Fake Intellectualism

I have no idea who coined the catchphrase "fake it until you maker it". Whoever it is, the subject was obviously not the attitude is the Business Daily at a general level towards what passes for good economics and at a specific level the appreciation of how the financial system works beyond the usual scandals (real or imagined).
But the Business Daily has made it almost a preoccupation to come up with an hypothesis, accept it without testing (by the way researchers never accept an hypothesis; they only fail to reject the null hypothesis!).
Before the new law capping interest rates was enacted, anybody with a basic understanding of financial economics warned that it will lead to shrinking of credit. This is because if the caps (obviously determined arbitrarily) are below the price that a bank will lend to a risky borrower, the decision will be not to lend to such borrower.
The official attitude at the Business Daily was that those making such argument are scaremongers, and that lower rates will translate to high credit (as if the credit  market is the same as the potato market).
While it is still early days, evidence has started trickling in that indeed what some of us anticipated as a consequence of this new law is playing out.
But trust the Business Daily to waffle when faced with the evidence. First, it reports the evidence of shrinking credit with a twist that it is the private sector that is shunning credit from banks - this of course being totally a nonsensical argument - see 'Businesses cut credit uptake as rate cap uncertainty bites' (Business Daily, 15th November 2016).
Then in quick order, there is realisation that the banks (villains in the Business Daily hypothesis) need to take the entire blame. So the great minds in Business Daily pen an editorial the following day to put the blame 'where it belongs' - see 'Change lending strategy' (Business Daily, 16th November 2016).
The editorial makes three arguments, all of which entrenching what I often call an attitude in search of justification.

• One, banks are deliberately starving the private sector of credit. So was the Business Daily  reporting of the previous on the subject wrong and was the editorial seeking to correct it? No; this is textbook waffling.
• Two, the stringent screening by banks has led to more investments being channelled to government securities. So does the Business Daily understand the zero-sum argument? No; game theory is not thought in its school! More seriously, nobody there cares to know the difference between crowding out through the quantity channel and through the price channel. I presume that it is the obsession with interest rates (the price channel) that the Business Daily does have the guts to simply report the evidence that it is the quantity channel (the government's unquenched appetite for funds from the market) that carrying the day here.
• Three, what obtains is a betrayal of the spirit of the law capping interest rates. So does the Business Daily imagine that the spirit and the reality are one and the same? Oh well, let me take this opportunity to welcome everybody in that house to the real world!

All said, I believe in consistency of thought in any debate. On this one, I see lots of shifting of arguments in a desperate quest to fit a preconception. That is the definition of fake intellectualism.

Interest Rate Capping: Muthoni Thang'wa an Innocent Victim of the Dunning-Kruger Effect

One of the luminaries in Kenya’s financial sector recently wittily quipped that on the subject of interest rate capping “everyone and his/her cat” has an opinion. And he was right.  Ms. Muthoni Thang'wa has very strong opinions on the matter as expressed in her Op-Ed in today’s Daily Nation.

Ms. Thang’wa’s short bio in the Daily Nation indicates that she “works in the heritage sector, specialising in culture and enterprise”. That does not deny her the right to have an opinion on this subject. It however makes one wonder whether she knows what she is talking about when she asserts thus:

“It has been proven, economically and mathematically, that banks will make profits on loans at the current regulatory rate of 14.5 per cent, yet they charge up to 11 per cent more than this rate. This greedy difference is what this law seeks to regulate”.

On this I can only ask one question: where is the study? I suspect that there is no study she or any person of her persuasion has done of the matter. If there was such study, she could have been all over town with it.

But then again I know how those who earn a living out of pontification operate. They simply take leave of logic and reason if that will come between their preconceptions. In other words they have attitudes that they desperately seek to justify through sounding profound but not making any sense.

It gets juicier when Ms. Thang'wa argues thus”.

“All the players in the financial sector take the public for granted; none of them had any research or data that supports any of the claims they used to oppose the Bill, including inefficiencies in the credit market and credit rationing”.

Really? No studies? I argued yesterday that there is a group of people whose arguments on this subject can be characterised as “accidental expertise”. If Ms. Thang'wa is the reading type, she can see the link on my blog post to a World Bank Paper that could easily rubbish the arguments in her Op-Ed.

Let me make it easier for her by saying that the financial sector knows a lot on this subject than she imagines. And that knowledge is based on experience and, yes, research.

