"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.