In September 2008, the United States and several other countries suffered a serious economic body blow that practically froze the entire financial system. Dubbed as the global economic crisis, the fiscal fiasco came in like a tidal wave that drowned major financial institutions in an ocean of immense debt.
It engendered a massive rate of unemployment; cost millions of pensioners their pensions; depositors and investors lost their money, which in some instances was their life savings; forced several businesses to close their doors, in many cases for good; and, to top it off, left thousands of homeowners on the streets.
The financial system, which, like the Titanic, many believed was too powerful to fail – hit its own self-made iceberg, sank, and took a host of unsuspecting investors and depositors down with it. How was this possible in a world when consumer protection is to be at its peak? The answer could be summed up in one word: deregulation.
The government enabled banks to engage in risky business with their risky financial products by deregulating the industry and relying on the invisible hand that guides the heart of capitalism.
While the trail of bread crumbs can go back for decades into the past, it was under the administration of U.S. President William “Bill” Clinton that the Glass-Steagall Act was repealed. It was a law that prevented banks, insurance companies and brokerage firms from crossing over into each others’ industries.
It is also important to note that the law kept investment banks and commercial banks separated as well.
In a November 1999 article, journalist Martin McLaughlin wrote, “An agreement between the Clinton administration and congressional Republicans, reached during all-night negotiations which concluded in the early hours of October 22, sets the stage for passage of the most sweeping banking deregulation bill in American history, lifting virtually all restraints on the operation of the giant monopolies which dominate the financial system.”
A year later, the policy makers also introduced the Commodity Futures Modernization Act that prevented the Commodity Futures Trading Commission from regulating over-the-counter (OTC) products such as derivatives. One such derivative product was the famed Credit Default Swaps, which worked pretty much like an insurance scheme for investments.
In 2004, the Securities Exchange Commission (SEC) even proposed eased regulations on global investment banks, which wanted to relax their capital requirements that would allow them to keep less reserve funds to protect their clients’ monies while being able to take on more debt. This means that investment banks were able to increase their leverage.
Now, without real regulations and a booming derivatives market, the mortgage companies, local banks, investment banks and investors started doing new business with each other.
A real estate bubble led to over confidence and banks started to do riskier types of loans—subprime loans and mortgages. Like what was done with prime mortgages. The banks sold the subprime loans to the investment banks, which they morphed into Collateralized Debt Obligations (CDO’s) and sold them to investors. However, in 2007 when subprime mortgagees began to default on the loans, it sparked the domino effect that eventually led to the credit crisis that sent shockwaves throughout the entire financial system.
In reality, many placed the blame on Wall Street, but it was the government’s responsibility to provide the leash to control mankind’s state of nature as coined by philosopher Thomas Hobbes (1588-1679).
Was deregulation done for the people’s benefit?
McLaughlin wrote that the Democratic President Clinton and the Republican congress “had good reason, to be sure,” he said before adding, “The banking, insurance and brokerage industry lobbyists have combined their forces … to mount the best-financed campaign of influence-buying ever seen in Washington.
“In 1997 and 1998 alone, the three industries spent over $300 million on the effort: $58 million in campaign contributions to Democratic and Republican candidates, $87 million in “soft money” contributions to the Democratic and Republican parties, and $163 million on lobbying of elected officials.”
Money is indeed strong medicine it would appear, because it was odd to see a Democrat (Clinton) administration settle for deregulation when the party has traditionally been known for its policy for more interventionism from government.
It was, of course, under Republican President George W. Bush’s watch that the SEC took the limiters off the trading of OTC derivatives. That move was not as surprising, because his party is known for its stance on a smaller government and the need for the private sector to do more.
Bringing it closer
The catastrophic culmination of the economic melt- down and the involvement, or lack thereof, of all players served as an epitomic example of woes that could befall any electorate that allows policy makers to make unchecked decisions.
Belize, fortunately as was reported by the Government, was able to wade through the recessionary times quite gracefully, even though some stings were felt.
The Belize economy is in no way as sophisticated as the U.S. economy, but the need for voters to take a more scrupulous look at our politicians and their policies remain the same. Belize’s weak or bad policies might not threaten the world economy like the USA’s hiccup did, but it can affect how well the country can grow.
