We inherently believe that if we had a chance to change the world we would do something dramatically different. In reality, when people get into positions of power, they get bogged down with the mundane and eventually become conformists; it’s easier to adapt than to change. Having lived through five economic cycles over the last 30 years, I asked myself what I would do differently if I had control of the world at a time when the world economy is gutted by the pandemic and the World Health Organization has stated that the worst is yet to come. With these onerous terms of reference, one is compelled to think of extreme measures to provide relief to the dire and helpless situation that the majority of the people around the world find themselves in.
In any crisis what becomes most critical is the availability and flow of money within our economies particularly to the small and medium-sized enterprises (SME’s). It’s recognized that almost 70% of employment comes from the SME sector. However, in difficult times, the cash-tap dries up and money flows to this all-important sector dries up. Commercial banks are best known for the adage “offer an umbrella when there is no rain” and as entrepreneurs in the SME sector will validate this as banks ask for 100% cash collateral when things get tough.
That is risk mitigation 101. When unemployment is at 30% and when almost 70% of the global population is at risk, there is this select group of institutions that continue to do well. These are a majority of the listed companies and the financial services sector in general. I am quoting from my publishers note in June 2020:“Continuing to look at our magical numbers, global GDP is flirting around $100 trillion and total global debt is around $250 trillion (give or take a few trillion). The market capitalization of the 60 main exchanges in the world is around $70 trillion. In terms of profitability, just the S&P 500 companies were projected to deliver approximately $1.5 trillion in profits in 2020, the global banking sector would deliver profits of $250 billion to $300 billion and the technology sector approximately $356 billion.
These numbers are larger than the GDPs of most countries. The numbers for Africa are not as high but there are thousands of businesses that are doing well and will continue to do so after the pandemic is over. It’s therefore, clear that while we have problems from time to time, we also have the resources to fix them; many times over. Hence, it’s time for us to go back to the drawing board and start from zero by redefining our purpose, the difference we need to make and the legacy we will leave”.
Let’s also put two other terms of reference on the table relating to banks. Banks closures and failures on account of bad debt write-offs, non-performing assets or over leveraged balance sheets seldom come from bad loans to the SME sector or to farmers in the agricultural sector.
History is a witness (as Google can validate) that the majority of causes come from lending to large corporates, poor governance and through fraud. Secondly, even in crisis, as central banks reduce interbank rates, commercial banks seldom pass this on to the SME sector; beneficiaries are once again people who can afford the higher interest rates.
Rather than rearticulate I want to quote from the same note in June: If we are to be truly reincarnated, the script must be rewritten and inequality must be the first value for rehabilitation. In reality, even though resources are abundant, the gaps have continued to widen and the levels of poverty have increased. This is largely because of how we have developed the economic value chain;people that make the most money are the financial engineers who are trading stocks and not those sweating in the field manufacturing products and delivering services.
The cocoa bean, sugar or chicken farmer make 6% of the amount that the retailer makes selling the finished products, who in turn makes 50% less than the equity trader, who makes the most money trading on the stock. Anna, the tea lady in our office in Johannesburg, was charged an annual interest rate of 26% by one of the top banks to pay the college fees for her only son; no recourse. This is exploitation and needs to change through radical reforms of our entire banking system and the capital markets to harbor on making them very efficient but not for profit; the profit needs to be reinvested at the grassroots level. We need more farmers ploughing the fields, as at the end of the day, we cannot eat “paper stock”. Let’s agree that governments cannot be the answer to all the problems. Governments can provide stimulus, change policies and even print money (if that is indeed a solution) but at the end of the day the real cash that is available is in the financial system to include capital markets. Even when the entire world economy has come to a standstill, the people who continue to make profits are those that are feeding off the financial services trough.
My over simplified list of actions, as radical as they may sound are mild in contrast to what is needed today. I would increase the capital of all Multilaterals and Development Finance Institutions (DFI’s) by prorata contributions from the wealthy nations, but ensure that in turn they (including the World Bank and IMF) reduce lending rates significantly and waive interest for 3 years on all national debt for developing countries.
Secondly to shut all capital markets and exchanges for 2 years, stop all exits from private investments for 2 years (rather invest in venture and growth capital), no dividends are paid by listed companies for 2 years, ensure all cash raised in funds goes into growth capital, interest cap on loans to individuals at the lowest income bracket, and 100% of profits from banks, insurance, credit card, listed companies, investment banks, audit firms, consultancies, and property development companies is channeled back to government coffers to support the core sector industries particularly agriculture, healthcare, SME’s and infrastructure (including low-cost housing).