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 cut its target for the overnight funds rate to a range of zero to 0.25 per cent 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 is now acting more like a bank itself (at least in the US financial context).
The Fed said a few things as it took the actions it did on 16 December.
It said; ‘The Federal Reserve will 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 that 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 per cent 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 not write 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 per cent (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 five and six 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 its 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 have 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 Cayman Credit Union, in line with standard interest rate realities.
Empower the Cayman Islands Monetary Authority 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.
George R. Ebanks