Let me not speak to experience because that is a subject on its own that portrays Ms. Thang'wa’s attitude seeking dubious justification. Such attitude is such that:

(a) she knows more on the subject than the Central Bank of Kenya (CBK) which has opposed the capping of interest rates as a way of addressing the structural issue of high interest rates
(b) she knows more than the National Treasury, on the subject whose view on the matter is the same as the CBK’s
(c) she knows more on the subject than the Deputy Managing Director of the International Monetary Fund (IMF) who recently argued that “Another challenge facing many African countries is the persistence of very high spreads between the interest rates offered on deposits and those charged on loans. This has led to understandable frustration among borrowers about the cost of credit, and has produced political pressure for interest rate controls. However, the politicization of monetary policy bears well-known risks—for the soundness of the financial system and for credit access, notably higher-risk borrowers. International experience suggests that, in many cases, interest rate controls may actually end up reducing access to the banking system for small borrowers—such as farmers, SMEs and consumers—and may also revive informal lending at much higher cost for borrowers”.       

Instead let me speak to research conducted by the financial sector in Kenya.

·         We know through research that the Kenyan banking industry exhibits strong competitive attributes. So if interest rates are sticky at high levels it has less to do with competition and more to do with exogenous factors such as huge government fiscal deficits financed through domestic borrowing. That study is available here.

·         We know through research that the challenges that exists in the interbank market (yes, no assumptions here that Ms. Thang'wa knows that there is a credit market amongst banks!) are structural and could be compounded by capping of interest rates. That study is available here.

·         We know through research that banks are strategically positioning themselves to support capital markets deepening through their investment banking subsidiaries; therefore strategically they are diversifying away from interest income towards entrenching transaction and advisory based income. That study is available here.

·         We know through research that the challenges of SMEs are wider than financing, although Thang'wa et.al. would want to make it appear that finance is the only problem of SMEs. That study is available here.

I can go on and on and on about the studies on matters finance, banking and economic policy by researchers in the financial sector, but I guess it cannot help persuade Ms. Thang’wa to move an inch from her jaundiced view. I need to say this though. The fact that she doesn’t know about the existing research does not excuse her empathic assertion that there is no body of knowledge on this subject and more.
What it does it bringing out the possibility that Ms. Thang’wa could be an innocent victim of the Dunning–Kruger effect, which is a perception bias whereby low-ability individuals suffer from illusory superiority, mistakenly assessing their ability as much higher than it really is.

Interest Rate Caps, the “Accidental Expertise” and Our Version of Donald J. Trump

In April 1999, economist Paul Krugman published a small book with a big message. The book is titled “The Accidental Theorist and Other Dispatches from the Dismal Science”. I recommend it to anybody keen on understanding why in economics and in business, relationships are not always linear.

I have my doubts though that many of those who this small book (yes, it is only 204 pages) should realty help could even touch it because it has the world “Theory” in its title.  I guess it is because they consider themselves to be “practical”.

My understanding of practical men is shaped by Lord John Maynard Keynes who, in the last Chapter of his Magnus Opus – The General Theory of Employment, Interest and Money – noted thus:

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist”.

 The “practical” men and women are now telling us that all will be fine with the interest rate capping, and that they have done “their research” which points them to a WorldBank report that concludes that the practice is all over. Their inference is therefore that the practice must be beneficial. If only that was true! But it isn’t. The report says exactly the opposite; but then who – among the “practical" people – cares about the truth in this logic-free, fact-free interest capping regime? Indeed who cares to read a 40-page paper whose main conclusion is contrary to ones prejudiced position?

That is not where it ends. The “practical” people are telling us that the “greedy” banks (remember Gordon Gekko in the movie Wall Street?) will do all they can to keep their levels of profitability. In other words, their greed will push them to lending more; in any case, they argue, with low margins banks will be “forced” to lend much more.  In other words, to them the credit market is like the potato market.

If I was talking to my fellow “’non-practical” people, I would say that the “practical” side assumes that credit demand is price elastic. And they are wrong. Consider this: walk into The Junction Mall in Nairobi and see two banners. One of the banners is by a bank – pick any, for there is NIC Bank, Commercial Bank of Africa, Standard Chartered Bank, etc. – and it says that you can get credit at 14.5%. The other banner is by Nakummat Supermarket and it says that you can buy one kilogramme of potatoes at Kshs14.50.  

With Kshs14.50 in your pocket, you can walk to Nakummat and stroll out with your bag of potatoes. Just as you find that the price of potatoes in Nakummat is competitive, you would be on the idea that credit is now competitively prices thanks to the capping law. With your potatoes in hand, walk into the nearest bank and apply for credit.

It may not take as short a time as buying the potatoes, but the bank will make a decision either way. If the appraisal process shows that your credit risk is larger than the cap, then the bank will make the decision of not lending to you.  Under no capping, the bank will make an offer of a rate that matches your risk profile; but what the capping law does it make it illegal to lend to people of a certain risk profile!

