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| Reference Material |
| All is Not Well in the Management of Monetary Systems Executive Summary of the book Puzzlers/Economic Sting By Marcelo L. Tecson What is the government doing to prevent recurrence of staggering bad loans in the Philippine banking system that eventually visited upon Filipinos for the past sins of their central bankers? What severely wounded borrowing sectors in the Asian crisis was not the crisis itself but its mishandling by the International Monetary Fund (IMF) and affected central banks, including the local Bangko Sentral ng Pilipinas (BSP). Survival in the crisis turned from difficult to impossible for many borrowers when IMF and monetary authorities fought currency speculation through back-breaking high interest rates. Yet, there were less disastrous alternatives languishing right in BSP's long standing circulars, as proven by BSP itself when it successfully implemented some of the suggested measures after the crisis--but it was too late for many defaulting borrowers. By May 2002, their bad loans had soared to PhP600 billion, twice the capital accounts of commercial banks and 36% of their lending and acquired assets that hovered at PhP1.6 trillion (page 72 of this book). If the Propounded Subsidy and Other Flaws in the High-Interest-Rate Cure Cannot be Refuted, then the Cure is Unsound Economics and, as such, A Challenge to Economists to Come Up with Subsidy-Free Economic Solutions How will victimized borrowers feel if at last they will know that their bankruptcies from high interest rates in the Asian crisis were just due to human errors because this economic solution is an economic folly--if not a sign of evil conspiracy? (pp. xvii-xviii, 46-52). It is merely the product of IMF's and central banks' ignorance of high-interest-rate fallacies and alternatives that spawned monumental errors in the crisis, some of the most damning of which are as follows: � They mishandled the regional crisis by doing the totally unexpected--what present-day economists consider taboo and disgraceful--wantonly violating free market through operating on a grand scale their own hidden subsidy scheme in high interest rates! In economics, there is no such thing as a free lunch. Everything, including "free" benefit enjoyed by some economic sectors, has a cost that somehow is paid for by other members of society. This maxim is recognized by two revered public finance or taxation doctrines that rationalized the situation, the benefit and ability-to-pay principles, to the effect that those who receive benefit must pay for it according to their ability. Stated differently, it means that the cost of implementing an economic solution that inures to the benefit of the nation should be borne by the nation, not by just a part of it. Alas, it was not to be in the Asian crisis. Through their instituted high interest rates, IMF and central banks forced borrowers to bear exclusively the cost of calming down the economic turbulence for the sake of the nation--composed of borrowers and non-borrowers--thereby activating a scheme of subsidy by paying borrowers to free-lunching non-borrowers! However, subsidies are pass� because these distort market prices, vitiate free market, and encourage wasteful consumption by subsidized sectors. Therefore, as free-market apostles that abhor anti-market subsidies, IMF and central banks violated free market through their market-price-distorting subsidy scheme in high interest rates that were not free market rates (pp. 38-39, 53). It is a uniquely cruel and absurd subsidy scheme--it exacts subsidy BEYOND THE LIMITS OF SANITY and up to the point of loan defaults or even bankruptcies from discriminated borrowers, no matter how poor, yet demands nothing from equally benefiting but freeloading non-borrowers, no matter how rich! (pp. 29-32, 97-102) � They protect the banking system by impairing the financial capacity of the source of its stability, the de facto custodian of depositors' money by way of bank loans--the all-important borrowing sector. The paying ability of borrowers is the foundation of strength of the banking system. No amount of reforms in banks will work if borrowers cannot religiously repay their loans. Hence, borrowers have to be held inviolate and insulated from economic convulsion so that they can amortize their loans even during hard times. In defiance of this common sense, in the handling of economic crisis and protection of banks, IMF and central banks intentionally saddled borrowers with bad-loan provoking high interest rates (pp. 33, 59-60). In response to IMF's 60% high-interest-rate prescription, BSP adopted 30% "middle ground" interest rate that peaked at 38% or higher, compared to generally less than 20% for other Asian countries hit harder by crisis, with accompanying shamefully out-of-line highest bank spreads in the region that reached as much as 25.5% or more-as against 3.9% or less for other crisis-hit countries (pp. 75-79)--despite available less catastrophic alternatives (pp. 113-136), our lack of request for IMF bailout fund, and our having strong economic fundamentals and mere contagion crisis! � They reward with very high interest income rather than punish currency speculators. In response to a baffling international economic problem, they raised interest rates during the Asian flu simply because IMF officials and "central bankers from around the globe have found no immediate solution to currency speculators." (pp. vii, xxii, 103, 119). They could not see, or think of on their own, the available but unimplemented high-interest-rate alternatives mandated right in old Philippine central