulating bank notes, or notes payable to the bearer, for less than a certain sum, and if they are subjected to the obligation of an immediate and unconditional payment of such bank notes as soon as presented, their trade may, with safety to the public, be rendered in all other respects perfectly free."

Foresees currency control by central banks

Smith foresees control of the currency in the hands of central banks and restrained fractional reserve banking.

He goes on to comment on the "late multiplication of banking companies in both parts of the United Kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the public. It obliges all of them to be more circumspect in their conduct, and, by not extending their currency beyond its due proportion to their cash, to guard themselves against those malicious runs which the rivalry of so many competitors is always ready to bring upon them."

The English is old, not ancient, but the idea has no boundary in time - it is ever current.

We do not have multiplication of banking companies, but multiplication of financial entities competing for services that only recently, were available only through banks and other authorised agencies.

They offer higher interest rates. Some say unbelievably higher interest rates.

More trust in investment clubs

They cause people to mortgage futures for quick, enormous, but non-guaranteed gains.

These people apparently trust their investment clubs more than government and the established banking system.

Indeed, there are some who hold strongly to the view that our commercial banks are attempting to restrain competition in their moves to close accounts or give notice of their intention not to honour erstwhile existing payment arrangements associated with new investment schemes.

Now, what is the meaning of all this? There are several impacts.

First, to the extent that interest rates are in the region of 120 per cent per annum, Government's attempts to encourage economic activity by reducing interest rates might be stymied.

But this depends upon the extent to which funds are moved into these schemes.

Official statistics recently quoted in this paper do not indicate an overwhelming move away from the conventional.

But one would be hard-pressed not to conclude that there would be a negative impact on both interest-rate policy and expected new investment in productive ventures.

No bail-out

If investment funds are not being channelled into productive operations in Jamaica, and if their proceeds are, when paid over to fund holders, merely spent on consumption, Jamaica faces serious problems.

With a falling U.S. dollar, the Jamaican dollar will be in reality falling as if enhanced by a lever.

As far as the financial services sector is concerned, the policy of 'no bail-out' has been clearly specified.

Were there to be runs on investment clubs, could the general mood be contained? What of the assets held locally and abroad, of funds that might find themselves unable to continue operations at levels previously expected?

Adam Smith thought that if each participant in the banking system had a 'small' footprint "failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the public."

What size are the footprints of our participants in the financial sector? Is it too late to determine some of these features? Is it possible to create conditions such that an 'accident becomes of less consequence to the public'?

wilbe65@yahoo.com