Friday, 27 February 2009

Real Restructuring

27th February 2009

The Malta Independent - Friday Wisdom

President Obama has his new work really cut for him. For some time he can blame the inherited crisis on his predecessor and consequently has no motivation to play down the seriousness of the economic downturn and the herculean task required to turn the economy around both by throwing at it substantial fiscal resources but especially by re-injecting the confidence which evaporated with the collapse of Lehman brothers last September.

At the same time he has to infuse confidence about his ability to keep US budget in reasonable shape, in fact cutting down on the size of the inherited deficit. He must also maintain consumer spending going at a time when in reality addressing past excesses needs higher savings to reduce dangerous reliance on foreigners to finance US consumption.

This seems like a task to square a circle and needs intervention by a miracle worker who can restructure the biggest economy in the world and take it to a higher level. Yes even the largest and most efficient economy in the world needs serious restructuring and in his first “State of the Union” address to a joint session of the Congress this week Obama identified the three main areas which will be the pillars of such restructuring: Energy and Environment, Health Care and Education.

Applying this to our own circumstances, while we are thankfully not suffering the sort of disequilibria which have eroded the strong financial base of the US economy, we also should be galvanised by the challenges of a serious recession in order to restructure. And the same three pillars of Energy and Environment, Health Care and Education should form the main thrust of our restructuring as they are the three areas where we are expending too many resources without gaining a commensurate return.

Let me start with Energy and Environment. Hopefully the saga regarding the utility tariffs will be sorted soon enough and put behind us so that we can focus on a future tariff mechanism flexible enough to reflect with promptness international price fluctuations but with some stabilisers to

cushion out extreme price volatility. What we should try to avoid at all costs is that in an environment of unsustainably low energy prices (which comes after a period of unsustainably high energy prices so underlining the need for a stabilising mechanism to cushion price extremes at both ends) tariffs get cut low enough to stall in their tracks investment initiatives by households and industries for energy conservation and for production from alternative renewable sources.

We must proceed with imposition of standards on new buildings to conserve energy and must widen budget proposals for investments by household and industry to make them widely available without having to queue up in third world country style.

Health Care must be rendered financially sustainable. Presently it is not, and denial can only serve short-term political red faces but will do nothing to ensure that this country can have a universally available health services we can remain proud of. Ageing and exploding health care costs (especially as new remedies become available), will force demand and affordable supply to get seriously out of line, leading to falling standards and longer waiting time for non-life threatening interventions. Many will be forced to expensive private health schemes as they become unwilling to leave their family’s health reliant on progressively inefficient public health services. This will lead to great waste with people paying twice for their health cover, directly for their private schemes, and indirectly through general taxation for the public schemes.

We must gradually move to a system for rendering public health services available on a commercial basis in competition to private health services (competition remains the best source of efficiency). To ensure that no one is denied basic health services a compulsory national health insurance scheme will be introduced with opt-outs for those who prefer paying their own private scheme.

Those, who following well researched means testing, prove as unable to afford the compulsory scheme will be socially assisted to pay the premium. The government will thus save on its exploding recurrent health care costs and channel part of these savings to socially assisted cases on the basis that social services should be available only to those who really need them. Those who need not be socially assisted should be rewarded through tax cuts which government would be able to afford if it saves millions on the waste of recurring health costs.

Finally in Education there must be a shift of emphasis from first line education (being education to children and youth before entering the job market) to continuing education (being educational available to those already in jobs but wishing to enhance their knowledge and employability). We must seriously question whether we are getting real value for the huge recurring expenditure, including stipends to students in the tertiary sector, in the current system of education and whether better value can be extracted from applying the same, and possibly even less resources, to encourage more after-work vocational training.

I much favour the latter for four reasons. Firstly it is more efficient in keep human resources adequately re-trained in a rapidly changing world as against the present system where first degrees are often out-dated by emerging events even before the graduation ceremony. Secondly it gives a fair chance to those who discover their education vocation a bit later in life then the normal progression from secondary to tertiary education. Thirdly it extends education to more mature age where education can be better appreciated and can be reconciled to life experiences that are gained at work and in the family. But more than anything I prefer it because it would permit us to channel education funds to real education rather than mere stipends and we will encourage and reward continuing education through tax breaks rather than outright grants.

