THE INCONTROVERTIBLE HIGH-INTEREST-RATE FALLACIES

PART II

THE INCONTROVERTIBLE

HIGH-INTEREST-RATE FALLACIES

by Mar Tecson




WHY IMF'S HIGH-INTEREST-RATE

PRESCRIPTION WAS ECONOMIC FOLLY—

NOT WISDOM--IN THE ASIAN MELTDOWN:

IT WAS EITHER (1) THE MEANS OF THE

PROPOUNDED IMF GRAND DECEPTION

ON THE TRUE OBJECTIVE OF HIGH

INTEREST RATES IN THE CRISIS, OR

(2) IT COULD HAVE BEEN THE PRODUCT

OF IMF'S GROSS IGNORANCE OF

HIGH-INTEREST-RATE FALLACIES

AND ALTERNATIVES--RESULTING IN

A DISASTROUS BUT USELESS AND

AVOIDABLE BUT NOT AVOIDED

ECONOMIC SCOURGE


Raising of interest rates in moderate amounts, like fraction of one percent as done in the United States and elsewhere, maybe an economic wisdom--though it is still a mild subsidy scheme--but it is not what I meant in my writings. I refer to IMF's high-interest-rate prescription of as much as 30% to 60% during economic turbulences. It is a big hoax, fraud, farce, or folly in economic crisis because it is not what IMF represented it to be. It may simply be the product of IMF's gross ignorance of what its high-interest-rate solution is really all about, as follows: (1) it produces intolerable side effects, (2) it exacts supreme sacrifices for nothing, and (3) while it is disastrous it is avoidable--yet not avoided--and it deceives the public as it is not a necessary evil because there are less disastrous alternatives.




A. IMF'S HIGH-INTEREST-RATE CURE

PRODUCES INTOLERABLE SIDE EFFECTS—

A CLASSIC CASE OF SOLVING A PROBLEM

BY CREATING ANOTHER AND MUCH

BIGGER PROBLEM


The high-interest-rate antidote activates unbearable SUBSIDY by borrowers to non-borrowers, orchestrated by institutions responsible for past abolition of pro-poor subsidies in developing countries (pp. 29-32, 97-102). As such subsidy scheme, it violates free market (pp. 38-39, 53). It sabotages poverty alleviation programs of governments, non-government organizations, the World Bank, Asian Development Bank, and even IMF itself--by WORSENING the ECONOMIC CRISIS through curtailed investments, borrowers' loan defaults, banks' bad loans, closure and downsizing of many businesses, and rampant loss of jobs. It DAMPENS the EXPORT MARKETS of advanced IMF-member nations, like the United States, Japan, Great Britain, and others—the ripple effect of worsened economic crisis and greatly reduced purchasing power of depreciated currencies of crisis-hit countries. It increases and makes imperative requested foreign aid or BAILOUT FUNDS from IMF and its benefactor-countries, as exemplified by the reported $18 billion US contribution to IMF and the $30 billion Miyazawa assistance fund from Japan during the Asian conflagration.





(1) Through High Interest Rates,

IMF Provoked Massive Loan Defaults

and BAD LOANS in the Asian Crisis


From the regional magazine Asiaweek and the Internet, and as quoted from page 59 of the cited book, bad loans were what ailed the banking systems of the crisis-stricken Asian nations:


Indonesia: problem loans--75% of total loans as of 1999; required bank recapitalization--$90 billion (Don Roper, "Indebtedness and Turbulence in Indonesia," as posted to the Internet as of 2002).


Thailand: problem loans--42% of total as of November 1999; bad loans--$63 billion (Wayne Arnold, "Fewer Bad Loans in Thailand," New York Times, December 30, 1999, as posted to the Internet as of 2002).


South Korea: problem loans--30% of total by end 1999; required bank recapitalization--$50 billion ("How East Asia is tackling banking ills," Asiaweek, July 31, 1998 issue, p. 49).


Malaysia: problem loans--30% of total by early 2000; required bank recapitalization--$15 billion ("How East Asia is tackling banking ills," Asiaweek, July 31, 1998 issue, p. 49).


Philippines: problem loans--31% as of 2001 and 36% as of 2002; bad loans--$9 billion as of 2001 and $11 billion as of 2002 (BSP website as of 2001 and Manila Bulletin, October 24, 2002, p. 1).