I guess being “practical” simply means that you ignore even the very basic truth that many households and small business are constrained more by access to credit than the cost of credit. This by no means suggests that cost is irrelevant; it simply means that if you come up with a blunt tool such as capping to address costs, you may end up frustrating access.

Will the low margins mean increased credit so that Mr. Gekko can quench his greed? The answer is in a document that many “practical” people  haven't read – while posing as experts in matters banking when in fact their lives revolve around the equation Assets = Capital + Liabilities – ; that document is called the Central Bank of Kenya Prudential Guidelines.

For those too busy being “practical” to read the Prudential Guidelines, they provide for how much a bank can lend for a given level of capital. So more lending demands more capital, if price is restricted. But what happened when the capping law was signed tells anybody careering to look at this matter intelligently that capital was the first variable to quickly move – the listed banks’ stocks simply crashed.

So therein lies the “accidental expertise”. It doesn’t surprise me therefore that leading media houses wrote celebratory editorials about the capping law even as the bank stocks where their staff pension funds are invested collapsed. Nor does it surprise me that even respected business newspapers such as The Business Daily is treating its readership as if it all have a one-day memory on this matter.

 If not having a Donald J. Trump mentality of switching positions daily, what can explain the following switch?

July 28, 2016 Editorial: “The Kenya Banks Reference Rate (KBRR) for example was a brainchild of intense the banks lobby as it sought to calm MPs who were at the time baying for the lenders’ blood. The widely discredited rate again did not move a needle on the interest rate charts, but has been used as political tool to appease any critics of the high interest rates”.

September 14, 2016: Editorial:  “For instance, the CBK waited till the very last minute to speak to the key issue of the base rate that would be applicable in the pricing of loans as the new law requires. When it did, it chose the Central Bank Rate (CBR), an instrument set by armchair economists in boardrooms instead of the transparent and market driven KBRR – and felt no obligation to tell Kenyans what informed that choice”.

A Mechanical Tool for a Structural Problem - ICPAK Edition

My first economics lesson in high school decades back was on the subject fancily referred to as "market structures". My teacher, Mr. Stephen Mugenyi, started by telling us that there are three types of markets - monopolistic (one market player), perfectly competitive (many players), and oligopolistic (in between the two extremes).That was a mouthful.

The following day, he went on to tell us the features of each of the three. A monopolist has total market power and plays in a market with entry barriers. A monopoly makes 'abnormal profit' based on the ability to restrict output and therefore charge high prices.
In a perfectly competitive market there is free entry and exit, and market players make 'normal profit' as the market dynamics enable prices to adjust to a common level.

As I came to learn later (as I grew to become a professional economist), monopoly and perfect competition are two extremes - what we later used to call "corner solutions". The real world is somewhere in between, and that is the oligopolistic structure. [there is also monopolistic competition; I didn't learn this from Steve]. In an oligopolistic set up, there are either few players or a few dominant players.

If one wants to move the market towards perfect competition, one needs to look at one variable: number of players - not simplistically increasing such number but ensuring that that market dominance is not by few players (in other words expand the top).

Even this will not lead to perfect competition; it can only approach but not attain perfect competition status (we used to  romantically refer to this as an "asymptotic process"). You cannot move an oligopolistic market towards perfect competing through attempting to fix the price. That is because, the reason you have oligopoly is "structural".
Now, the Institute of Certified Public Accountants of Kenya (ICPAK) leadership has chosen to argue that price controls will address a structural issue. They argue that the banking industry is oligopolistic, therefore cap interest rates will just do the magic.

This brings three things to mind.

• One, things that are expected to be obvious to some a group of professionals who are expected to be thoughtful and knowledgeable aren't usually so.
• Two, playing to the gallery is  very very tempting. I can't see the motivation though when it comes to ICPAK leaders on this issue. Is it politics? Well, I don't know. What I know though is that it is not economics!
• Three, there is a huge difference between simple solutions (carefully thought through but easy to implement) and simplistic (looking at which side of the debate is noisy and assuming that they have a point). ICPAK leaders present a typical simplistic solution. Not that there is a simple one when it comes to interest rates; but one expects logic in any conclusion and I see none of that in ICPAK's assertions.

Illiteracy in Basic Economics - Once Again!

When I saw the Daily Nation tell us today that the IMF calls for  interbank rate control in Kenya, I wouldn't help but recall that in the recent past I have asked (actually twice - here and here) whether the Nation Media Group has an economics editor. I guess I would have to go easy on the question and surmise that clearly they do not need one.