Real restructuring must involve our taking a serious fresh look at our policies in Energy, Health Care and Education.


Sunday, 22 February 2009

Recession Depression or Denial

 22nd February 2009
The Malta Independent on Sunday

Three questions I am frequently asked are:

Why is international economic news so gloomy that it seems more like a 1930s depression rather than merely a cyclical recession?

How come the domestic economic situation is still ticking in positive territory (at least on basis of data so far available)?

Is it merely a question of time lags and that we will probably feel the pinch in the coming months?

These questions have to be put high on the national agenda and be seriously discussed.

This recession is not merely cyclical. It is more serious than that, though hopefully it will not deteriorate into a full blown 1930s style depression given that today we have that bad experience to guide us and we have more and better economic policy tools to protect us. The difference between this and other cyclical recession is that this time round we do not have a sound banking and financial system to help us get out of the recession through expansive and cheap availability of credit. This time round the banking system itself is in the eye of the storm and it has in fact led other robust economic sectors into this recession. And, given that banking and financial services are one of the most globalised economic sectors, this recession which started with the collapse of the US housing market in the summer of 2007, has become global with astonishing speed.

Credit is the life-blood of economic systems and of international trade. If credit stops flowing throughout the system, domestically as much as internationally, economic contraction becomes inevitable as demand shrinks. Without an adequate supply of fairly priced credit, people cannot buy houses, they cannot buy cars, businesses cannot finance investments and the overall demand in the economy shrinks. For some time producers build up stocks but soon enough their liquidity stress demands that they sell their inventories by reducing prices, cut down on capacity by shutting down facilities leading to unemployment, and cut down costs wherever possible.

Even those consumers who do not lose their job will feel uncertain about the future and will unavoidably tighten their purse strings, spend less and save more even when their overall incomes are falling. So economic contraction enters into a dangerous spiral of falling demand, more unemployment and uncertainty, falling asset prices, leading to yet more reduction in demand and yet another turn in the downward spiral.

The UK economy is contracting sharply, property prices are falling like a rock and the State had to nationalise one smaller bank and take majority or significant stakes in two major banks in order to recapitalise them as they faced insolvency. Iceland has imploded. The Irish economy is horrifying with a burst property bubble and over-exposed banks nationalised to survive. In Spain unemployment is shooting up. Italy’s economy has contracted and even stronghold Germany has entered recession as demand for its exports has forced its manufacturers to cut back production. Eastern Europe is in shambles. Latvia is economy is contracting by some 10 per cent, Ukraine is on the verge of defaulting on its international payments and Russia is running down its international foreign exchange reserves at an astonishing speed as it defends the value of the rouble with market interventions. Swedish and Austrian banks are suffering on their over-exposure to Baltic and East European borrowers. Hungary has had to resort to an IMF bailout. How come in the midst of all this distressing noise our economy, while clearly slowing down, is not yet on the ropes?

The simple answer is that we have so far escaped the immediate impact of the credit crunch because we do not borrow on the international markets and have a very liquid economy with all bank loans mainly domestically focused and fully financed by domestic retail deposits without currency mismatches. The drop in domestic demand and the near freezing of the property market is being cushioned by sharply reduced interest costs. Borrowers in other countries are not benefiting from such interest rate reductions because with banks strapped for liquidity and the complete loss of appetite for risk by investors, credit margins have widened more than the reductions engineered through monetary policy cuts to the risk free rate. We are probably the only country in the world where new low quality corporate bond issues are being launched on the market with single digit coupon rates.

So while the local banking sector is experiencing a sharp reduction in profits, very much reflected in their equity prices on the Malta Stock Exchange, this results from the drop of revenue or outright losses on their foreign investments portfolios where they park their excess liquidity, rather than from deterioration in their local loan book. The same bitter experience is being shared by the private investors on their quoted investments portfolios outside top rated sovereign bonds.

So will we escape the recession? Do not confuse the credit crunch with the recession. The credit crunch has led to a recession in countries that were substantially leveraged on foreign debt, especially the US, UK, Ireland, Spain, Italy, Eastern Europe, Iceland and others. The impact has been immediate especially after the collapse of Lehman Brothers in mid-September 2008 led to the freezing of credit. We have been spared the harrowing consequences of the credit crunch because we are a liquid economy and not leveraged. We have no international credit lines that have been pulled back or not renewed.

