Our present situation

As you listen to the various radio shows, none of us are prepared to take the blame for our present predicament.  Instead, we blame our financial institutions; they are the main culprits, according to some pundits and by nearly all persons who took out mortgages they could not afford, who now discover that the property is now worth less than they paid for it.  It is often overlooked that these financial institutions never forced anyone to buy or borrow.  Admittedly, some institutions made it extremely easy with no or minimal down payment requirements which were supported by inflated appraised values by the realtors; both with the knowledge that should one person lose their job in a household they could no longer honor their commitment.

The sad and more egregious situations are those property owners who could afford to pay, but decided to renege on their obligations anyway because they needed the monies to support their extravagant lifestyles. Those persons who abandon their commitments know they are behaving disreputably and tend to justify their actions by blaming someone else while the politician and the media blame the financial institutions. 

For the most part, the financial institutions lend in good faith, thus enabling citizens to buy homes and acquire other assets.  To be sure, there was some reckless lending and some reckless borrowing and once brought together, the merry-go-round was started.

The Bahamas is at a stage in its economic life where there is a need to step back and objectively and dispassionately review the tenets of a market-based system and what is needed to make that system work.

On the micro-level, it is understandable and easy to feel sympathy for the homeowner evicted or about to be foreclosed on.  We feel the pain and we see the misery.  On the macro-level, however, we must recall that our society was built on the sanctity of civil contracts.  If borrowers are allowed to abrogate their responsibilities without consequence, then the system unravels.  If that happens we all suffer.  As we have written before, the first casualty is that credit disappears which can have serious implications for re-starting our economy.  This leads to bankruptcies, further increases in unemployment and ultimately, a declining GDP.  Precisely the opposite of what we need today to fix our economy. 

The most recent debate on the economy speaks to the government needing to borrow some $500 million.  It’s our opinion that it would be substantially more than that (we will write on this at a later date) but it is likely that after shifting some things around the public won’t see exactly how bad things really are. 

We must keep in mind that a number of companies are seeking to raise several hundred million for any number of projects in addition to the government’s need for funding.  It is the confidence in the local financial system that determines whether private or public projects could proceed.  Expected return on capital is what drives the system.  If investors don’t think they will be repaid, they would not lend to anyone including to the government.  We need only look at the Eurozone for examples of this.

Finding our way

At the heart of capitalism is deferred gratification.  We seem to have lost our way and need to urgently re-examine our priorities.  We have been living off our children’s future for far too long.  It must stop and it must stop now.  We seem to live in a “I want it now universe” – a “want” that must be satisfied irrespective of what the government or companies can afford.  The recent demands by some unions and other non-organized groups are good examples of that attitude.

We should never forget the fundamental economic principles upon which our economy is based.  Investments are made on the premise that they would yield a good return over the long term.  If institutions are not assured of getting paid, they would hoard cash and require insane amounts of security. 

If that happens, businesses can’t expand, new jobs cannot be created and young people cannot obtain financing for a home.  It is a business of trust.  Once that trust is broken, the system would freeze up and we all will suffer the dire consequences of a dysfunctional economy.  We must work diligently to prevent this outcome; we need to honor our obligations or at the very minimum, work collaboratively with our financial institutions to design and honor an appropriate re-worked financing plan.