worrell-sinckler

Dr. Mascoll Exposes the Central Bank

Dr. Clyde Mascoll

Dr. Clyde Mascoll

BU read Dr. Clyde Mascoll’s weekly column with great interest. The fact that it has not garnered any serious critique on the talk shows and on social media says a lot about our level of discernment.  An advantage over the traditional media is that we (social media) tell it like it is.

Last week the BLP member of parliament for St.James North Edmund Hinkson made the attention grabbing request for Minister Denis Lowe to repay the state the financial loss suffered as a result of his error in judgement concerning the NCC workers matter. To add to Hinkson’s call the BU household calls on the commercial banks of Barbados to redistribute the profit to customers collected as a result of the Governor of the Central Bank Delisle Worrell removal of the minimum savings rate commercials banks had to pay their customers.

Read Mascoll’s column to understand how one of the biggest scams in our post Independence history is being perpetrated on Barbadians. Now go and buy some savings bonds!

WHAT MATTERS MOST: The interest rate gap

CLYDE MASCOLL,

Added 20 October 2016

whatmattersmost-new

 THE LATE PROFESSOR Roland Craigwell once told me that “a man who has time to read is a dangerous man”. It was his way of emphasising the need to read almost everything in an area of study if you want to present your case.

Those words never stopped resonating with me. He reinforced the need to never go public with anything on the economy, unless I have verified the evidence. In this vein, I read all that I can on issues in the Barbados economy. This requires reading material from the distant past.

There are two issues that engaged me over the last weekend: (1) the increasing gap between loan rates and deposit rates, and (2) the ongoing printing of money that some still want to deny.

In its most recent economic press release, it was noted that the financing needs of the Government had widened the gap between the United States and Barbadian treasury bill rates.

The Central Bank attempted to narrow the gap by intervening in the treasury bill auction after the commercial banks were allowed to set the minimum deposit rate. The concern now is “since April 2015, commercial banks have lowered their deposit rates more substantially than their loan rates”.

First of all, why was the Central Bank trying to narrow the gap between the two rates? There is no good economic reason why the local treasury bill rate should mimic that of the United States.

Why should the widening interest rate spread surprise anyone? This caused me to read material from the past. Worrell (1997) identified powerful reasons why the Central Bank should lead on changes in interest rates. He suggested that “it is the most fully informed, being the repository of a wealth of data, producing the most comprehensive assessment of the economy and maintaining constant economic oversight”.

In analysing interest rate spreads in the past, he noted in periods of Central Bank regulation, they widened. He concluded that the Central Bank “was never able to persuade the banks to agree on narrower spreads and was wisely never willing to risk evasion by defying the banks’ wishes”. So what has changed to expect the banks to act differently now?

On the second issue, Worrell (1997) wrote that “the Central Bank of Barbados was concerned from its inception with the need to avoid money creation [printing of money] through lending to Government”. He also stated “there is no problem of excessive money if banks are happy to leave excess cash with the Central Bank at no interest rate, as they have for extended periods in countries that have stable exchange rates”.

There is evidence that the banks have been leaving excess cash with the Central Bank, which it is using to help finance Government spending. For example, Government needed $273 million in domestic financing between April and June. It received $92 million from the National Insurance Scheme and the private sector not including commercial banks. In fact, the banks reduced their lending to Government by $120 million over the quarter.

As a result, the Central Bank had to provide $301 million in financing to the Government. It did so by using the commercial banks’ additional deposits with the Central Bank of $198 million for the same period April to June. This means that the Central Bank had to print money to the tune of $103 million.

Why did the commercial banks reduce their lending to Government but still put additional deposits at the Central Bank? In the face of excess cash, there is still a problem with financing Government spending from domestic sources.

Why is the Central Bank holding $775 million in treasury bills and $592 million in debentures? The Central Bank is using the commercial banks’ deposits and the printing of money to purchase Government securities. Worrell (1997) also found that “in circumstances where banks were not actively seeking to employ excess cash, the Central Bank has never been able to effect a sale of bills by offering a more attractive return on them”.

In the current circumstances, the Central Bank has become too big a player in the treasury bill market and therefore the banks are prepared to take advantage of the low deposit rates. This is done by widening the spread, while the loan rates are slightly more attractive.

The Central Bank has tried to use monetary policy to accommodate fiscal madness. There is scope for monetary policy to support fiscal adjustment that is well thought out. It cannot correct fiscal adjustment that is inappropriate and insufficient.

• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email: clyde_mascoll@hotmail.com

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83 Comments on “Dr. Mascoll Exposes the Central Bank”

  1. Hal Austin October 23, 2016 at 9:36 AM #

    David,
    One economic failure of this government is its printing of money to pay civil servants’ salaries. QE is one of those policies that can b defined by who is doing the defining, like Humpty Dumpty.
    When first introduced by the Japanese, to curb their over-saving, the government gave cash to households expecting them to go out and spend, in a Keynesian manner; instead they saved the money.
    In Britain, something that I wrote very strongly against, the Bank of England used the money to buy gilts off insurance companies and banks, expecting them to then offer more funds to businesses and home buyers. Instead they built up their liquidity.
    I said, and was typically ignored, that the money should have gone towards a mortgage-lending mutual bank.
    For Barbados, I suggested that government should print money – not borrow from the Chinese – to rebuild the inner city, Nelson Street and its environs, complete with architecturally designed apartments, shops offices and recreational spaces, offering the present residents first refusals, then the young middle class professionals (all those coming out of university and still living with their parents and grand parents), and small craftspeople.
    I also suggested they should move the awful and grossly loss-making Transport Board out to St John (Four X Road), and rebuild that prime land with modern apartments, a leisure club, tennis, basketball and netball courts and include Weymouth as part of the plan. Four X Roads will become a new town with tax incentives to businesses to move there.
    One benefit will be to ease traffic heading in to town every morning.
    Funding will come, not from QE, but from off-plan sales of the apartments, through mortgages available from the mutual mortgage bank.
    In other words, the cost of this infrastructural development will be spread over generations and will benefit the whole nation.
    If Messrs Sinckler and Stuart want more of these ideas I will offer them for free, as part of my contribution to our independence anniversary.

    Like

  2. Dompey October 24, 2016 at 9:43 AM #

    William Skinner

    Here is the ironic thing about our educational system: the Minister of Financial and Economic Affairs the Hon. Christopher Sinckler, took the Common Entry Examination and ended up at the Garrison, and many of his classmates took the same examination and ended up at schools of national reputation like Harrison College, Lodge and Combermere etc. And after Mr. Sinkler completed his secondary and tertiary education, he ended up at the UWI lecturing to the same classmates who attended: Harrison College, Lodge and Combermere etc. Piece, how did this happened?

    Like

  3. Dompey October 24, 2016 at 9:53 AM #

    Piece

    Thumbs up for the Barbadian educational system. Boy when someone attends a secondary rated school and ends up lecturing to students who attended secondary schools of national reputation it speaks volums of our educational system .👌👌👌👌👌👌👌👌👌

    Like

  4. William Skinner October 24, 2016 at 2:19 PM #

    The Wild Coot column in today’s nation
    should be a very informative piece as to how
    the Barbados economy was undermined by
    Barbados Shipping and Trading.

    Like

  5. millertheanunnaki October 25, 2016 at 5:09 PM #

    @David (BU):

    Do you have access to the load of bullshit the Guv of the CB has delivered as a report on the Qtr. 3 economic performance?

    What is the country’s foreign reserves position?

    Like

  6. David October 25, 2016 at 6:05 PM #

    @Miller

    Will post the PDF shortly. You need to respect the Guv’s review!

    On Tue, Oct 25, 2016 at 9:09 PM, Barbados Underground wrote:

    >

    Like

  7. abajanhowe November 3, 2016 at 10:55 AM #

    Here is an excerpt from another news media that has relevance to BU readers.

    “BANKS are Broke, Central Banks are Criminal Organizations and the Taxpayers are being taken for a ride of their lifetime (and your children’s and their children’s lifetime)!

    However, the system is so all-encompassing that nothing printed and/or otherwise told would make much of a difference — unless people rise up en masse. Ain’t going to happen! Remember, money replaced the chains.

    Everytime a Central Bank prints money, it is doing something that YOU would be arrested for (counterfeiting), and for a long time…but they get to be the top GANGSTERS. I am sure you remember your Central Bank in Barbados RECENTLY printing over $114,000,000 (so they say). You’ll never see that money. And if it’s PRINTED it has to be accounted for and repaid — and guess who is there to wipe up the mess — YOU, the taxpayers.
    As you can see, every now and again, the news media this extract was taken from moves away from the salacious blogs to post things that are exceedingly important. All things are important and all IN-FORM-ATION should be used as tools to pull thoughts together cohesively.
    It’s time to stop being afraid. That’s what I say!”

    Like

  8. millertheanunnaki November 3, 2016 at 12:13 PM #

    @ David October 25, 2016 at 6:05 PM #

    Respect my donkey! Why should the statements made by a liar be accepted as the Truth?

    Academic, intellectual and professional respect has to be earned not demanded.

    Until he provides a proper account of the missing $300 million in foreign reserves nothing should be taken as valid from that source.

    What would you call the continuing printing of money where there is no corresponding economic production or output?

    Isn’t it a case of saddling innocent future generations with financial burdens they will not be benefiting from?

    Can you explain how the spending by visitors in the local economy can increase ‘significantly’ but the foreign reserves are regressing? What massive capital works programmes are in train to account for this on-going decline?

    Like

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