The recession is a different matter. We will not escape that and the major impact will hit us with a time lag some time next summer. It takes time for the order book pipeline to run dry; it takes time for employers to decide to cut costs as they keep hoping that things will recover without much ado. But if the summer tourist season falls flat and if by summer the international demand for our exports shortens the order book to a level where extended shut downs, short work weeks or outright discharges have to be resorted to, we could be given a cruel wake-up call. If property prices continue to fall tempting buyers to hold off thus reducing demand further, it will become progressively more difficult for developers to continue carrying their unsold inventory, with banks breathing down their neck to meet interest costs when no revenue is coming in. We could well see things precipitate in the property market too.

So in summary the answer to the three questions: yes this recession is different and more painful but hopefully will not aggravate to a depression. We have been spared the immediate impact of the credit crunch thanks to the culture of thrift we inherited from our fathers. We will not be spared the impact of the recession, which will hit us with a time lag over the summer, and while hoping for the best we should prepare for the worst.

Friday, 20 February 2009

Isn`t This a Lovely Place

20th February 2009
The Malta Independent - Friday Wisdom

Indeed it is! There is no country like it. While the world is economically falling apart, while currencies of East European countries, EU countries like Latvia, Hungary, and Poland among others, EU aspirants like Ukraine, or EU ‘not interested’ like Russia, are in a free fall on the world foreign exchange markets, while euro anchor members like Spain and Ireland are seeing their credit rating cut down and the cost of their credit insurance soaring as their risk of sovereign default is perceived more real than ever, we seem to be living in a world of our own.

What makes our headlines and what we waste our energy upon at this critical juncture is whether we should dig a quarry in the heart of Valletta to house better our national treasures, or whether the Opera House site should be restored to its original glory or should be re-developed to house our parliament.

While governments the world over are falling over themselves to launch fiscal stimulus packages to protect their economies from the grip of the recession and reverse its course to make it as shallow and short as possible, we seem content living in denial. We take no initiatives to keep our property market ticking, to render our tourism more competitive as products of competitors become instantly more price attractive as a result of the exchange rate turmoil going on, and we seem unconcerned about the real possibility of layoffs by manufacturing units as their order book gets shorter and shorter.

I give up, temporarily at least, so I write about the headline grabbers which are mere distractions from the real problems facing us.

The St John’s Co-Cathedral museum extension saga marks a landmark in the political evolution of this country. I don’t buy the eyewash that the project was scrapped by the government, merely a few hours before its fate was about to be decided in parliament, because the Archbishop convinced the Prime Minister that the project had become a matter of divisive controversy. I don’t even give it an ounce of probability that the government’s decision was motivated by respect to the public’s generally expressed bad taste for the project. The timing of the decision and the way it was announced leave little room for doubt that the government’s decision was solely motivated by fear that it could not count on the support of all its backbenchers in parliament and its one-seat majority was too fragile to risk a highly damaging humiliation.

I am not qualified enough to speak with any authority on the matter so I refrain from stating on which side of the argument I stood.

But what annoyed me greatly is the reaction of the main promoter of the project who joined his role as member of St John’s Co-Cathedral Foundation and Malta’s representative for the EU with a seat in the Cabinet, to push forward the project to high priority status. When acknowledging the inevitability of government’s decision he was reported saying “It is sad when decisions are not allowed to be taken by professionals.”

What poor regard for the working of democracy! This was not a case of some minister unilaterally over-ruling broad professional opinion. Does RCC truly believe that professionals should prevail over the whole body of the representatives of the people?

Here we had the prospect of parliament putting its weight against the project with the assistance of backbenchers from the government side departing from their whip discipline probably at the expense of their personal political career. I say this was an interesting evolution of modern parliamentary history as for the first time since I can remember, the government is no longer acting as a five-year dictatorship and neither is it surrendering its mandate as Labour did in 1998 because it could not continue the tradition of five-year dictatorship.

Here we have a case of healthy, desirable but rare separation between the roles of the legislative and the executive; a case of the government being forced to take the views of its backbenchers into the equation (views which hopefully reflect strong personal convictions and not mere jockeying for trading parliamentary loyalty for a better front row seat).

As to the right sort of development for the old theatre site, I have little sympathy for the nostalgia of those who prefer a perfect replica of Barry’s project. Neither do I fall in line with the view of those who argue that Valletta needs a cultural centre which must include a theatre even if we depart from Barry’s model. Such a cultural centre, needed as it is, need not be in the centre of Valletta and could well be in a more peripheral location with St Elmo, Baviere or Bighi across the Grand Harbour meriting serious consideration.

The theatre site must serve the daily needs of those who visit Valletta, not those who visit occasionally to watch an event happening in Valletta. Primarily it must be a teaser to whet the appetite for a return to the many thousands of cruise tourists who visit us for just a few hours. We need an exhibition to persuade them to return for a longer stay.

It should serve as a service point for customer service (NOT the full back office rigmarole) of all government entities to ensure that the citizen can get all services from its government from under one-roof without having to run like mad from one department to another. And if on top of these it can house parliament and its offices then that would a productive use for a prime site. Parliament is the primary exponent of democracy and its location in a prominent place in the capital city symbolises the importance of democracy for our development.

If we can create something in the spirit of Norman Foster’s Berlin Reichstag forming an attractive and distinctive mark in the skyline, Valletta could earn what it is ominously missing – a vantage point accessible to the public which gives a 360° view enjoying the magnificence of the Grand Harbour and Marsamxetto from one location.

Friday, 13 February 2009

Will the Euro Survive?

13th February 2009
The Malta Independent - Friday Wisdom

I suppose this is a question which should not be asked and if it is asked those who are in charge of protecting the integrity of the euro can only answer in the most absolute way that the euro will most definitely survive and even prosper.

But such absolute assurances should not bar thinkers and realists from asking the question. The very act of posing such question implies the existence of doubt about the euro’s long-term staying power.

The euro has just celebrated its first very successful decade and doubters could easily be dabbed as spoilers. But 10 years is a very short time to prove the longevity of a monetary union. History is riddled with similar monetary unions between separate sovereign states which blew up after several decades of initial success. In fact if one looks around it is clear that the major currencies of the world apart from the euro, are the currencies underpinned by individual sovereign states.

In 1998, when the euro was launched, Milton Friedman famously warned that the euro would be truly tested by the first major global economic recession. He issued this warning in the belief that, lacking labour and product market flexibility, Europe was not an optimum currency area in the sense that was the case of the US economy.

We are now at the point that the late Milton Friedman had perceived. The euro is being tested by a fierce global recession and developments going on within the individual component states of the monetary system do not suggest much optimism that the system has the necessary resilience to come out of this challenge unscathed.

We are seeing the euro area economy being dragged into a deep recession at an astonishing speed. In this context we are bearing witness not only to external measures of protectionism but we are also seeing measures of protectionism even between members of the EU and the euro area.

The euro and single market rule book has been shelved. Faced with the primary responsibility to the electorate of the sovereign state that elected them, governments have to put taxpayers’ money at risk to try to stabilise the financial system and to cushion their sovereign economy from the possibility that the recession will deteriorate into a depression. And it is obvious that once taxpayers’ money is put at risk, governments have to take narrow sovereign circumscribed measures to ensure that the benefits of such extraordinary fiscal measures will be enjoyed by the sovereign taxpayers and not by the general members of the Union. The we-are-all-in-this-together syndrome rarely goes beyond lip service.

So we are seeing France bailing out its car industry but making conditions to ensure that jobs are kept in France and if redundancies are needed these are squeezed out of plants in other EU states. We are seeing Ireland nationalising its banking industry, guaranteeing all bank deposits, and making conditions on its now state-owned banks to give preference to local borrowers in their normal operations across the whole EU.

It is evident that under the stress of an acute recession, potentially a depression, a monetary system that does not have the benefit of a federal government that can draw up a federal budget to support monetary measures with fiscal measures, is unlikely to withstand within its boundary the tremendous pressures that are building up within it.

So what could happen if the internal stress of the euro monetary system becomes too much for the system too bear?