Why do I think so? Because the author of the piece hinges his sweeping observations on a recent IMF Working Paper. I happen to have read the said paper three days before the Daily Nation story was published. I would like to argue that:

• One, my reading was very careful because the paper is very technical but well written for a trained eye to enjoy [I didn't expect the Daily Nation reporter to understand what the hell the exponential generalized autoregressive conditional heteroskedasticity  (E-GARCH) specification is all about!].
• Two, the paper's conclusion - written in plain English nowhere suggests for a control of the interbank rate.
• Three, the habit of picking statements from a technical paper with the objective of fitting a particular narrative is very addictive in the media, especially when there is a desperate endeavour to appear knowledgeable on a subject where the reality is the exact opposite. 

I have a strong feeling that either the author doesn't - or chooses not to - understand  how the interbank market operates. So let me make no assumption here and observe as follows:

• First, the interbank market is an overnight market whose price (the interbank rate) is influenced by the overall liquidity in the market. 
• Second, the other money market rates such as treasury bill rates are a reflection of liquidity situation in the market and therefore have an implication of what the interbank rate could be.
• Three, (and this is for those technically inclined) the E-GARCH methodology allows for the determination of the direction of influence between the interbank rate and the treasury bill rate; and such influence can be dual (meaning the two influencing each other). The IMF paper indicates that such influence is strong from the interbank rates.
• Four, the interest of ensuring a smooth interbank rate that is coordinated by the policy rate (the Central Bank Rate[CBR] in this case) is such that the central bank could use the interbank market as an operational target for monetary policy - the CBR is the signal rate and the interbank is the operational rate
• Five, there are merits in the central banks creating a band around the CRB around which the interbank rate could fluctuate (the paper calls it a corridor). The narrower the corridor the better it is to manage volatility in the interbank market given that the CBK does not fluctuate frequently.

Does the proposal for the creation of a corridor amount to a call for controlling the interbank rate? Definitely not. The central bank can only seek to influence, but not control, the interbank rate. That is why, to let the IMF paper speak for itself, 

"by announcing a rate that it wishes to prevail in the overnight interbank market and ensuring its implementation through day-to-day liquidity operations, the central bank aims to influence and stabilize longer-term rates, important for overall level of prices and real economic activity. Likewise, the central bank’s ability to reduce volatility of overnight interbank rates should matter for monetary policy because interbank market volatility may

affect funding costs for longer-term financing".       

So where is the Daily Nation coming from with its screaming assertion about the call for interbank rate control? I do not know. I suspect it is a function of the implicit sympathy to have money market rates controlled - aligned to the silly proposal by the a section of the legislature - that the media house is shy of directly asserting.

But it all amounts to illiteracy in basic monetary economics.        

Non-economics!

Simon Wren-Lewis, one of my favorite academic economists, has a very interesting post on his blog on economic reporting without economics. I have been on this subject for a while now, but more explicitly in the recent past (see here and here).

At the very best, a new branch of economics has been "created" although it doesn't go through the formal route of rigour and logic, which Prof. Wren-Lewis cleverly calls media macro!

And still the posturing continues!

Does Nation Media Group have an Economics Editor? A Redux

I recently asked: Does Nation Media Group have an Economics Editor? This was not a pedestrian question. My motivation was that the media house makes unforced errors in matters basic economics.

In today's Business Daily, the lead story talks about inflation tax. The author talks about how proposed tax measures on financial services and consumer goods will lead to inflation. It is an accurate report, only that it does not amount to inflation tax, which is a technical word that means something else.

Am I splitting hairs? No. Instead I am illustrating how the pursuit of sounding informed by the media house often results in embarrassing inaccuracies.

If the report was about government measures that have an implication of raising medium term inflation, which then erodes the value of money - or bonds - it would be accurate.

Moral of the story: modesty - of words - is a virtue.  

What Hapenned to the Policy Reset Promise?

When I got an invitation from the IMF to attend a 9th May 2016 lecture by Its First Deputy Managing Director, Mr. David Lipton, at Strathmore University, I was excited. Part of the excitement was underpinned by the promised thrust of the lecture - Sub-Saharan Africa: Time for Policy Reset.

Is that what we got? Well, Mr. Lipton instead talked about "The Challenges of Sustaining Africa’s Growth Momentum". At the end of it all, the case for policy reset was not litigated; not even when the lecture ably navigated the terrain of remaining optimistic about the continent while being rife to the downside risks.

What struck me though was the celebratory tone that Mr. Lipton made reference to African economies' foray into the international capital markets. For what it is worth, I am all for a careful venture into the Euro bond market as well all other  capital markets but with one condition: the economies shouldn't do it as a matter of fashion; rather they should undertake a careful examination of the implications of such venture.

I honestly expected Mr. Lipton to provide some context on this subject, even from the wider perspective of debt sustainability, but he didn't; at least not explicitly.  What am I saying here?

• One, the  May 2013 issue of the IMFs Regional Economic Outlook for Sub-Saharan Africa has a brilliantly crafted chapter on Issuing International Sovereign Bonds: Opportunities and Challenges for Sub-Saharan Africa. In this publication is a list of Sub-Saharan economies that had issued Sovereign bonds in the international markets.
• Two, many of these economies are beneficiaries of the debt relief initiatives such as the HIPC and its enhanced version.  
• Three, these economies' venture into the international capital markets was premised on the argument that they were debt sustainable, at least based on the IMF-World Bank criteria.
• Four, it can be argued that without relief, these economies could have not have been deemed debt-sustainable; in other words their debt sustainability was a function of somebody else's benevolence and not their debt management ingenuity.
• Five, given the downside risks that Mr. Lipton ably pointed out, and consequently the gloomy outlook of Sub-Saharan Africa as illustrated by the IMF's latest Regional Economic Outlook, some of these economies are heading back to debt unsustainability.

One question then comes to mind: if these economies get back into debt unstainable positions - and there evidence that some could - is a new form of debt relief the policy reset that the lecture didn't allude to?

I don't know. All I know though is that Mr. Lipton brilliantly  set the base for an interesting engagement; however  the discussants who were meant to motivate the engagement were at best underwhelming!
    

"It Works in Practice; But Does It Work in Theory?"

I recently was largely reflecting on bank runs using historical episodes and relying on the 1783 wisdom of Walter Bagehot. You could be tempted to think that this was practice in search of theory; certainly not. That is precisely the point that David Ndii made three days later.

"The Dog Ate My Homework" - Third Edition

The Business Daily has a story to the effect that the sales of new luxury cars have dropped by a wopping 32% because of high cost of funds. The instructive words here are "new" and "luxury" - we are talking of Mercedes, Jaguar, et. al.

In other words, the author of the story - or the caption - is telling us that these crazy banks are coming  between the rich and their search for luxury!

While that is utter nonsense, I see a pattern in the way the Businessun Daily takes excuses and imagines they are a proper account for certain occurrences. This is what I call an attitude in search of justification.

A while back, I argued that there is tendency of the Business Daily to insinuate that the woes of Uchumi Supermarkets were occaisoned by expensive loans from banks is a kin to a akin who didn't do his homework and when asked by the teacher why he unequivocally says: the dog ate my homework!

It didn't matter to the "analysts" at the Business Daily that Uchumi was not able to issue a commercial paper - or rather the Capital Markets Authority was not keen to approve the  issuance on account of Poor financials. Yet, some people imagined that banks will ignore the risk and give the supermarket chain cheap credit - in other words provide it with an interest rate subsidy!

It didn't take long before Uchumi suffered an embarrassing closure of a section of its shops in Uganda because of poor hygiene!

This story illustrate one thing: you don't need to search very hard to see the Business Daily's attitude in search of justification when it comes to matters banks and banking.

If you don't believe me, just have a go at Mr. Jaindi Kisero's commentary in today's issue. He argues, I think logically about the goings on in the banking industry and says in passing about the industry being ripe for consolidation. This is what new mentions casually and even explicitly says that it is a digressions from his thesis for today's column.

Mr. Kisero says thus: "clearly, our banking sector has never been more ripe for consolidation. I digress". My take of this is that he is yet to make a case for consolidation. Indeed this is a debate that we can have. But the Business Daily imagines that that was the core message, for his column is so titled.

Retired President Daniel arap Moi used to wittily quip that it reached a point where everything - including failure of rain - was blamed on him. Are we seeing the same for the banking industry? May be not; may be the dog actually ate the boy's homework!

Thinking About Bank Runs: Are We All Monetarists or We are all Keynesian?

Milton Friedman was a great economist. So was John Maynard Keynes. Friedman was a great narrator of ideas economics. I find his story (see video) about the role, or lack thereof, of the Rederal Reserve System in the run-up to the Great Depression.

I suspect the architects of the Federal Reserve System had been inspired by the compelling work of Walter Bagehot in his seminal 1873 book, Lombard Street: A Description of the Money Market. The Bagehot prescription to central banks during time of panic:
(a) lend freely,
(b) at high interest rate,
(c) on good security.

The Fed didn't do any of these three according to Friedman, thus leading to the heart depression.
But it doesn't end there. While he is full of praises for Keynes, the thinks that his followers irresponsibly used his ideas, consequently high inflation experienced post the Great Depression.

