When the 'Business Daily' Falls in Love with a Narrative

Yesterday the Business Daily had some “breaking news”! A Citibank economist had proclaimed that interest rate capping is upsetting the Central Bank of Kenya’s monetary policy conduct.

The economist – David Cowan – knows what he is talking about; and his observations in the research note that underpins the story are entirely valid.
What is interesting, at least to me, is the timing of the decision by the Business Daily to give the story prominence.
First, it is not breaking news. When the Monetary Policy Committee (MPC) of the Central Bank Kenya (CBK) said as much in its communique of March27, 2017, it wasn’t news worth of Business Daily’s prominence.
 Instead, all we got was the nonsensical argument that the decision to retain the policy signalling rate – the Central Bank Rate (CBR) – which is also the base for capping at 10% was a reprieve to borrowers.
My colleagues and I have elaborately argued twice [here (March 2017) and here (June 2017)] that, if for no other reason, the capping of monetary affects monetary policy consequences; and the consequences of that is damning to the well-functioning of the money pricing regime and the economy as a whole.
But I guess I have been around the block enough to know how masquerade to thought leadership in newsrooms operate: it is not about the logic and the merit in the argument; it is who makes the argument and as a consequence how will it sell the newspaper for a day.
Second, it is a reflection of the thinking that is compartmentalised – monetary policy is now hamstrung is one compartment and banks are engaging in blackmail through reducing credit to the private sector is the other.
I must be quick to excuse such thinking, to the extent that it happens in the newsroom; the reason why I do so is because I do not expect a “general equilibrium” way of thinking – where one looks at all possible connections – to happen there.
If I am right is so arguing, then it is easy for me to see why people are now making the lazy argument of there being a nexus between banks’ decision to rationalise their branch network and the “blackmail” conspiracy theory.
What I know for sure is that the decision by a bank to open (and close) a branch or extent credit is tough to make than that of wring a careless newspaper story or a pretentious editorial like today's where there is an assertion that “removing the caps demands that all other distortions are dealt with at once”. 
One wonders whether there is really an understanding at the Business Daily of (a) what the distortions that they are talking are (b) whether it is practical to imagine that those distortions can be dealt with “at once” (c) how it doesn’t make any economic, even logical sense to start putting a sequencing (more accurately a condition) that the removal of the distortionary caps needs at happen once all the other distortions have been removed “at once” – why not remove all of them “at once” then?
 But hey, I am not naïve to expect a newspaper that has fallen in love with a narrative to let soberness come in its way.                    

"Inflation: Both Sides Have a Point"

What comes to your mind when you read the Business Daily's Friday 3, 2017 splash about how poor households are skipping meals in order to beat inflation? What was the essence of seeking the views of the Chris Kirubi and Donald Kipkorir?

This is what the duo had to say.

Kirubi: "It's the small people that the government needs to step in and cushion from rising costs".

Kipkorir: "I even don't know the price of fuel, food and such. I am never bothered by these price changes as they don't affect me".

When I saw the quotes attributed to the duo, I couldn't help but recall a column written by Economist Paul Krugman nearly 17 years ago in the New York Times where he said thus:

"If a presidential candidate were to declare that the earth is flat, you would be sure to see a news analysis under the headline "Shape of the Planet: Both Sides Have a point".

In other words, the story above was looking for balance in giving  the duo a chance to gloat about why the inflation thing is not about them - I naively used to imagine that business people need a stable operating environment as assured by low and stable inflation!

Crazy!

The Trageddy of a One Day News Cycle

On January 31, 2017, I published a Research Note that made some policy makers unhappy. In the Note, I observed thus:

"We therefore observe that the decision by the MPC to hold the CBR at 10.0 percent as justified
by the Committee’s argument that inflation is within the target range and previous decisions
need time to work through the economy was anticipated. While on that account the MPCs
decision seems justified, its assessment of the immediate term risks on price stability and other
macro  parameters  are  of  less  candour.  Consequently,  this  reflects  the  MPC’s  inability,  or
unwillingness, to provide forward guidance in its monetary policy signalling".

At that point in time, everybody who has an opinion on such matters - especially the pretentious business media - was fixated on the cost of credit, terming the MPC decision a reprieve to borrowers.

To many,  it didn't matter then that the capping of interest rates had dampened credit expansion as many of us had forewarned and that the main worry was macroeconomic stability.

It equally didn't matter that the MPC - in its wisdom or lack thereof - decided to hold its meeting a few hours before the release of  inflation numbers - the core policy target; this meant that the Committee chose to make a decision without the benefit of one crucial piece of information.

Fast forward to February and as I had anticipated Inflation hit the roof, busting the official target. Now everybody is wise. The editorials are roaring: "Inflation rise a wake-up call for policy makers".

The next MPC meeting is scheduled for March 27, 2017 - curiously three days before inflation numbers are published.

If the MPC does the right thing and adopts a tightening stance, the same wise people will predictable start talking about the cost of credit - as if that is all that matters!

While this is a tragedy of the one day news cycle syndrome - that coincides with the editorials' short  memory - is vindicates my argument on the folly of the CBK's choice of the Central Bank Rate (CBR) as the benchmark rate for capping  lending rates.

For those curious, the CBR is a policy signalling rate meant to balance the inflation gap (actual vis-a-vis the target) on the one hand and the output gap (actual output vis-a-vis potential output).

The CBR therefore has no business being linked to credit pricing. It is role is to signal policy intentions, and then be operationalized by a market rate (be it the interbank rate, repo rate, or even the Kenya Banks Reference Rate (KBRR) - which the MPC chose to suspend).

That is funny stuff right there!  

Yours Truly as a Talking Head!

Courtesy of the CFA Society of East Africa, John Randa (World Bank ) and I had this interesting conversation.

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”.