On too big to fail and subsidies
During the financial meltdown in Europe and North America, one phrase we read in magazines such as The Economist, was “too big to fail”, meaning that some institutions, especially banks, were too important to be left to their fate.
The most important institution in the United Kingdom, which was facing bankruptcy, was the Royal Bank of Scotland. The UK government took all the measures necessary and brought back to life Scotland’s flagship financial institution. It was too big or important to fail.
This in Malawi is the case with Malawi Savings Bank (MSB). When it was known as Post Office Savings Bank (POSB), this bank was responsible for educating the whole country’s masses about the advantages of entrusting their personal money to it instead of burying it under a floor or stacking it in the roof. Wherever there was a postal service however, remote, there was savings bank service. This service is still indispensable as far as the ordinary citizens of the country are concerned who cannot easily travel to the main centres of commercial activities and where purely commercial banks are found.
A month or so ago, some of us got alarmed with the news that MSB was unable to collect billions of kwacha from its clients. John Maynard Keynes once made a lapidary statement. If you owe a bank one thousand pounds, you are at its mercy, if you owe it one million pounds the bank is at your mercy. Why this paradoxical phrasing?
If the public learns that a bank is failing to collect one thousand pounds from its client, they would not bother. If they learn that a bank is failing to recover billions, they fear that it has wasted their money and is unlikely to honour cheques and withdrawals. Unless the bad news is countered at once, there will be a run on the bank. Most clients will try to withdraw their money before their bank is closed. The closure of a major bank has repercussions throughout the financial sector. Nay, throughout the economy.
From some news items we learned that the Minister of Finance had confessed that government was unable to rescue the ailing MSB. In other news items, we learned that Governor of Reserve Bank of Malawi (RBM) would easily close MSB. We believed this remembering that he had just written a death certificate for an insurance company.
It was heartening to read part of the press statement issued by chief executive officer of MSB that there was no cause for public alarm since MSB is being recapitalised from private sector sources.
The statement “there should be no cause for alarm having had similar share dilution processes before that have involved other banks” raises some curiosity.
How far will this share dilution go? MSB is, in a sense, in a category similar to that of the RBM in that it is an instrument of monetary and social policy. While profitability is its goal, social welfare is also its foremost concern.
Subsidy on production is preferable if it enables people to produce commodities that they can sell and earn more money. They can then use that money to exercise their freedom of choice, either to build houses or to buy car or to invest in the business and expand it.
For people in rural areas, priority should be given to subsidising rural industries that will generate unprecedented incomes. It will be up to them what to do with that money. While some may wish to spend the money on countryside bungalows, others may give college education for their children. Any further subsidies government contemplates should be concomitant with the policy of agriculture and economic diversification.
The extent to which poor people will avail themselves of the subsidised cement and iron sheets will depend on whether they have the minimum capital or energy to mould bricks. Unless safeguards are put in place, these subsidised materials might be bought mostly by rich people who otherwise can easily afford the materials at the market price. This would frustrate the policy.