I have my suspicion that Friedman was pushing his idea like you,can push a string! I could ask: What caused the bank runs?  The real economy challenges that frustrated business that had relationship with banks.

Keynes saw such challenges as insufficient demand. His ideas were carefully cratfted in The General Theory of Money, Interest and Employment. By general, Keynes didn't mean that is was generally applicable. He gave insights on what fiscal policy can do in the event of insufficient demand.

It is evident that Fredman pushed the Monetarist theory too had; but it wasn't all about money. The recent Great Recession, when money was abundant thanks to Quantitative Easing and other non-conventional monetary policy tools, wasn't enough.

With interest rates close to zero, those economies that acted Keynesian are now seeing some bit of recovery. Those that went the austerity route are not busy saying that easy money failed!

The moral of the story: the difference between money from the fiscal source and from the monetary source is not mere nuance!

Wile E. Coyote and the Banking Industry

All of a sudden, everybody - including those who cannot differentiate a balance sheet from a profit and loss account - are telling all those who care to listen that the Kenyan banking industry is going to hell in a hand basket.

They imagine, wrongly, that stability is a function of size and profitability; the bigger and the more profitable, the better - following therefore that the reverse is true.
They equally imagine, wrongly again, that the classification of banks in tiers -  Tier 1, 2, and 3 - is in order of vulnerability; Tier 1 is less vulnerable than Tier 2 which is less vulnerable that Tier 3.

Their conclusion: the banking industry is having a Coyote moment in every episode - careless and accident prone! and people believe them.
Talk of gullibility on the part of the self-declared experts that feeds into the understandable anxiety of depositors!

You mean a Currency Depreciation Could be Good? Oh Yes!

The clever people in the Kenyan financial sector - they go by names such as analysts, dealers, traders, strategists - have this embedded assumption that whenever the economy's currency is depreciating, it is a reflection of a bad omen. Not even when it is a correction.

The last time I argued that the depreciating spate that the local unit was experiencing didn't necessarily amount to a crisis, they almost hounded me out of town; until they later realised that it was an inevitable adjustment that gave way to stability at a weaker nominal level.

I would want to imagine how they take it when the Wall Street Journal is telling us that there are good news from Japan as the Yen seems to have taken the depreciation road and could walk it for a while.

Given what Japan exports - stuff such as VX V8 (you know that one?) - this will lead to a boon. And it doesn't amount to some form of manipulation similar to what some American politicians are happy to accuse China of doing.

To my analyst - or dealer, or strategist - friends, this would amount to confusion because the same Wall Street Journal was not too long ago busy telling everybody that a weaker Yen does not necessarily boost exports! Talk of confusion at the Journal!

Bernanke's Chronicles - Simply Hilarious!

Two of my friends and I started reading Ben Bernanke's autobiography, The Courage to Act, at the same time. Once I was done, I distilled my understanding of this succinctly and interesting book in a review the I published in the Business Daily. The reaction from one of the two friends, upon reading my review, was: we're we reading the same people?

I understand the basis of the questing. It is easy to take the Bernanke's memoir as two books in one. One is a very candid account of his personal life - modest upbringing, great academics accomplishments. The other is a compelling career in the academy that grounded his success in policy making.

My review focused in the latter in the context of how it relates to our circumstances.
It is a memoir I recommend to anybody keen on a good read.

Does Nation Media Group have an Economics Editor? Oh, Does it Need One?

I am an avid reader of the World Bank's analytical work, especially those on developing economies and Kenya in particular. Arguably, its latest is the best of them all given its rigorous analysis and compelling conclusions. The report gives a glimpse of how the economy's progress - more accurately, perceptions of progress - have a shaky grounding as inequality, institutional challenges, instances of policy failures that could trigger market failures, and (without calling it as much) crony capitalism is the order of the day.

A very good summary of the report was presented in a commentary by Anzetse Were in the Business Daily, March 13, 2016 edition. Ms. Were's column came three days down the road after the Business Daily - in its wisdom or lack thereof - decided that the thrust of the report is about how all the problems of this economy are caused by the "big banks cartel".

It is clear to me that the author of the Business Daily lead story hadn't read the World Bank report in its entirety. If he did, then he hadn't read it carefully. At the very least, he donned the jaundiced eye  - seeing everything as yellow (in other words, starting from the conclusion that it just be the big banks' fault and then seeking to hang it on the World Bank report).

It is no coincidence that the Business Daily had an editorial on  March 13, 2016 that explicitly accused big banks of being a cartel. This is a strong accusation that even the Competition Authority of Kenya has not made; indeed it cannot make such accusations unless it proves it! But hey, the Business Daily could have quietly done a "rigorous study" and come to that conclusion. Only that I fear that the conclusion was a function of  the seat-of-the-pants determination, devoid of careful thought.

It can't be that the leading business newspaper doesn't understand that a cartel, as defined in economics, means a formal collusion by competitors to fix process and/or block entry into the market; nor can it be that the same newspaper doesn't know that cartels are illegal. What is it then?

I do not know. All I know is that sometimes the heat-of-the moment temptation to sound authoritative   cannot give way for logical, objective and convicting analysis and conclusions. That is why, for instance the World Bank's December 2013 report (Reinvigorating Growth with
a Dynamic Banking Sector) could have been a good basis on whether or not one could arrive at the same conclusion as the Business Daily does.

But then such report will not fit the pre-determined conclusion, for it brings out market dynamics, as well structural and policy issues that lead to the state of the banking industry as we see it now. Or that could well be history, and the good Business Daily, just like good old Sam Cooke is quite capable of sing, "don't know much about history"!

But the storyline - or is it an attitude looking for justification - seems to have permeated the Nation Media Group (NMG). Being officially a family affair, the Sunday Nation carried two interesting write-ups on the same topic. One of them was a predictive piece - "Hope of lower lending rates as CBK's advisory team meets on Monday"[March 21, 201] - based on quotes from the likes of Cytonn Investments and a host of other actors in a practice called pseudo-economics (the only economist quoted in the piece is Jibran Qureishi of CFC Stanbic Bank; and among those interviewed, only his views made sense ). Three things come out of this story.

The first is in the heading ( you may think this is trivial, but it isn't) and specifically the phrase "advisory team". The monetary policy committee (MPC) is not an advisory team. It is an independent, decision making team. This points towards either a casual attitude or a lack of understanding about the Central Bank of Kenya's structure and the reasoning behind it. It didn't help that even when the MPC decided to hold the policy rate at 11.5% - the only logical decision, the same author of the earlier report indicated that the advisory committee "voted" to "hold fire". The impressions being create - a wrong one at that - is that there is no science (and fine art) in the MPC's thus it out outcome of reached at whim.

The second is that based on this shaky reporting, the Sunday Nation, in its editorial page on the same day almost exclaimed that the case for lower rates has been made and the only reason why banks are keeping  rates high because of greed. I don't know whether to call this gullibility or mere incompetence because the same editorial commences with observation opinion is divided on the likely decision of the MPC.

Just to be clear, I have argued in the past that lower interest rates are always desirable for both lenders and borrowers. But when it comes to interest rates, it is not simply a George Orwell-equivalent of "two-legs-bad, four-legs-good" in the form of "high-interest-rates bad, low--rates good". If high interest rates are towards pursuance of stability either in the goods market (as happens when we have high inflation) or foreign exchange market ( has happens when there is volatility at a time when foreign exchange reserves are constrained), then they should be seen as a necessary evil.

I therefore don't see the retention of the MPC's policy rate as a sign of holding fire; instead I see it as a way of entrenching policy credibility.

The third is that there is a common thread in the editorial of the Business Daily and the Sunday Nation's. They converge in their conclusions:

"we urge the CBK, the CAK, Parliament and the executive to put in place strong measures to tame expensive loans for the good of Kenyans and the economy" (Business Daily);

"The question Kenyans will want answered after the Monetary Policy Committee meets on Monday is what tools CBK and treasury can use to force banks to lower the prevailing rates which can only be regarded as extortionate" (Sunday Nation).

They put that out with a sense of immediacy! What do they expected these four institutions to do? I do not know. But to the extent that they haven't explicitly stated their prayers, I can assume they are looking for a short-cut, such as the one proposed in the form of interest rate caps (a wrong-headed and potentially disastrous piece of legislation) but are portraying inexcusable intellectual coyness. I throw a challenge to NMG to make such a case.

Such a case has to navigate the  evident lack of appreciation that a concentrated market - and our banking industry is not necessary the most concentrated - is not necessarily a less  competitive market. There are numerous studies that have demonstrated that the relationship between competition and concentration is at best tenuous. Similarly, such a case has to be litigated on the back of a clear  lack of appreciation that in our market, and others at our level, the monetary policy transmission mechanism is very weak.

It will take a keen eye with an appreciation of the logic that economics provides to see through this maze (or more precisely mess) that is easily created when matters banking - more so pricing - are publicly argued. A good economics editor would be of help. But does NMG have one? oh, do they need one? I do not know.

The Last Time I checked, the World Economy was "Closed"!

