Analysis of the Current Economic  Meltdown.

By Yankuba Mamburay

Someone once posed the question to me: “The news is all over about people losing all their moneys; that companies are collapsing and the stock markets keep sinking. If people have so much money and they have not withdrawn it, where does all the money go? In that case someone must be collecting the money somewhere," he said. This is a valid question that most of us silently ask ourselves all the time.

However, in nowadays economies, especially those that are as advanced as the United States, our deposits and investments are channeled through so many instruments. Prominent among these is the stock market where the shares of various companies are traded in on a daily basis. Most of the people who own investment portfolios such as 401K do not have a clue as to who manages such funds for them in the first place, more so where the funds are invested. Most do not have an idea that they can have a say about how and where that money is invested. Or even if they do, they might not be equipped with the sophistication of knowing which area of investment is best for them. This does not apply to us only, Gambians and other foreign nationals; it does apply to people born, bread, and educated here in the United States and other highly industrialized nations.

Alluding to the question posed in the headline: where all the money has gone, I would like to note that some of these earnings/incomes are fictitious; they are mere projections of expected amounts of money to be made in the future. Such projections are used to gauge our wealth as reflected in our 401ks, stocks, etc. Therefore, if expectations are not realized, what do we get? The values of our investments in the forms of stocks and 401ks, and other financial instruments, will go down, thus accounting for losses we incur. In worst-case scenarios the principal amount of the investment might be lost. The most recent example of how such expectations play out came last Monday, when Bank of America announced earnings of up to $4.2 billion in the first quarter of the year. Instead of positively responding to this hike in profits, investors did not buy the story as real, based on the circumstances, and their unusual negative reaction served as the catalyst for the Dow Jones Industrial Average to plunge by up to 289.60 points, 3.56%. The “after-shock” of the Dow’s tumble was felt the following day in Hong Kong and Japan, where the Hang Seng and the Nikkei indices plummeted by 465.02 (2.95%) and 213.42 (2.39%), respectively.

This phenomenon got out of control when some banks, out of greed and overconfidence, started lending almost $30.00 out of every $1.00 of their customers’ deposits. This way, they (the banks) are lending what they do not have. They in turn resort to borrowing so they could continue to generate more and more loans so as to make more and more profits. However when borrowers started defaulting, so did the banks, and the general level of spending started going down. Gradually almost all the sectors of the world economies started feeling the pinch. Demand for houses, for example, started going down. Most of us, if not all, know that lower demand, especially when coupled with higher supply, leads to lower prices. The prices of houses started plummeting. Some commodities are exceptions to this as lower lending led to lower production, lower supply and higher prices. Space will not allow us to elaborate on this in this piece. Going back to our earlier point about lower housing prices, the stock markets started responding negatively. Stock market performance is generally a measure of investors’ expectation or level of confidence in the economy. Investors tend to hold unto their moneys tight and refuse to invest in the market when confidence or expectation levels are low. In fact, a lot of people are now resorting to traditional savings and failing to invest in the stock markets due to lower confidence in the economies.

At this juncture, I would like to draw a simple analogy, regarding whether governments should resort to more regulation or deregulation. In banking there is a concept called required reserve. Most of us are familiar with this concept. In The Gambia, as in most countries, it is the duty of the central bank to require all banks to abide by their required reserve ratio, which is the proportion of a bank’s total deposit that it must keep with the Central Bank. Experience has shown that banks can extend a large proportion of their total deposits as loans or investments, knowing that all customers would not withdraw all their moneys at the same time. The question now arises: do we go for more regulation or more deregulation? If we deregulate do we aspire to have a 100% non-regulatory, totally free, laissez-faire, market enterprise economy? Free market economy is an idea advocated by the great economist, Adam Smith, also known as the father of modern economics. However most readers, especially students of economics, are attuned to the term ceteris paribus (other things being equal). Whenever great economists make fundamental statements, such statements are usually accentuated by this.

From the aforementioned point I would assume that even great economists like Adam Smith would have said, “ceteris paribus (other things staying constant - with no changes in circumstances) we should let the forces of the market determine everything. This includes the banks' ability to respond to demand and give out unlimited amount of loans, regardless of their levels of deposits. However, how about when things do not seem to be going as expected? In fact, all things do not stay the same at all times. This is where regulation helps. If there was an overseer who ensured that there were checks and balances the problems that the world economies found themselves in today might not be this catastrophic. This is my fervent belief and that is why I espouse for a middle-of-the-road approach – some regulation but not total regulation. Excess in everything is not good.

Yankuba Mamburay is the author of the non-fiction book, “The Search for a Lost Brother.”