bank circulars (pp. 130-132). They fight dollar speculation through high interest rates, when all they had to do was punish banks violating old central bank circulars disallowing sales of dollars to speculators--or those without proof of foreign obligations--as was successfully done in the Philippines in August 2001 and March 2003, when BSP finally but belatedly saw the light (pp. 123-124, 188-190). � They resorted to price rationing and totally ignored the lesser evil quantity rationing. In past economic crises, just to minimize borrowing and consequently tighten money supply, IMF and central banks resorted to price rationing by means of high interest rates, a form of credit rationing treated in economics textbooks. They totally overlooked or disregarded the lesser evil quantity rationing, another form of credit rationing, which could have been done through the less calamitous temporary prospective drastic reduction in loanable value of collateral. Price rationing, through high interest rates, will discourage both prospective and existing borrowers, with prospective borrowers having the choice to reject new loans--as in fact they do, as shown by resulting slowdown in borrowing-while captive existing borrowers, who can no longer avoid high borrowing rates even if they want to because they cannot back out from their already invested or spent loans, are caught in the no-choice situation of having to pay unaffordable high interest rates in a market that was free at the time they obtained loans, but is damaged now by those who unilaterally raised interest rates without borrowers' consent, the very people sworn to protect free market-IMF and central bank authorities! (pp. 38-39). In contrast, quantity rationing, through temporary prospective drastic reduction in loan value of collateral, will adversely affect new-loan applicants but not existing old-loan borrowers. It will minimize new loans out of available finite collateral while amortization of old loans continue, thus it will promote tight money supply even without charging high interest rates to both old-loan and new-loan borrowers. Why did IMF and BSP ignore it? (pp. 127-128, 140, 190). High Interest Rates Inflict Long Lasting Damage to Economies And Discourage Investments Out of Borrowed Funds Even After Economic Crisis "Temporary" high interest rates--prescribed by IMF and stimulated by central banks in the stabilization of exchange rates and control of inflation�bring financial disasters to countless investor-borrowers for the rest of their lives. "Just like a couple we know who borrowed P12 million for their poultry contract growing project in 1996. The total indebtedness suddenly ballooned to P18 million because the original 18% interest had escalated to 32%. In (another).case the hike in interest was even worse. The interest increased from the original 18% to 38 percent." (Zac Sarian, "Agri-talk," Philippine Panorama, May 21, 2000, p. 10) The disasters from high interest rates in the Asian meltdown are vividly expressed by unprecedented bad loans and bank recapitalization problems that plague affected Asian banking systems to this day (p. 59). Those who had the capability to borrow capital and go into business had generally done so in the past. When ravaged by high interest rates in the ensuing crisis, many of them defaulted on their loans, lost their collateral, and destroyed their credit standing before banks. It takes time for them to recover from their disasters, or for a new breed of investor-borrowers to fall into IMF's and central banks' ingenious trap�low interest rates now, high interest rates later. So, central bankers may boast today of lowest lending rates ever but these will not bring about immediate and complete resurgence of economic activities. For, if a few years from now high interest rates will recur and wipe out again what will have been gained through hard work in the next few years, why invest at all in business using borrowed funds? With the Lifting of the Veil of Ignorance Shrouding High Interest Rates, IMF-Member Nations' Highest Government Officials Who Will Tolerate IMF's And Central Banks' Sin against a Part of Humanity Will Be Equally Guilty of It If concerned government officials and citizens of IMF-member nations will take a long, hard look at the foregoing propositions and conduct their own independent investigation, including asking IMF and central bank officials to defend their institutions against the totally unflattering propositions against them, they will be shocked at what they will find out for themselves--that countless Asian borrowers suffered huge financial losses, or even bankruptcies, from the high-interest-rate prescription during the Asian crisis under the false pronouncement that it was a necessary evil, whereas it was only a direct result of IMF's and central banks' blissful ignorance--if not malicious disregard in deference to a cartel�of high-interest-rate fallacies and alternatives. Thus, the problem may not be entirely in economics, it may be partly in men. If a few seemingly ignorant IMF and central bank officials commit the grievous sin of impoverishing a part of humanity through fallacious or malicious high interest rates in recurring economic crisis, with all due respect, the highest government officials and economic managers of adversely affected IMF-member nations do not do justice to their exalted positions, for as long as they themselves remain blissfully ignorant of the sin wantonly committed against their constituencies. Then, once they become aware of it, they will become equally guilty--if they opt to ignore it. ***** OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO |