Sunday, September 28, 2008

Comparing Jamaica's 1990 crisis to the US

Recently I have been asked questions, from various persons, about what comparisons are there

between Jamaica's 1990 financial crisis and the current US financial crisis. And this is understandable, because for us in Jamaica it seems like déjà vu.

There is no doubt that the current crisis in the US is of grave concern for the world, as any mishandling of the situation could lead to devastating consequences for the global economy. It is therefore very important for this proposed bail out plan to be handled properly, as the US unlike Jamaica, cannot afford room for any mistakes, as the global consequences are too significant.

On the one hand, while the Fed and Treasury is proposing this US$700 billion “bail out”, the Congress is very carefully considering the details of the plan, as they are all about protecting the taxpayers' interest and ensuring that in the long run cost to the taxpayer is not significant, if there is any cost at all.

There is no argument that some intervention is necessary by the US government, just as intervention was necessary in the 1990s in Jamaica, but the manner in which it is executed is very important, as it could affect the long term viability of the economy and the ultimate cost to the taxpayer.

The following table provides a brief comparison of Jamaica's 1990s crisis versus the current US crisis.


These are some of the main differences between Jamaica's financial crisis and the one in the US. In both cases they are the worst economic shock as far as I can remember that has happened to both economies.

While in both cases the bail out was necessary, there is a fundamental difference in approach. It is clear that behind the philosophy in the US is the need to stabilize the markets but not to interfere by government acquisitions. In our case our philosophy was to stop the crisis by talking over the entities, but what we ended up doing is creating a greater burden on the economy, as the bail out package as a percentage of GDP was too great, and created a significant fiscal challenge. In addition the fact that government took over the productive sector and left interest rates high meant that the productive sector was effectively killed, and it was more attractive to invest in high yielding government paper.

It has been more than 10 years now that our crisis has occurred, and hindsight will show us that we could have approached some things differently. It is very important for us though to properly study the situation and provide some answers to the taxpayers who have paid dearly for the crisis, and for us to understand if the process was handled in the best interest of the taxpayers. The borrowers of course cannot wash their hands clean though as the business practices in some instances were wanting, and would have had an effect on the results.

There is no doubt that some bail out was necessary but we must try to understand what happened if we are to learn from it and silence the critics on either side. This is why a comprehensive study is necessary if we are to learn, even if more than a decade later.

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