The first thing that will happen is that further expansion of the monetary union will be frozen till the financial markets get back to a state of normality. One could argue that the fact that countries like Denmark, Hungary and Iceland are clamouring to join the monetary union (even though Iceland is not yet an EU member and would have to become one before being accepted in the monetary union) is a sign of strength resulting from the attractiveness of the union. I doubt it! A system which has de facto suspended its rules cannot bring in new members before it re-establishes discipline. And, frankly, bringing in members motivated by their economic weakness rather than their economic strength is not conducive to stabilising what is an already fragile structure.

The next thing which could happen is that some of the existent members could find the conditions, legal or de facto, of the monetary union tough going in order to protect their sovereign national interest or indeed to protect the popularity of their own government with the national electorate. It is tempting to think that I am referring here to the weakest links in the system, countries like Italy, Greece, Ireland and Spain either because of their huge national debts (Italy and Greece) or because they are suffering more than others in the recession from exposure to a burst national property bubble (Spain and Ireland). Wrong! These countries would be hurt most if they leave the system and would suffer substantial downgrade of their national debt and consequently an explosive increase in the cost of servicing it.

I am referring to the strong countries that can leave without suffering such consequences. It is countries like Germany, France, Netherlands and Austria, among others, who can afford to leave the system with little damage. If the recession worsens to an extent that weak link countries could risk default on their sovereign debt or would need support from the stronger members, we will have to see whether the fraternity bonds are strong enough for the healthy to bear the cost of bailing out the weak.

In practical political terms it is inconceivable that taxpayers of the strong countries would accept to carry such hardship. So the only way it could be done outside the fiscal structures is by adopting more liberal (more reckless if you wish) monetary policy leading to a downward floatation of the Euro against other major currencies in order to give on a supranational basis what individual euro countries can no longer do on a national level.

Is it not strange that I am arguing that only reckless monetary policy can save the current composition of the monetary union?


Expensive Medicine Won`t Work if the Diagnosis is Wrong

Financial Times

Sir, Martin Wolf is absolutely right that Barack Obama`s plans are addressed to solve the wrong problem. They plan to resolve illiquidity when the problem is insolvency. Wrong diagnosis cannot lead to effective cure, no matter how expensive the prescribed medicine.

Avoiding nationalisation of the banking system while putting taxpayers` funds at risk is just incomprehensible. There is a huge difference between nationalisation as a freely chosen political doctrine and nationalisation as a rescue operation to restore confidence, re-sanitise and recapitalise the banks and as soon as possible return them to private ownership when they are perceived to be shiny enough to attract private capital.

No matter how undesirable, and although not without risks, the latter remains the fairer and more effective solution to get out if this mess as painlessly and as quickly as possible. Nationalisation would address the conundrum of what value to give to the toxic assets to hive them off to a bad bank. The transaction becomes an internal transfer between two entities owned by the taxpayer so ultimately the price is next to irrelevant. Once this is solved then we can truly proceed with the job.

Alfred Mifsud Balzan Malta

Saturday, 7 February 2009

Twin Brothers

7th February 2009
The Malta Independent on Sunday

John and Joseph Borg are twin brothers in their early fifties and both have accumulated a quarter century of working experience in their respective jobs.

They have kept their strong twin brotherly bond even after their parents passed away and their families are like one big family that share experiences and get through life together wherever possible. Their children attended the same schools, moved in the same circles, and quite often enjoy life together sharing their free time and often travelling abroad together.

Their residences are on the same plot and quite often the brothers help each other with maintenance and with whatever home improvements are demanded by the new exigencies of growing up, maturing and ageing. They have been lucky in that their respective wives get along together like sisters; in short their families are there for each other through thick and thin.

John has been working at the shipyards for more than 27 years, moving from apprenticeship to fully licensed tradesman and had reached the grade of chargeman when finally, after refusing many early retirement schemes offers along the years, he was forced last year to finally accept the cash bonus offered to retire voluntarily as part of the process for privatisation of the shipyards. He has already collected his substantial redundancy payment, stashed it away as part of his eventual retirement investment plan and so far he is still earning his salary from the shipyards, which have kept him on board to service the contracts in hand. He has already found a job as a maintenance technician with a private firm, so far being paid on an hourly basis. Eventually, he will have to decide whether to work in this new place full time or whether the new owners of the shipyards will offer him his old job back.

At 51 he feels he is too young to retire and once he settles in his new employment, he means to start investing part of his retirement funds, enriched by the recent generous redundancy payment received for continuing in the same job (so far), to buy into real estate at the more sensible prices now in the markets, purchasing a couple of shell apartments and doing all the necessary work to bring them to finished state in his spare time. Hopefully, they will be rented out, thus providing both regular income and long-term capital accretion better than any financial investments he finds hard to understand.

Joseph has been working for more than 25 years at ST. His experience has been very job specific and if he happens to be one of the 450 employees that ST will declare redundant, he will find it hard at his age to carry the knowledge gained in his job to a new employment.

Joseph believes that ST has been a very good employer, providing him with a good salary and benefits. He always felt part of a successful team with management informing them that efficiency levels at the Malta plant were among the best in the world and seeing ST renewing its investments to keep at the cutting edge of technology. Joseph always felt proud when his employer invested in his regular training and never in a million years did he think it possible that circumstances could arise where ST would be forced to cut down its work force.

Joseph knows that the unions are in a rather weak position to negotiate a fair redundancy package, beyond the meagre provisions of the law. He fears that both the government and the union would be more interested in securing the jobs of those who remain in employment rather than secure benefits for those who are discharged. He knows that at this delicate stage, where it feels as if the world economy has suddenly shifted from growth to recession at the flick of a switch, any undue pressure in favour of redundancy benefits would probably quicken the pace of relocation of ST’s operations bringing about more redundancies.

On a per capita basis, Joseph along with his colleagues at ST, has for the last 25 years been contributing to national economic progress more than most other workers, certainly more than the workers at the shipyards where his twin brother works. By any measure, whether value added per employee or exports per employee, Joseph has contributed to the national GDP multiple times more than his brother and without ever making any claims for State support, as his brother’s employer organisation has consistently done.

Who is going to explain to Joseph now that the Maltese nation could afford to be generous with its least productive employees but there is no assurance, indeed no likelihood, that similar treatment will be reserved for its most productive employees who are being forced into redundancy by the exogenous forces of globalisation and certainly not by any internal inefficiencies or lack of productivity?

This is the apartheid we have built in our labour market. We have turned the simplest of management policies on its head. We reward the least productive and punish the over-performers. Instead of taking care of our best and ensuring that they can move from job to job without pain, we have kept them fully exposed to the risks of globalisation. On the other hand, we have given expensive overprotection to those who, without exposure to the pressures of globalisation, have never been able to reach the level of efficiency as that achieved by employees such as those at ST.

Before we solve this riddle the country can never reach its full economic potential and we will continue performing below par. And whoever performs below par even when the going is good cannot expect to be spared when the harsh economic winds of international recession starts blowing from all directions. The government remains in a state of denial, that we are going to be hit hard and that our economic performance could even turn negative this year. It takes one bad summer tourist season and one ST with a shrinking order book to push us over from growth to recession. And the die seems cast while the government has been doodling.

The private sector needs help by the creation of subsidised training pools where they can shed labour resources which have been rendered idle by the falling order book but keeping such employees on tap for reinstatement as soon as the economic fortunes turn, as we hope they will later this year, as the mega monetary and fiscal policy measures being taken by world governments start taking effect.

We must ensure that ST’s misfortune is a short bracket on a long ascending trajectory and not the first in a series of downsizing leading to eventual total relocation. ST’s case cannot be considered as a healthy exercise of creative destruction when it is our technology flagship and we are basing our economic future on becoming a technological centre of excellence.

Friday, 6 February 2009


6th February 2009

The Malta Independent - Friday Wisdom

The gloom surrounding world economies seems to be affecting everybody’s rational thinking leading to confusion and complications.

On the local front, the question of the utilities tariff seems to be a neverending saga. Unions are insisting that the government immediately revises them downwards to take into account falling oil prices and quite a few of them are insisting that the October 2008 increase in tariff rates be revoked altogether as if it never happened.

The government on the other hand is trying to ease itself out of this situation by promising revisions probably after the first quarter of 2009. To justify its stance, the government says that Enemalta made a huge loss in financial year 2007/2008 (15 months to December 2008) and argues that through forward contracting and hedging the full impact of reduced energy prices will only have the positive effect on Enemalta’s acquisition costs in the course of 2009.

The situation is so simple that there is no use complicating it. In the period October 2007 to June 2008 when energy prices were exploding upwards, the government kept an unrealistically low 50 per cent surcharge in order not to risk voters’ outrage in the run up to and immediate aftermath of the March 2008 elections. I had forewarned about this in an article in this series published on 7 December 2007 titled Surcharge surprise. I had warned that:

“If we continue to tailor such important policies merely to suit election and political convenience, then the electorate should not be amazed if after the election surcharge freeze we could have a post-election surcharge surprise”.

So in the period July 2008 to March 2009 (nine months) we have to pay up, through unrealistically high utility rates in comparison to prevailing international energy prices, what we have enjoyed in the period October 2007 to June 2008 (nine months). It’s as simple as that really and there is no need to beat round the bush. The electorate should learn that there is no such thing as a free lunch and what appears as a free lunch before the election normally is paid by a double bill after the election.

At an international level, the economic crisis caused by the financial turmoil seems to be setting the world on a very dangerous slippery slope where the vast benefits gained by all through globalisation are quickly forgotten, and now that it has gone into reverse mode, many are experiencing an irresistible urge to adopt a protectionist mentality.

Governments who have bailed out their banking system are pushing their banks to give credit priority to domestic customers, penalising innocent international borrowers especially from developing countries. We have seen riots and protest in major European cities with Britons showing displeasure against foreign guest workers for taking British jobs. French workers protest against government being generous with banks without realising that the economy can never return to a growth path before the financial sector is stabilised enough to permit the easy flow of credit. The US government suggests a ‘Buy American’ condition favouring US steel producers in the proposed mega stimulus package that is being considered in an attempt to kick start the economy. This has already attracted protests from the EU and Canada who could retaliate with similar protectionist measures further reversing the growth of international trade.

It is odd that at the recent Davos World Economic Forum it had to be Russian Prime Minister Putin to warn against “the blind belief in the over arching power of the state” as major democracies are forced to take direct control of their banking systems. The Chinese Prime Minister said he is re-reading Adam Smith in search for inspiration. Evidently, Russia and China have much to lose now from reversion to protectionism than was the case in their traditional communist days.

What is also offending my eyes is the pretension by senior economists and key bank executives that while governments should put taxpayer money at risk to save the banking system from further damaging the general economy, sort of saving Wall Street to protect Main Street, governments should not make conditions like those being proposed limiting the executive power of the bank management to pay themselves and their subordinates unrealistic bonuses. Such economists and bankers still don’t get it that their irrational exuberance, over-leverage in search of short term profits at the expense of long-term sustainability, and inability to self-regulate have landed us in the mess we are in and is forcing the taxpayers to mortgage their children’s future in an attempt to regain financial stability and avoid a deep depression.

Truth is that while governments are fire-fighting the crisis, they cannot be too bothered about wetting the furniture. However, once the fire is put out and normality returns, there should arise a philosophical argument about who should own the banking system and how it should be regulated.

The concept that banks are too important to fail gives rise to moral hazard issues. Can democracy tolerate a situation where private shareholders enjoy profits when the going is good while taxpayers have to move in with their dollars to save the banks from their own excesses? Is it fair that profits get privatised while losses get socialised?

The only way permanent nationalisation of the major players in the banking system can be put off the agenda is if bank regulation is revolutionised and rendered so effective that banks are not allowed to incur risks which could get them into trouble. This could involve tough regulation regarding the size of banks that will not be allowed to grow too big to fail and that would have to maintain high capital ratios and low leveraging to ensure that if they mess up they can be allowed to fail without causing systemic risk.

In the meantime we have to learn from experience and forget any hope that banks, financial institutions, or anyone else for that matter, can effectively self-regulate. Human nature is what it is! Thank goodness that our banking system was not infected by international greed leading to over-leverage. But events should certainly send a message that for banks as big as the two main banks on the local scene, the government should not (in case of Bank of Valletta) or should not have (in case of HSBC Malta) given up its right to appoint a chairman. Banks commanding a huge slice of the market need more, not less, regulation.