For example, deficit financing (borrowing more than the country is making in revenue) can lead to reduced taxes in the present, but when it’s time to pay the piper, the incidence of the tax may very well fall on you five or ten years in the future. It could also fall on your children or grandchildren.
Scrupulous scrutiny ought to commence during the campaign season. What does the United Democratic Party stand for? What does the People’s United Party stand for? What makes them different? Whose policies are best for the economic growth of Belize? These are questions that every voter should be asking before casting their ballot.
Apologies for making a U.S. comparison, but we could clearly see where the Democrats and the Republicans are dichotomized along the left-right political spectrum. For example, the conservative Republican Party’s economic view favors less governmental interference and naturally lower taxes. The Democrats, however, say bigger is best to protect all citizens, and therefore uses a progressive tax system to fund the increase in public services that they provide.
That reality alone sets the stage for a fundamental debate: how involved should government be and how much public service should they provide? Fact number one is that the more public services provided by government, the higher the taxes. The reverse is obviously true. This is something to think about when it comes to the caretaker-style of politics that is championed in Belize.
To debate or
However, in Belize, the discussions in the House – as clearly seen during the recent budget debate – seem to generally gravitate towards character attacks by both sides. It is usually rooted in a retrospective look into who did or did not do what while they were in office.
Even more recently, the land-grab scandal came up, again, in a Special Sitting of the House of Representatives held on Friday, July 27, 2012, in which the Prime Minister accused a PUP minister of owning a vast amount of land. The Opposition of course responded in a press conference less than a week later to point fingers at the UDP for allegedly being guilty of the same thing. It is pretty much dirt-slinging politics.
These accusations of corrupt practices between Belize’s two main political parties have been like an endless waltz that has dazzled and, in some instances, dizzied many of the Belizean people.
But maybe in the political bible there should be something written that says, “Voters cannot live by the bickering alone, but by the practical, fact-based policy debates that lead to informed decisions.”
For democracy (the rule by the people) to be successful, the people must be conscientious beyond just the five-year political practice of going to the polls. They must be informed and more importantly, they must be involved.
Where do you stand?
The fact is that economists and politicians (especially politicians) are not omniscient. There were members of the financial sector who thought that the securities industry prior to the global recession of 2008 was perfect and worthy of deregulation. Today, policy makers should know a little better; but, believe it or not, Democrats and the Republican still don’t entirely see eye to eye on this.
Take, for example, former U.S. Secretary of the Treasury Henry Paulson. He was the former CEO of the investment bank Goldman Sachs, and during his time at Goldman was one of the principal advocates for the deregulation of the financial industry. However, when the decline began in 2008, Paulson had to try and save the economy from their Pandora’s Box.
Back home and during the 10-year period in office, the PUP government radically increased the country’s debt. It culminated with the so-called, US$544 million “super bond” that is presently choking the public purse. They relied heavily on deficit financing, which isn’t inherently bad. It could work once the monies borrowed are put to work in the most efficient way so as to guarantee returns that can justify the debt incurred.
What was their investment plan, if any? Was that considered at all when voters went to the polls?
The UDP nationalized Belize Telemedia Limited and Belize Electricity Limited. Again, these decisions are not inherently bad or good; however, the acquisitions did hike up the already burdened public debt.
To make matters worse, GOB has to now compensate millions of dollars to the former owners, while simultaneously trying to shave off some of the weight of the “super bond’s” interest (coupon) rate that just went up to 8.5 percent.
The conservative, right-winged opponents of nationalization would say that an enterprise is best managed by the private sector. Those on the right would say that they should also be taxed less, so as to enable them to have more revenue that can help grow the economy. However, was that approach best for Belize?
The fact of the matter is that in a democracy the people get the government they deserve. If the people deserve a loud mouth, dirt slinging, corrupt government that does not put the real issues before the people, they will elect that government.
However, if the people take the time to study and peruse their politics and engage in debates on best practices, then they deserve a conscientious government. The question then is where do you stand? And what type of government do you deserve?
As was seen in the U.S. economic crisis that was brought on by deregulation, which of those new policies and bills had the citizenry at heart?
Informed voters would have had to speak for themselves, in the same way in Belize, Belizeans need to equip themselves and ask the right questions to the right people to debate the right choices.