"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.