A press conference by the Governor of the Central Bank, Mr. Riad Salameh, addressed things on people’s minds — capital controls, haircuts, and devaluation/floating the currency. Should we do it? Can we avoid it?
Let’s start by establishing a benchmark of mutually agreed-upon facts and premises.
If you have a deposit in a current account at your bank and you can only withdraw a small amount of your money, like a teenager pleading with his dad for his weekly pocket money, don’t we already have capital controls?
Maybe it’s temporary, right? When a government is formed, we’ll get relief? When CEDRE funds come? When the US or EU writes us a check for $20 billion because we are too important for the survival of the world order? When oil and gas starts gushing in a few short months?
If two thirds of all deposits are at the central bank, with his having no way of creating it to pay you back, what exactly are we waiting on, for us to recognize our ailment?
If you’re too busy to read the balance sheet of your own bank (published on its website) to see exactly what percentage of its deposits are with BDL, don’t you feel something is wrong just from the reaction you get when you visit a branch?
This is the quintessential metric in Lebanon to know the real liquidity of your bank. The average is 65%. If your bank ratio is below, this is good. If it’s higher, then the senior managers at your bank own the most expensive suits, watches, cars, homes, and yachts ... thanks to you. Before you start transferring your money to banks with lower ratios, or a Lebanese foreign bank, which (probably) wasn’t allowed to play in Disneyland, it’s too late — it’s just fake money moving around.
Does Governor Salameh have to spell it out for you in black and white? Are you waiting for him to tell you that things are not “top”? Can’t you see the truth in his eyes? In the grave look on his face? In the ever-so-slight quiver in his voice?
The one time he told the unvarnished truth on CNN, he was hammered by the market and commentators, and was alihassankhalilled.
When you see people offering 10% commissions to trade a check for cash, isn’t that a voluntary 10% haircut or a DEVALUATION OF THE LEBANESE DOLLAR? If a check is no longer the same as cash (despite it being a felony to bounce one), what does that tell you?
If you can’t buy dollars at the bank, and you have to execute in the parallel market at 1,850-2,000 Lira, to meet basic needs (like paying a loan or rent), then, for all practical purposes, haven’t we already de-pegged or floated the currency? Hasn’t it already happened, but we just haven’t received the memo?
Do you really prefer to continue to be lied to? That the Lira is still at 1,507.5, when all your daily experiences tell you it’s not? Do you want to continue believing that your account is intact, when your personal experience and deepest intuition is screaming that something is drastically wrong?
Does postponing recognition improve things? Does shooting the messenger help? Is it like good wine and will get better with time ... or more like cancer, spreading relentlessly through the bone marrow of our economy?
Governor Salameh himself said he has $30 billion cash reserves — that’s “real” money in the system. Real money is dollars that can be tracked to a transfer from overseas to Lebanon, or generated through selling an export, or actual cold, hard cash. Fake money is the virtual, theoretical crap generated from fake interest in banks, with nothing on the other side, such as deposits at the central bank, which are now 65% of all deposits. What that means is that there’s only 1 real dollar for every 3 or 4 fake ones. The owners of fake dollars are all competing for that one real dollar, 75% of which is part of the central bank reserves. The rest, between $3 and $9 billion are with the Lebanese banks’ custodians (such as Bank of New York or Standard Chartered Bank). It’s somewhat like three guys trying to pick up one girl in an empty bar. At best, one of them will get lucky, with the other two going home empty-handed ... or forced to experiment with new adventures.
To make matters worse, many of these foreign banks cut credit lines to our banks, which is why our banks cut credit lines to our companies, choking them further.
These fake dollar owners are also competing with importers, who need real dollars from the central bank, to buy fuel, grain, medicine, cars, clothes, vacations in Greece, iPhones, AK-47 assault rifles, etc. The Chevrolet dealer in America or oil exporter in the GCC would not be amused if you gave him a check drawn on these fake dollars — Monopoly money can only be used in the Lebanese Monopoly board game. And this is why when you go to a gas station to fill your car, the attendant limits you to 20,000 Lebanese Lira.
In other words, our circular Ponzi scheme has now spilled over into the real world, causing shortages of products on our shelves, including some necessities like syringe needles at hospitals. As these competing forces all converge on the dwindling real dollars, the struggle becomes more and more ferocious, not unlike calm people exiting a sinking ship onto a life-raft, that is until they realize that the raft can only fit one third of the passengers. That’s when the orderly exit turns into a violent stampede as people shove each other, each trying to save himself. Little do these poor, middle class, and “merely rich” passengers know that on the other side of the Titanic, there’s a nice luxurious yacht quietly and calmly loading the upper level passengers — the super-rich and super-connected — with little fanfare. In our banking sector, these are the insiders, whose surrogates are going on TV calming you down, telling you that there’s plenty of space on the raft, and to trust them, while they’re getting the hell out of Dodge.
As this competition gets more intense and violent, i.e. the next time you’re at that bar, with 5 guys now competing for that one girl, a fight might break out. At gas stations, maybe in a few weeks, 10,000 Lira might be your limit per car or maybe they just won’t have any fuel. So all this circular problem and denial culture, with these multi-millionaires insisting that their net worth is still intact, a central bank who pawned the problem over to the politicians, politicians refusing to acknowledge reality and react, is now turning us into a self-generated failed state, with broken law and order, all to protect 6,000 decamillionaires.
If you execute capital controls, this forces everyone to get on the same raft, so no more unfair advantage for the top 3 per 1,000 — we all live together or we die together — there’s no better incentive to make us work as a team.
One of the advantages of official, legally-enforceable capital controls is that in the same way that you don’t pay a convict in prison the same wages as a normal citizen on the outside, similarly, interest rates could be reduced for all our deposits, to stop this fake growth, and reduce pressure on our dollar reserves. There’s also another ancillary benefit. We can now reduce interest on all our businesses and factories whose loan rates became way too high, driving many of them to bankruptcy and increasing our already dismally high unemployment rate. This would reduce nonperforming loans and halt the accelerating unemployment rate. This is when dealing with our virtual problem can decisively translate into improving conditions in the real world.
I won’t lie to you. It will take several years of pain, but then we’ll truly rise up, better than we were before, with a real economy, not the lazy rentier fake economy we had before.
Today, the central bank governor missed a chance to take a leading leadership role and unwind some of the mistakes of the past. There’s no shame in making mistakes, but there’s no excuse for piling on bigger mistakes to cover up smaller ones.
What exactly is the end game? Keep depleting the reserves for the next 3 years, and hope that people won’t notice? That’s one hell of an assumption about the collective stupidity of the country.
I leave you with what the top economist in the country, Professor Naim Halawi said, “Your financial engineering is great, now where’s our money?”