Wrong way, Audley!

Gordon Robinson, Contributor

It's official. This finance minister doesn't want my advice. One day after my column 'The essence of economics' (August 10), wherein Apochrypha's Oma D'unn advised R.U. Shaw to buy the banks a wheelbarrow, Jamaica's Audley 'Are You' Shaw repeated his stubborn analysis that Jamaica's banks were somehow delinquent in not reducing interest rates faster.

A Gleaner report, 'Shaw pleads with banks', recorded: "Finance Minister Audley Shaw ... stepped up his verbal flogging of commercial banks over their failure to significantly lower lending rates.

"We need the commercial banks to ... come back with interest rates that are more attractive," Shaw declared.

Did he hear himself? He correctly declared, "WE need ...", not "banks need ..." Audley, are you Shaw? If yes, you're going about it the wrong way.

Shaw continued, "Commercial banks will probably end up making more money ... because they'll have more business, and more businesses will borrow money to invest as a result of ... lower interest rates." Really? Why don't banks agree? Is it possible banks don't have wiggle room, especially with their high administrative costs and lower total margins (after the Jamaica Debt Exchange)?

Where banks commit corporate customer rape is with fees charged for various 'services', including lodging your money to your account! Congratulations to Karl Samuda for his detailed exposé of this ingrained system of pillage. Finally, Government works for the people. Interest rates are entirely another kettle of sharks.

No excuse

The report continued, "Shaw says ... Government has ... created the conditions for lower rates, and ... commercial banks have no excuse. He argued that ... central bank open-market rates are ... at a 31-year low, and that should encourage commercial banks to follow suit."

What conditions? How do the bank of Jamaica (BOJ) open-market rates affect commercial banks' commercial decisions? What has BOJ done to encourage reduced commercial banks' interest rates? What's Government's contribution? In December 2008, local currency cash reserves for commercial banks, FIA institutions and building societies were raised to 11 per cent; local currency liquid assets ratio (LAR) to 25 per cent. By February 2009, cash reserves were 14 per cent and LAR 28 per cent (source: BOJ website). Are these the 'conditions' Shaw's on about? Are BOJ and his ministry in harmony?

Government appears reliant on its successful bullying of banks (ensuring Government pays banks' customers less interest) as the template for convincing the same banks to provide a political quid pro quo by reducing interest rates to their same customers. Obviously, Government has benefited from this debt default disguised as economic wizardry. It's unclear how plummeting interest rates would "follow suit" (what's the 'suit''?) or why it should happen. There's no lessening of local currency restrictions, no economic growth, no improvement in customers' technological proficiency and, consequently, no lessening of banks' administrative costs. From whence are reduced rates to come?

Government must accept there's no free lunch. If Government wants banks to reduce voters' interest rates, it must give to get. So far, only voters have contributed to the economic recovery effort (JDX; increased taxes). It's Government's turn.

Tax incentives

What's required are tax incentives to those banks significantly cutting rates. The recent elimination of tax waivers was a lazy and counterproductive overreaction failing to address the fundamental problem. The accompanying speculative hype regarding possible fiscal deficit elimination but for waivers is delusional. The ethically acceptable purpose of tax incentives is to encourage otherwise unlikely activities. Anticipated positive consequences include additional indirect taxation.

Conceptually, appropriate tax incentives give nothing away while encouraging growth. The trouble with tax waiver systems is the attendant corruption. Political parties don't help by posturing about tax breaks after presiding over 18 years of corrupt tax waivers without a murmur regarding how this'll suddenly be either afforded or avoided. But this the Government shows no greater inclination to address the real predicament of proper systems enforcement preferring instead to bury its collective head in the sand of an all-encompassing ban. Plus ça change, plus c'est la même chose.

A former finance minister once advised privately: Every tax scale has two points where zero tax collection is guaranteed:

1) A tax rate of zero per cent

2) A rate of 100 per cent.

A finance minister's job's to locate the point, between these extremes, where government revenues are maximised."

This finance minister should understand that this job can't be blustered away. He must find the right mix of taxes and incentives that will encourage banks to embrace their customers' welfare. Why can't we too pay a monthly mortgage of J$60,000 on a J$8.6 million loan?

Songwriters Cargill and Ike ask the crucial questions:

"Are you sure there's nothing you can do

To help someone worse off than you?

Think before you answer. Are you sure?"

Peace and love.

Gordon Robinson is an attorney-at-law. Feedback may be sent to columns@gleanerjm.com.