Leading in a time of adversity – Part 2
The Subprime Crisis of 2008 and the ensuing global recession was the worst since living memory. Like in the prophecies of Daniel of old, the seven fat years were to be followed by seven lean ones. The Clinton years (1993-2001) brought some prosperity to the American industrial juggernaut. For the first time in decades, the budget was in surplus. Wise investments in education, infrastructures and human capital gave the country hope of a better future. Silicon Valley brought with it the feeling of a new gilded age. Young men barely out of their teens were talking in terms of billions of dollars of net worth. The country was awash with money.
In 1999, the Clinton administration decided to repeal the Glass-Steagall Act 1933, believing it was no longer necessary. It was replaced by the Gramm-Leach-Billey Act 1999 which chipped away at the Chinese wall that was meant to separate deposit money banking from investment underwriting that had contributed to the turmoil and depression of the thirties. Across the Atlantic, Gordon Brown who was Chancellor of the Exchequer at the time declared that the era of booms and busts had come to an end. For a historian and finance minister of an advanced industrial nation, it was an extraordinarily foolish remark.
The presidency of George W. Bush and his neoconservative brethren ushered in an era of lower taxes and more lax financial regulations. The Federal Reserve, during the long reign of Alan Greenspan, kept interest rates low while allowing speculative bubbles to run amok. Then as now, central bankers were at sea about how to frame monetary policy in the context of stock market booms and rising asset prices. Mortgage companies were offering financing to clients that had no assured means of income, let alone collaterals. Repayment terms were unbelievably generous, with interest rates at historic lows. The financial engineers in Wall Street came up with new fanciful financial instruments known as asset-backed securitizations. Most were repackaged and sold in the secondary markets. Meanwhile debts continued to accumulate while the actors involved in their origination had creamed off their profits and gone fishing. Ponzi schemes were all the rage. Cowboys in dark suits and glistening Porsches played Russian roulette with the capital of their clients. Bonuses reached unprecedented levels. Sooner or later, something had to give. In the autumn of 2008 Lehman Brothers, one of the most venerable investment bankers in New York was the first casualty. Others were to follow.
Several factors can be adduced for the subprime crisis and the ensuing Great Recession.
First, there was a shift in favour of mark-to-market accounting which placed more emphasis on market value rather than real book value. Agency theory in corporate management underlines the dual mandate of managerial leaders as that of optimising value for shareholders while ensuring the survival of the firm. Everything else was deemed to be second-order importance. Corporate leaders ignored major risks while gunning for higher share-value upon which their mouth-watering bonuses depended. In that intoxicating exuberance, there was a tendency to throw all caution to the wind.
Secondly, the big ratings agencies did not help matters. Over the years, their need to preserve custom meant that there was a bias towards over-valuation of the actual condition of firms. There was also the little noticed judicial fact that some captains of industry owed major shares in the agencies that were being called upon to rate their own firms; a conflict of interest situation that impaired both objectivity as well as professional judgement.
Thirdly, there was the prevalence of a weak regulatory environment. The institutional architecture of financial regulation in the United States had been a relatively chaotic one, with a tendency for rivalrous rather than cooperative behaviour between the various agencies. This was in addition to growing global imbalances occasioned by the accumulation of external reserves by emerging economies. These were meant to self-insure against balance of payments deficits and the attendant humiliation by the Western-controlled Washington international financial agencies.
The lot fell on the young Barack Obama to rescue America from the jaws of catastrophe. A package running into trillions of dollars was put together over ensuing years to save American and world capitalism from self-destruction. Hundreds of billions of dollars were given to Wall Street and some of the big industrial firms, especially in the automobile sector. A stimulus package was also put in place to re-boot growth, invest in infrastructures and restore confidence. Quantitative Easing — the printing of dollars by the U.S. Federal Reserve to buy government and other securities – entered the lexicon of central banking. The objectives of such unconventional monetary policy were to lower interest rates and enhance money supply.
America and her cousin across the Atlantic, Britain, recovered sooner than Europe, Japan and Asia. Two cases illustrate the sheer drama that has accompanied the Great Recession: Iceland and Greece. A prosperous northern European country, Iceland had been in the grips of a speculative bubble for more than a decade. Banks invaded the country in droves. Money was cheap. The Icelandic people were drunk with the wine of success. When the turbulence arrived, the banks went under. The speculators fled. Iceland was saddled with a debt that outstripped its GDP by several orders of magnitude. Iceland recovered remarkably faster than anyone could have imagined. The leadership of the country took bold and courageous measures. Apart from a stimulus package and rescue plan that was put in place, Iceland sought the help of the EU and the IMF. Tough political decisions were also taken. The “banksters” were tried and jailed while a more robust regulatory regime was put in place to forestall future excesses.