The basic discipline in practicing economics is anchored in the requirement that when you make strong prescriptions, there has to be an underlying model. It doesn't have to be complicated. It nonetheless must be intuitive.
You may ask: why a model? Because it allows you to test whether there is enough logic for the arguments to hang together. If that test is passed, then the conclusion - however profound - could merit serious consideration for implementation.
So when I see a profound headline such as the one highlighting Ms Anzetse Were's commentary in the Business Daily of March 6, 2016 - "How African States can cash in on China’s economic slowdown" -  I ask myself whether the inferences in the commentary are a function of what one could consider to be a good economic model.
I ask so because I would hope it is true that indeed Africa can take advantage of China's misery; only that it can't. I argue that it can't because the arguments in Ms. Were's commentary don't hang together; not even when there is an attempt to tie them to some Brookings Institution podcast .
Let's assume a Robinson Crusoe economy where there is no trade - the poor shipwrecked guy in Daniel Defoe's novel ended up in an island cut off from the rest of the world, making it a closed economy. The World is, strictly speaking, is  closed economy - we don't trade with other planets; all the space missions are not trade or investment missions!
Instead, the trade and investment regime allows countries within the world to trade with each other. When for instance trade flows in one direction, finance flows (payment for trade) in the opposite direction. That the world is a closed economy necessitates that the current account surplus (cumulative for all countries than whose financial resource inflows exceed outflows - therefore exporters of savings) is equal to the capital account deficit (cumulative for economies whose financial recourse inflows are less than the outflows - therefore being importers of savings).
Why is this relevant to the story that Ms. Were is trying to sell -  unsuccessfully, at least to me? Because China - the second biggest economy in the world - is systemically important such that its misery has negative ramification to the global economic performance. This is the message that the IMF's bi-annual seminal publication - the World Economic Outlook - has been consistently passing over the past 3 years (meaning 6 issues of rigorous analysis).
We are now seeing China's current account surplus - and in effect foreign exchange reserves - start to decline. This has obvious ramifications on China as exporter of savings  at a time when many of the African economies are looking "East" - read China - for investment financing. [For what is worth Ms. Were's commentary does not make any arguments on how the prescriptions around industrialisations will be funded].
There are two more problems with any argument purporting to sell China's misery as a boon. One is the implicit, if killer, assumption of communality of Africa - what I call the Africa - China; Africa - US; Africa - India syndrome. Unlike China, Africa is not a country to have a common policy, ideology, or even strategy; it is a collection of disparate countries with differences in endowment, challenges, visions, institutions, even friends.
The other is assumption that China's woes will last long enough to allow that "country" called Africa to put its act together to and cash in. On this, yet another killer assumption, I will let Ms. Were speak for herself:
"So the time is now for Africa to lay the groundwork for industrialisation so that when the world economy eventually recovers, the continent will be well poised to reap dividends".
I know a thing or two about how long business/economic cycles last; it is certainly not long enough to craft an industrialisation strategy, put in place, and hit the markets. On this I am not alone (see here and here).
 How I wish the arguments in Ms. Were's commentary were hanging together!
                          

The False Alarm of "Be scared; It's Not Balancing!"

I had taken a one month break from blogging, all through resisting the temptation whenever I see bad economics being packaged as authentic reporting or analysis. I am back now and a good starting point is to step back to January and start updating my thoughts on some topical issues.
I am given to being excited whenever I see good reporting. Case in point: this January 4, 2016 story in the Business Daily  about the current account boost from export inflows. My excitement was short-lived though. By February 7, 2016, the story had changed and now the thrust was: The Balance of Payment (BOP) is not balancing! we are at a deficit now! in other words we are bleeding finances. This is when I couldn't help but recall what John Maynard Keynes said in the essay The Great Slump of 1930 when he quipped that "For — though no one will believe it — economics is a technical and difficult subject."

The point is that somebody has no appreciation on how to interpret the BOP. Oh, it could well be a case of letting facts speak for themselves; in the process one gives the impression that hell has just broken loose.
The fact is that the current account (one component of the BOP) has been weak for a while now.
The logic of the BOP is that if the current account is in deficit, the capital account (the other component) must be in surplus - for the BOP must balance.
If I were to report on BOP, I will be keen to have an appreciation of the difference between what economists the stock variables (measured at a point in time)  and the flow variables (measured over a specified timeframe). In BOP, current account is a flow; and some components of the capital account (e.g. debt) are stock. The adjustments that happen in the BOP dynamics will lead to the expected balance.
So the overall BOP deficit shouldn't  be over-blown. If anything, the wolf has always been with us; and that wolf is that the external position has been very weak over the past 5 or so years. If you don't believe me, and you do  not want to be trapped in the stock-flow matters, just look at the trend of the Kenya Shilling in nominal terms.