If 1990 Nobel laureate in economics Dr. Merton Miller, who spoke before the Asia Society in Hong Kong in January 1998 ("Asia wrong to raise interest vs. speculation," Manila Bulletin, January 20, 1998), as well as 2001 Nobel prize winner in economics Dr. Joseph Stiglitz, could anticipate early on, got alarmed over what was bound to happen, and blew the whistle on the impending staggering BAD LOANS from IMF-prescribed high interest rates, why couldn't learned IMF officials similarly anticipate and fathom the gravity of the impending loan-default and bad-loan problems, so that they could have avoided or minimized the bad-loan carnage that ensued in affected Asian economies?

As it turned out, both banks and borrowers of crisis-stricken Asian countries never had a chance. They did not know that they were mere SACRIFICIAL LAMBS in IMF's grand design of saving DOLLAR-DEBT-RIDDEN Asian companies from huge exchange losses and consequent loan defaults--in order to spare in turn from corresponding bad loans their FOREIGN CREDITORS in advanced nations that dominate IMF—and let Asian banks and borrowers be hanged!




(2) Through High Interest Rates,

IMF Operated its Own Disgraceful

and Back-Breaking SUBSIDY Scheme

in Past Economic Crises—Resulting

in UNJUST TAXATION of Borrowers


The high-interest-rate subsidy proposition, treated in detail in the cited book, is briefly stated as follows:


The high-interest-rate economic solution, aimed at tightening money supply, defending the local currency against speculative attacks, stabilizing the exchange rate, curbing currency depreciation, and ultimately containing inflation for the benefit of the nation--composed of borrowers and non-borrowers--is a SUBSIDY SCHEME, because, under it, borrowers shoulder exclusively the cost of the solution that inures to the benefit of both borrowers and non-borrowers, thereby having paying borrowers subsidize non-paying but equally benefiting non-borrowers.


In the Asian crisis, IMF and central banks committed the unthinkable error of having a discriminated few shoulder the burden of all. They compelled a relatively few borrowers to shoulder the responsibility of the nation. They activated an ultra subsidy scheme of mind-boggling proportions that shook banking systems by way of resulting unprecedented loan defaults and bad loans, which now call for multi-billion-dollar banking industry recapitalization. As applied to the Philippines, this meant an estimated THREE MILLION BORROWERS, or roughly 4% of total population, financing the cost of solving the economic crisis for the benefit of 76 MILLION Filipinos. How IMF and central bank economists ever thought that such a discriminatory and irrational scheme is a valid solution to an acute economic crisis is beyond comprehension.



Among other evil things, the high-interest-rate SUBSIDY scheme equates to UNJUST TAXATION of borrowers. As the INCREASE in interest rates is NO longer COST of USING BORROWED MONEY but cost of tightening money supply, stabilizing the exchange rate, curbing currency depreciation, and ultimately CONTAINING INFLATION, it is a PUBLIC EXPENDITURE that should be financed by TAXES or other funds emanating from the entire benefiting NATION. Having the BORROWING SECTOR alone shoulder a public expenditure aimed at solving a NATIONAL economic crisis constitutes UNFAIR EXACTION of FUNDS from borrowers, a subtle case of UNJUST TAXATION (p. 36).




(3) Through High Interest Rates,

IMF Impaired the Borrowers' FINANCIAL

CAPACITY to Repay Bank Loans, to the

Detriment of Both Borrowers and Banks


The currently raging global financial meltdown that erupted in 2008 showed the dire consequences of borrowers' mass inability to repay their loans. However, if IMF officials and economists were competent, they need not actually see the present meltdown to know the evil implications of hurting the entire borrowing sector. Thus, it was astounding why, in the 1997-1998 Asian crisis, IMF itself intentionally or knowingly orchestrated through high interest rates the impairment of the borrowing sector's financial capacity to repay bank loans, with concomitant impoverishing burden to borrowers and destabilizing bad loans to banks--due mainly to the fault of IMF.



Anybody with enough common sense and financial savvy would not have done it, but IMF, the central bank of central banks, did it in the past crisis--protecting the central-bank-supervised banking system by fallaciously impairing, through high interest rates, the financial capacity of the source of its stability, the de facto custodian of depositors' money by way of bank loans—the all-important borrowing sector. IMF terribly missed the point that to protect banks holding empty bags, it had to protect borrowers to which bulk of the banking
system's money flowed earlier through bank loans. In effect, IMF was not smart enough to realize that harming borrowers meant harming banks.




THE PAYING ABILITY OF BORROWERS IS THE FOUNDATION OF STRENGTH OF THE BANKING SYSTEM (p. vi of cited book). No amount of reforms in banks will work if borrowers cannot religiously repay heir loans. Hence, borrowers have to be held inviolate and insulated from economic convulsion so that they can amortize their loans even during hard times. In defiance of this common-sense and rational wisdom, in the handling of economic crisis and protection of banks, IMF and central banks committed the gross tactical error of intentionally saddling borrowers with bad-loan provoking high interest rates (pp. 33, 59-60). In response to IMF's 60% high-interest-rate prescription, the Philippine central bank adopted 30% "middle ground" interest rate that peaked at 41% or higher. The result was of course economic-drag bad loans in the Philippine banking system from its abnormally HIGHEST LENDING RATES in the region--instituted in dutiful compliance to IMF, surpassed only by those in Indonesia, which eventually succumbed to IMF's ultra high-interest-rate cure of as much as 65% as apparent quid pro quo for $42 billion IMF bailout fund.



(4) Through High Interest Rates,

IMF Made a Mockery of IMF-Member

Nations' Justice System by REWARDING

GUILTY Economic-Saboteur

Dollar-Speculating Banks With High

Interest Rates and Correspondingly

PUNISHING INNOCENT Productive

Entrepreneur-Borrowers


IMF's and central banks' high-interest-rate solution made a mockery of IMF-member nations' justice system and added insult to injury of borrowers. In the Philippines, just because a few of the 40 or so COMMERCIAL BANKS under direct central bank supervision were indulging in economic-sabotage dollar speculation, THREE MILLION BORROWERS had to pay high interest rates to the economic-saboteur themselves just to discourage them from their destructive act! By rewarding guilty banks with high interest rates for their past acts of economic sabotage, IMF made crime pay. Worse, through the same high interest rates, it severely punished innocent borrowers--instead of simply having the central bank do the equitable, the obvious, and the less disastrous: running all-out after dollar-speculating banks for violation of long standing central bank regulations, as was successfully done by BSP in August 2001 and March 2003 even without high interest rates.


Were IMF and central banks so incapable, or so beholden to misguided free market, that they would not know how to properly deal with a relatively few DOLLAR-SPECULATING ECONOMIC-SABOTEUR BANKS--at the expense of productive entrepreneur-borrowers and the entire economy? IMF and central banks must realize that economic-saboteur currency speculators, who destroy free market by way of their "extramarket" manipulative acts, do not deserve gentle free-market indirect control treatment in the guise of high interest rates. Rather, they must be given a dose of their own medicine--stiff "extramarket" direct control measures, in the form principally of severe punishment for their speculative acts inimical to public interests (p. 103).




(5) Through High Interest Rates,

IMF Violated FREE MARKET—

Causing Injury to Both Transacting

Parties, Borrowers and Banks


Just what is IMF's definition of (free) market rate that it wantonly violated it in the Asian crisis? Market rate is a product of the meeting of minds of transacting parties. During the crisis, the new high interest rates--raised from about 14% non-prime rate to as much as 41% in the Philippines--were not product of market forces. These were the direct result of IMF's and central banks' drastic manipulation and disturbance of the market through their tight-money measures, like increase in bank reserves and key policy rates. Borrowers never agreed to IMF's high-interest-rate prescription. It was priced out of the market--that is, beyond free market rate—as evidenced by borrowers' inability to pay subsequent loan amortization. Many of them rallied against it in Mindanao (southern Philippines) in first quarter 1998, while others sued banks and their lawsuits are still under ongoing litigation.


Unfortunately for those with existing loans as of the onset of crisis, they became captive borrowers who could not avoid high interest rates because they could not prepay or return their loans, the proceeds of which were already invested or spent. They were then under compulsion to accept the banks' unilaterally set high interest rates, thereby removing from them a basic element of free market—FREE CHOICE. The high interest rates likewise lacked another element of free market—AFFORDABILITY on the part of borrowers. There will be no market price that evolved from market forces through mutual agreement by buyer and seller if the buyer cannot afford the price set by the seller. Without enough money to pay, the buyer will simply opt out of the transaction.


As applied to the monetary system, there would be no loan transactions to speak of if right at the start borrowers knew that they would be required to pay interest charges at unaffordable rates of as much as 30% to 65%. Giving set-up borrowers no choice but pay unaffordable and impoverishing high interest rates during crisis is an out-and-out economic TYRANNY--courtesy of IMF--that has no place in a really free market under a democratic society.


The proof that IMF-prescribed 65% ultra high interest rate was not free market rate maybe further gathered from the fact that left to themselves, banks and borrowers did not--and would not--come up with such ridiculously high rate, which was way beyond what the market could bear. If it popped out in the Asian crisis, it was simply because IMF, through central banks under its sway, intentionally destroyed free market by means of tight-money measures, thereby giving rise to the 65% ultra high interest rate in Indonesia that was not the product of market forces. Apparently, this ultra high rate was rammed down the throats of our brother Indonesians, otherwise they could kiss IMF's $42 billion bailout fund a tearful good-bye.





(6) Through Discriminatory, Confiscatory,

and Tyrannical High Interest Rates, IMF

Committed Mass VIOLATION of Borrowers'

HUMAN RIGHTS


Article 7 of the Universal Declaration of Human Rights, proclaimed by the United Nations on December 10, 1948, reads in part: "All are equal before the law and are entitled without any DISCRIMINATION to equal protection of the law. All are entitled to equal protection against any discrimination in violation of this Declaration…." On the other hand, the second item of its Article 17 provides as follows: "No one shall be arbitrarily of his PROPERTY."


IMF's high-interest-rate prescription was DISCRIMINATORY to borrowers. It compelled them, a small part of the nation--4% in the Philippines—to shoulder exclusively the obligation of the much bigger and more capable entire nation in the stabilization of exchange rate and curbing of inflation during the Asian crisis.


Further, IMF's high-interest-rate cure arbitrarily deprived borrowers of their property. With CONFISCATORY high interest rates beyond their capacity to pay, many of them PAID high interest expense NO LONGER out of PROFITS--which many of them did not have--but out of their OWN cash, a form of ASSET or property sourced from their equity investments or business CAPITAL. Thereafter, with ensuing borrowers' loan defaults due to high interest rates, their loan collateral or mortgaged assets were eventually foreclosed, resulting in an even worse case of deprivation of property. In both cases, their deprivation of property was ARBITRARY because its proximate cause--high interest rate--was discretionary to IMF and central banks. They could have avoided it as they did not have to pursue tight monetary policy under the automatic tight-money situation of economic crisis. Moreover, even if they did so, they could have done it without high interest rates because there were less disastrous alternatives.


By opting for high interest rates in the pursuit of tight monetary policy, IMF and central banks automatically condemned into a form of INVOLUNTARY SERVITUDE the captive Asian borrowers. Because their loan proceeds were already invested or spent, they could no longer back out from their suddenly high-interest-incurring loans subjected to drastic interest-rate escalation under a floating interest rate system. In contrast, in advanced nations like the United States, low interest rates at the contracting of the loans are fixed for the entire long-term duration of the loans, which can reach up to 30 years, therefore IMF-prescribed high interest rates might have been pardonable if instituted in the United States but not in developing nations. In the Asian crisis, owing to drastically escalated local interest rates, captive borrowers had to work harder just to earn more and pay against their will the unconscionable INCREASE in INTEREST RATES unilaterally set by banks—NO LONGER COST of BORROWED MONEY for the borrowers' business but COST of PURSUING the central bank's GOVERNMENTAL FUNCTION of stabilizing the exchange rate--with nothing left out of the borrowers' labor once they are in a net loss position in their business, otherwise their collateral would be foreclosed. In effect, in the Asian crisis, they were subjected to a subtle form of SLAVERY or forced servitude against the spirit and broad words of Article 4 of the Universal Declaration of Human Rights, to the effect that "SLAVERY...shall be prohibited in all forms."






B. IMF'S HIGH-INTEREST-RATE

SOLUTION EXACTS SUPREME

SACRIFICES FOR NOTHING!

IF SO, WHAT IS IT IF NOT A BIG HOAX?





(1) Pointless Pursuit of TIGHT MONETARY

POLICY Under Impending or Already Existing

Tight-Money Conditions of the Economic Crisis



One of the major issues against IMF and central banks was their thoughtless pursuit of tight monetary policy under the unsuitable conditions of the Asian crisis. In other words, even in the midst of a severe economic crisis, it did not follow that tight monetary policy had to be pursued through usual tight-money measures. Other causes could also provoke tight-money situation, and if such was already the case, why compound it at the expense of the economy? IMF's and BSP's pursuit of tight monetary policy during the crisis was a most basic and monumental error because it constituted a reckless, disastrous, and USELESS application of OVERDOSED antidote to the crisis. It was in BLIND DISREGARD of major EVENTS that took place right from the start of turbulence, as a result of which events TIGHT-MONEY CONDITONS could be anticipated in the economy, WITH or WITHOUT tight monetary policy. From this unthinkable miscalculation evolved high interest rates and other errors that reduced many borrowers and their workers to penury and drove the economy to the path of recession.



The stimulating EVENTS and resulting tight-money conditions that rendered tight monetary policy superfluous in the Asian crisis were as follows:



(a) Already drained liquidity in the economy brought about by massive CAPITAL FLIGHT, including cut off of banking credits, totaling $203 BILLION in the five crisis-hit Asian countries—Thailand, South Korea, Malaysia, Indonesia, and the Philippines—as divulged by World Bank Vice President for Asia-Pacific Jean-Michel Severino (Ricky Carandang, "WB exec blames rapid globalization for depression seen in Asia-Pacific," Marketwatch, July 15-August 14, 1998 issue, p. 9); as IMF could not fill with enough bailout funds the VOID left by the staggering capital flight, the drained liquidity was real, hence the United States had to earmark $18 BILLION quota contribution to IMF while Japan had to supplement with $30 BILLION Miyazawa fund the limited IMF bailout funds, to resuscitate the dehydrated Asian economies ("Peso strengthens to 4-month high," Philippine Daily Inquirer, October 29, 1998, p. B1).



(b) Tight cash position of banks due to the resulting "MATURITIES MISMATCH" in the banking system, or the sudden withdrawal of scared short-term foreign funds that fled to safe investment havens upon the outbreak of crisis, when these volatile funds had been lent out on long-term or renewable basis by the banks, as admitted by Alassane Quattara, IMF Deputy Managing Director, in a speech entitled "Globalization, Lessons from the Asian Crisis and Central Bank Policies" in Ottawa, Canada on June 23, 1998.



Clearly, the banks' acute need for replacement funds that would take care of "MATURITY MISMATCHES" from capital flight unfolded before the eyes of IMF and central bank authorities and was duly noticed by them. Incredibly, the glaring LOGICAL IMPLICATIONS of this economic EVENT—automatic tight money supply and consequent SUPERFLUITY of TIGHT-MONEY POLICY—escaped the best minds of IMF and central banks. They fiercely pursued fallaciously their misguided tight monetary policy, especially during the early stage of the regional crisis.



(c) LACK of INFLATIONARY BUILD-UP of MONEY SUPPLY in the economy owing to practically ZERO VELOCITY, or negligible flow, of money from BANKS to BORROWERS then to the SPENDING PUBLIC as a result of the halt or severe slump in borrowing and lending (p. 205) spawned by the economic crisis, as experienced in the Philippines through the contraction of banking industry aggregate lending from PhP1.4 trillion as of the early stage of the crisis to PhP1.3 trillion by mid-1999 (p. 151). Once this CONDITION prevailed, which started right from the advent of crisis, TIGHT MONETARY POLICY became a costly but USELESS exercise, at the expense of borrowers who were made to SACRIFICE for NOTHING by IMF.





(2) The VALIDITY of IMF's High-Interest-Rate

Solution is Questionable


With all due respect to IMF and central bank authorities responsible for ultra high interest rate of 60% or more in countries severely hit by political-economic turmoil, the validity of the ultra high-interest-rate solution is hereby questioned. This solution appeared to be a big hoax, fraud, farce, or folly. It did not solve the political-economic crisis in Indonesia in 1998 and in the Philippines in 1984-1985. Attributing to very high interest rates the recovery of Mexico from economic chaos in 1994-1995 is not conclusive (pp. 26-27). In that easier-to-finance isolated case of crisis compared to the much bigger Asian conflagration, IMF and the United States government promptly pumped in $50 billion bailout fund (Alejandro Reyes, "Latin Lessons for Asia," Asiaweek, May 1, 1998, p. 58), which calmed down the market and restored investor confidence in the country. Without that $50 billion fund assistance, high interest rates would have been useless in solving the Mexican crisis. With it, high interest rates were unnecessary.

As revealed by former BSP Governor Gabriel Singson in his TV interview on October 24, 2000 (pp. 67, 76 of cited book), IMF prescribed 60% ultra high-interest-rate to the Philippines at the advent of the Asian meltdown in mid-1997. If so, why would IMF recklessly prescribe such catastrophic rate even to the Philippines, which, at the onset of crisis, had strong economic fundamentals and in fact was about to exit from the IMF program? Was IMF so bankrupt of ideas that it could not address the Asian crisis without such economic-scourge high interest rate? How did it conclude that the taken-for-granted high-interest-rate prescription is an efficacious economic solution to begin with?


Indeed, the question has to be reiterated for the enlightenment of aggrieved IMF-member nations, especially Indonesia and the Philippines, that were apparently misled by IMF's utterly illogical and unsound high-interest-rate prescription: Just how does the high-interest-rate solution attain its objectives during economic crisis? We need the forthright answer to this question so that, for the sake of borrowing sectors and entire economies of unsuspecting IMF-member nations, IMF's high-interest-rate solution can be thoroughly scrutinized, word for word if need be—because it is a surefire formula for disastrous loan defaults to borrowers and destabilizing bad loans to banks that create bigger and more lasting economic problems, yet it appears to be a monumental fallacy. It simply does not achieve its objectives because, as Dr. Joseph Stiglitz also said, the economic conditions under which it can function have ceased to exist under the drastically changed and agitated economy. The detailed substantiation of this conclusion--apparently not fully presented in Dr. Stiglitz's writings—is provided in the cited book and is precisely one of the reasons that differentiate it from the existing wealth of literature on the Asian crisis.



(3) IMF Grievously Erred When it

Prescribed 60% ULTRA HIGH INTEREST

RATE in Acute Economic Crisis—Because it Was

Anchored on the Monumentally Erroneous

Premise that the Need for High Interest Rates

is DIRECTLY--Not INVERSELY--Proportional

to the Severity of Economic Crisis, Thereby

Resulting in SUPERFLUOUS and Therefore

USELESS High Interest Rates


The extremely BAD ECONOMICS or economic folly of the ultra high-interest-rate economic prescription springs from its implied monumentally erroneous premise that the need for high interest rates is directly proportional to the severity of economic crisis, that is, the more severe the crisis, the more need for higher interest rates--as in the case of the 65% ultra high interest rate in Indonesia when it went through the fit of combined political-economic convulsion in 1998.


On the contrary, the reverse is true—that the need for high interest rates, if at all, is inversely proportional to the intensity of turbulence. In a situation of ultra economic crisis, especially if attended to by political turbulence or threat of civil war, other economic factors—such as mass capital flight and more pronounced slump in borrowing and lending—come into greater play and diminish much more the role of high interest rates, through automatically constricting more severely the existing money supply and thereby rendering more superfluous and useless the tight-money-measure high interest rates.

The really serious economic ailment, characterized by combined political-economic upheaval, which could escalate to civil war and spawn riots, bloodshed, plunder, burning of bank records evidencing foreign fund placements, ransacking of bank vaults, and total loss of foreign funds under the care of banks and non-bank companies where these funds were invested, was an economic factor that only undiscerning IMF and central bank authorities would ignore at the expense of captive borrowers. Even without ultra high interest rates, who among investor-borrowers would want to borrow and invest, and who among foreign fund managers would dare maintain their foreign funds, under the uncertainties and frightening possibilities of public disorder or civil war?

As discussed further herein later, high interest rates are superfluous and unnecessary in TIGHTENING MONEY SUPLY because massive capital flight and severe slump in borrowing and lending will automatically tighten it. High interest rates will likewise be useless in restoring INVESTOR CONFIDENCE or STOPPING CAPITAL FLIGHT because it is not a question of profitability, it is a matter of SAFETY of the entire PRINCIPAL funds. Not even very high interest rates can stop capital flight if the risk of total loss of funds is so high from the demoralizing political-economic turmoil. This was eloquently shown in Indonesia in 1998 when, despite 51% time deposit rate, "Indonesia has not attracted any significant portfolio flows in the first six months of the year and net flows are about zero." ("Resigned to a Weaker Yen," Asiaweek, July 24, 1998, p. 58--as quoted on page 23 of the cited book). What's more, at the start of crisis, the probability of investing in a potentially bankrupt company was quite high, as borne by subsequent 75% bankruptcy rate in Indonesia's business firms (David E. Sanger, "US and IMF Made Crisis Worse, World Bank Finds," New York Times, December 3, 1998, as posted to the Internet as of 2001). In other words, while the crisis raged, FOREIGN FUND MANAGERS would NOT KNOW which one company--out of every four companies in Indonesia, in hindsight--would SURVIVE the crisis, so it was recklessness for them to stay and gamble the safety of their funds!



The WISDOM that foreign fund managers have to go into CAPITAL FLIGHT at the slightest signs of economic trouble in the host foreign economy is not even a matter for debate—only IMF and central bank economists UNSKILLED in fund management would ignore it in their fixation on high interest rates. This point was seen again in the still raging 2008 global financial meltdown, where at least two large Philippine banks which failed to pull out their funds from Lehman Brothers, despite signs of trouble way back in 2007, had some $160 MILLION of their investment funds substantially lost or totally frozen in the failed giant bank.





(4) IMF-Prescribed High Interest Rates

Shouldered by Borrowers Were Supposed

to COMPENSATE their CREDITORS'

INFLATION LOSS, but the Textbook

REAL-INTEREST-RATE Economic

Wisdom was a SHAM in the Asian Crisis,

Because the Borrowers' High-Interest-Rate

Payments for Inflation-Loss Restitution

on Borrowed Funds Did Not Reach the

Bulk of their Real CREDITORS:

the Numerous Ordinary Savings Account

DEPOSITORS--the True Owners of

Intermediary-Banks' Loanable Funds—

Who Continued to Receive the SAME RATE

of 2% Interest Income on their Deposits Even

When Bank Lending Rates Breached 40%

in the Philippines During the Crisis!



As learned from the academe, NOMINAL interest rate or that stipulated in interest-bearing loan contracts and actually paid by debtors to creditors, constitutes interest on loans as measured in MONEY at its FACE or stated VALUE. On the other hand, REAL interest rate represents interest on loans as measured in MONEY in terms of its PURCHASING POWER. It is calculated by deducting INFLATION RATE from nominal interest rate, which deduction gives effect to the decline in purchasing power of money as a function of inflation.



IMF and BSP knew the real interest rate concept, but they did nothing to achieve its objective—keeping depositor-owners of lent-out funds compensated for inflation loss. During the Asian crisis, countless ordinary-savings-account depositors continued to receive the same 2% interest income on their deposits, even when nominal interest rates zoomed to roughly 40%, bank spreads breached 20%, and inflation rate peaked at 11.6%, resulting in NEGATIVE REAL INTEREST RATE to depositors but not to banks—because banks unduly retained and appropriated for themselves even the part of high interest rates intended for inflation-loss restitution to the true owners of bank loanable funds—the DEPOSITORS, whose 91% or bulk of deposit accounts is owned by small depositors among them (p. 91).



It is NOT CORRECT to allow BANKS to receive and RETAIN the entire inflation-loss restitution out of their high interest charges. They are mere agents or INTERMEDIARIES between depositors and borrowers, therefore they do not own the lent-out funds that originated from deposits. As NON-OWNERS, they will not--and CANNOT--SPEND the DEPOSITED FUNDS, which will eventually be withdrawn and gotten back by depositors. Consequently, BANKS will not--and CANNOT--INCUR INFLATION LOSS on funds that THEY DO NOT OWN in the first place and are merely under their stewardship.



Thereafter, once INFLATION RATE EASES and goes back down, as it in fact went down to its old pre-crisis level, the UNSPENT FUNDS in the possession of banks as deposits and of borrowers as loans will automatically RECOVER their previously LOST PURCHASING POWER. Accordingly, with the return of low inflation rate, the portion of substantial interest-rate increases effected during the crisis that represented inflation-loss restitution will no longer be necessary, and will remain with banks as interest cost overpayments that are unfairly not being refunded to borrowers. Thus, borrowers sacrificed for NOTHING on their high-interest-rate payments intended for inflation-loss restitution—because these benefited the agent/intermediary banks but not the depositors who are the true owners and creditors of lent-out bank loanable funds.






