As I write this letter, the United States Federal Reserve has slashed its key lending rate- Federal Funds rate- (rate banks charge to each other for overnight loans via the USA Federal Reserve system) by a half a percentage point to 1 percent. The funds rate has not been lower since 1958, when Dwight Eisenhower was president of the United States.
This rate cut comes against a similar rate cut on 8 October when the US Fed, in a coordinated move with foreign central banks, saw fit to lead the way in interest rate reductions.
In a brief statement after today’s move, the Fed said that the ‘intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit’.
Indeed, it is a widely held belief now that the Fed will again have no option but to cut the rate again by a further half-point at its last meeting of the year on 16 December.
It should be bourn in mind that the main concern for these rate cuts by the Fed, is to encourage new consumer spending. In the US economy, consumer spending powers about 70 per cent of economic activity. Keeping this sector encouraged to spend is of critical importance to the very survival of the United States economy.
But I do not write so much about what the United States is doing. I write because I wonder what we are doing or could be doing in the Cayman Islands to mitigate the impact of a housing market gone sour, low consumer confidence, and now, an onset of tight credit among some of our lending institutions.
All the various steps that one sees being taken in recent times in the United States speaks to action(s) being taken by their government to assist their people. Consider that in May 2008, the Congress granted a US$150 billion tax rebate toward assistance in consumer spending. In September 2008, Congress again acted on a US$700 billion financial services bail-out.
These actions are all geared toward helping to ‘unfreeze’ markets that are not functioning properly coupled with the lowest level of consumer confidence index not seen since 1967.
Certainly we dare not resort to a futile endeavor of burying our heads in the sands and wishing that these uncertain and troubling times pass us by.
It is such a time as now that we need real political leadership, coupled with partnership and compromise by the private sector. We also need to be able to think in an innovative fashion and design products and services that will serve the people of the Cayman Islands to have access to low cost credit to continue our local economic growth and to also allow our people to weather the tough times that lay ahead.
I will list but a few of what I will call ‘my off the cuff innovative ideas’ that would, if considered by all relevant stakeholders ensure a continued decent quality of life for our people as we enter what most economic analysts predict will be a period of low economic growth, tight credit and low consumer confidence and could last well into 2012.
Here are but a few:-
Amend the local legislation for pensions to mandate that the funds generated from pension payments must be invested in local banks. Design a mechanism with these local banks that as a result of having these ‘guaranteed cash flows’ of some CI$10 million each month, which they will also pay a fixed rate of interest of, say 3 per cent on these funds. They in turn, would have authority to also on-lend these funds at a 2 per cent spread to locals by way of mortgage and loan lending. This would be loans at a fixed rate of 5 percent.
I would mention that as at 2006-2007, it was estimated that local pensions funds proceeds (excluding the Civil Service Pension Fund) was approximately CI$500 million.
If handled correctly and designed properly, we could have access to fixed rate home mortgages and other loans at fixed rates and with a reliable source.
Loans would be lent after proper procedures and due diligence criterion thus avoiding undue risk exposure from loan delinquencies.
Should the local banks not be willing to participate, then restructure the Cayman Islands Development Bank to manage the entire ‘pension fund portfolio’ and to design their own ‘in-house’ fixed rates to pay for access to these pension funds and then to also be able to on-lend these funds to all local borrowers at a 2 per cent spread.
This idea alone would result in a few positive spin-off impacts.
The Cayman Islands would have its own source of loan funds. Loan funds are also development funds and speak to the well being and to the quality of life for our citizens.
Consumers would have additional disposable income as their loan repayment outflows would decrease dramatically.
Local legislation would also mandate that should a qualified borrower of these pension funds wish to avail themselves to these fixed rate loans, that repayment of their existing loan or mortgage should not be held up by the ‘notice period’ of the current lending institution.
Caymanian families and households could once again plan for their futures and allow for sufficient residual income to be available to fuel ongoing consumer spending.
Urgent provisions need to be made to create a real private/ public sector partnership as we confront these next few years of low economic activity, possible rising unemployment, and general market instability.
This partnership of which I write, would entail some of these ideas:
Allowance for additional time to settle payables if required. This would come about because of good cross-communication between the consumer who is in need of additional time to settle their credit or arrears and the lender or debtor.
A realisation by all stakeholders that ‘we are in this boat’ together and to ensure our continued social harmony and future good economic growth, it will entail certain provisions to be made and perhaps even less profits to be achieved.
Government might have to issue a blanket guarantee to allow the utility providers to grant credit to consumers who are tardy on the settlement of their accounts. Such blanket guarantee would extend itself to the water utility providers, the telephone service providers, the power utility provider, and even the financial service providers.
All financial service providers could be encouraged to design and create their unique loan products so as to allow for a Caymanian styled banking product.
Loan repayments might have to be structured in such a way that a borrower could pay interest only or a partial payment that would include interest and principal loan repayments and still be considered to be in good standing.
Financial service providers would be encouraged to resort to home foreclosure action in regards to its local mortgage loan portfolio as a last resort and perhaps again, Government might have to engage with the various financial lending institutions to guarantee them some general comfort level in this regard.
We also have a shared responsibility in this new partnership.
This, like no other time before, should be a time for families to hunker down and stick together closely, supporting one another, being each others brothers’ keeper, and together to ensure that we ride out these uncertain times, which are just beginning to set upon us.
I encourage businesses and our churches and our synagogues to offer free day care and after school services to their staff members who have children in school or who will be unable to afford their own day care facilities. Government again, could offer some financial underwriting of this service. All families should be allowed to report to work with clear knowledge as to the well being of their children.
These then are but a few of my own ideas and if implemented would yield itself to an enhanced quality of life for all as we enter the uncertain times which are just beginning to impact us all.
It is said that behind every dark cloud there is a silver lining. Perhaps these trying times that lay ahead might serve to unite us all in this regard, and bring about some positive change that will focus on enhanced quality of life for all people and ensure our very own survivability into the future.
George R. Ebanks
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