The case of Greece was more tragic – a tragedy in three acts. First, the country probably should never have joined the Euro at the time they did. Greek officials had apparently fudged the relevant statistics to make the economy look better than it actually was. From the benefit of hindsight, southern European countries such as Greece were far from meeting the minimum conditions for monetary integration specified by Nobel laureate Robert Mundell’s theory of Optimum Currency Areas. Secondly, rich Greeks were not paying their taxes while citizens were leaving off a bloated welfare system. Thirdly, for a country that depends considerably on tourism and shipping for its external earnings, the Great Recession was a major blow to both sectors. The Greek state faced a huge burden of debt that drove the country to near-bankruptcy.
Germany and Europe came to the rescue, but on terms that were considered humiliating by the Greeks. The so-called ‘Troika’ consisting of the EU Commission, the IMF and the European Central Bank (ECB) were largely responsible for managing the rescue package for Greece as well as overseeing long-term structural reforms of the economy.
And the crisis is far from over. The Greek people became so desperate that newspapers reported that the monks of the ancient monastic enclave of Mount Athos, a Christian going back to apostolic times, were considering auctioning off thousands of venerable icons in order to raise money to rescue the fatherland. The so-called ‘Grexit’ was long touted before ‘Brexit’. Chancellor Angela Merkel and the German government no longer considered it politically feasible to be pumping public funds into what the Germans believe to be a bottomless Athenian pork barrel. This inevitably angered the Greeks. One of the unthinkable solutions was to kick Greece out of the Euro. But the very thought was capable of undermining the integrity and stability of the currency. It could have set off a domino-effect that could have spread to Southern Europe, leading to the ultimate dissolution of the European Union as a political system.
Although our country, Nigeria, has been spared the worst of financial crises, today we face a new scenario. The spendthrift follies of the Goodluck Jonathan years contributed to the predicament in which we find ourselves today. Thievery, rapine and grand larceny defined the character of the ancien regime. Nigerians were conniving with foreign vultures to steal crude oil estimated at a monthly average of US$1 billion during the years 2011 to 2013. During the last political-electoral cycle, backroom deals were settled in dollars, some of it taken directly from the vaults of the apex monetary institution; behaviour reminiscent of tropical gangsters as depicted in the improbable accounts of the Polish journalist-journeyman Ryszard Kapuscinski.
With the recent collapse of global oil prices, government revenues have dried up by over 50 percent. Government at all levels have had difficulty paying public sector workers, not to talk of financing major physical infrastructures. What began as a dollar shortage has mushroomed into a major recession – some would say stagflation.
The fat years are gone, and with them the phantasmagoria of our being a land flowing with milk and honey. The blissful fantasy in which we wallowed for more than forty years was spurred by a petrodollar political economy anchored on collecting and spending rent from multinational oil companies. It had nothing to do with productivity or assiduous application. Consequently our rulers exercised power with total impunity. They felt accountable to no-one, since the oil was being drilled by foreigners from the bowels of the earth and the ocean. Most of the wealth was stolen anyway, with little left to be invested in national development. It was no surprise that our politics became a titanic zero-sum game to capture power by all means so as to have untrammelled access to petrodollars.
Muhammadu Buhari is a statesman of destiny. It would seem that each time destiny brought him to head the High Magistracy, there would be one economic crisis or the other. It was the case in 1983 and it is the same today. God has a way of choosing people for specific tasks in history. Fate will not impose on us burdens that we cannot bear; nor will it place anyone in a storm that he cannot weather.
Let’s get it very clear: the current recession was neither created by Muhammadu Buhari nor by the ruling APC. It is the ultimate denouement of a long night of abysmal folly combined with Byzantine policy choices. But we cannot continue to play the blame game, of which Nigerians have grown weary. For better or worse, the buck stops with the President and no one else. We can only hope that, like the great Franklin Roosevelt during his time and like Barack Obama during his, Muhammadu Buhari will muster the vision and courage to reclaim the lost centre. He needs a brains trust of people who love Nigeria passionately and are ready to do what it takes to take us path to the path destiny has ordained for us. Indeed, the Chinese character for crisis is the same as that for opportunity. Our President has an opportunity to enshrine his name in marble as the man who saved our nation from despair and ruination. We trust him as a totally incorruptible patriot. While we must support him in the war against corruption, he must also come to the realisation that anti-corruption is not a substitute for sound economic policy.
Leading in a time of adversity is obviously not for the fainthearted. Statecraft itself, since the days of Aristotle, Ibn Khaldun and Thomas Jefferson, is a tough vocation requiring the highest qualities of intellect, creativity, courage and mindfulness – a call to justice and human dignity. In the words of the Prophet Isaiah, to heal the broken hearted, to set at liberty those who are oppressed. A calling deeply rooted in destiny and moral purpose. Beyond all parties and all ideologies, the dharma of this administration – indeed, the mission of our generation — is to build a New Jerusalem; a New Nigeria that is both humane and enlightened; prosperous and just; a light unto the nations; the leader of Africa; the hope of the black race.
(Being the concluding part of a lecture at the Workshop on Financial Crisis Management, Organised by the Central Bank of Nigeria at Channel View Hotel, Calabar, Thursday 6 October, 2016).
Obadiah Mailafia