C. WHILE IMF'S HIGH-INTEREST-RATE

PRESCRIPTION WAS DISASTROUS, IT WAS

AVOIDABLE BECAUSE THERE WERE LESS

CATASTROPHIC ALTERNATIVES--YET

IT WAS NOT AVOIDED! IF SO, WHAT WAS IT

IF NOT ECONOMIC FOLLY?


In response to a puzzler, or baffling international economic problem, they raised interest rates during the Asian flu simply because IMF officials and "central bankers from around the globe have found no immediate solution to…currency speculators." ("Central bankers share gripes on speculation," Philippine Daily Inquirer, January 13, 1999, p. B5; quoted on pp. vii, 103, and 119 of cited book). They could not see, or think of on their own, integrated currency SPECULATION control--the available but unimplemented high-interest-rate alternative mandated right in old Philippine central bank circulars (pp. 130-132). They fight dollar speculation through high interest rates, when all they had to do was punish banks violating age-old central bank circulars disallowing sales of dollars to speculators--or those without proof of foreign obligations—-as was successfully done in the Philippines in August 2001 and March 2003, when BSP finally but belatedly saw the light (pp. 123-124, 188-190).




How Could IMF Find the Proper High-Interest-Rate Alternatives if it Would Simply Ignore the Less Disastrous Alternatives Repeatedly Recommended to it--Which Were Not Necessarily Impertinent Because these Came Not Just from a Concerned Citizen of an IMF-Member Nation but Also from Long Standing Philippine Central Bank Circulars, Courtesy of Visionary and Pioneering Filipino Central Bankers?


What is puzzling is IMF's seeming lack of interest to find possible alternative solutions. Didn't IMF maliciously SUPPRESS possible less disastrous high-interest-rate alternatives when it did not react at all to my recommended alternatives, repeatedly communicated to it from 1998 to 2002? My recommended measures--which, to begin with, were already part of old but overlooked or unfathomed Philippine central bank regulations promulgated way back in the 1960's--were proven valid when BSP successfully implemented them after, but not during, the Asian crisis. Unless IMF can IMPUGN today the VALIDITY of LESS DISASTROUS HIGH-INTEREST-RATE ALTERNATIVES repeatedly recommended to it earlier and reiterated later in my book and emails, its total LACK of ACTION on my past repeated RECOMMENDATIONS suggests witting or unwitting DERELICTION of DUTY on its part.







MARCELO L. TECSON

Concerned Citizen

of an IMF-Member Nation



martecson@yahoo.com,

martecson@gmail.com,

Quezon City, Metro Manila

and San Miguel, Bulacan

PHILIPPINES

January 24, 2009







COPY FURNISHED Through Separate Mails/Emails:



Selected IMF officials:

John Lipsky, First Deputy Managing Director

Takatoshi Kato, Deputy Managing Director

Murilo Portugal, Deputy Managing Director

Olivier Blanchard, Economic Counsellor

Caroline Atkinson, External Relations Department Director

Shailendra Anjaria, Secretary, Secretary's Department
Editor, IMF Research Bulletin resbulletin@imf.org
Prof. Barry Eichengreen eichengr@econ.berkeley.edu
University of California, Berkeley
Prof. Sebastian Edwards sedwards@anderson.ucla.edu
University of California, Los Angeles
Prof. Joseph Stiglitz jes322@columbia.edu
Dept. of Economics, Columbia University
Project Syndicate office@project-syndicate.org,
Asia Society boxoffice@asiasoc.org,
info@asiasoc.org, pr@asiasoc.org
Far Eastern Economic Review letters@feer.com
Mr. Eli M. Remolona eli.remolona@bis.org
Bank for International Settlements
Selected Harvard University professors in economics

Indonesian Embassy, Metro Manila
Malaysian Embassy, Metro Manaila

Thailand Embassy, Metro Manila
South Korean Embassy, Metro Manila
Members of the BSP Monetary Board

Deputy Governors, BSP

Selected Philippine executive and legislative officials,

Selected economists, members of media and the academe,

concerned organizations and citizens, etc.