Our through the looking-glass economic policymaking

  • Seeking solutions: economist Robert Stubbs continues his series examining principle causes and appropriate solutions to the island’s economic crisis (File photograph by Blaire Simmons)

    Seeking solutions: economist Robert Stubbs continues his series examining principle causes and appropriate solutions to the island’s economic crisis (File photograph by Blaire Simmons)

Welcome back. We pick up Bermuda’s policymaking trail having just left the deliberations of our Financial Policy Council in 2017.

In this particular meeting, our panel of external experts has advised the Bermuda Government in clear and unequivocal terms that additional measures encouraging the retention of locally generated savings in investments right here on the island is the most prudent means of stimulating our chronically weak spending on Bermuda’s physical capital.

In other words, our FPC has just advised the Bermuda Government to reduce both our external and internal macroeconomic imbalances. Our external imbalance, or our capital exports minus capital imports, is to be reduced through moderating our vast export of investment capital.

The FPC is making the eminently reasonable assumption that more investment capital spending on the island will finance the business expansion and new entrepreneurial activity necessary to drive additional physical capital spending.

Thus, our internal imbalance, or the gap between our savings and spending on the island’s physical capital, is to be narrowed as well through greater spending on Bermuda’s physical capital. All sound advice adhering closely with the International Monetary Fund’s post-2008 oversight and management of macroeconomic imbalances in the world’s largest economies.

Having left the FPC, we rejoin the policymaking action by diving through a wormhole labelled “Bermuda Politics.” Here, one can never be sure quite what will happen.

We’ve entered Bermuda’s ‘Through the Looking-Glass’ realm of political machinations where it is nigh impossible to get a clear reading on one’s bearings. Best to hang tight and see where we end up.

With this particular policy, eventually we’re shot through another wormhole and we find ourselves on the doorstep of Bermuda’s financial regulator, the Bermuda Monetary Authority.

Bermudians can be forgiven for believing the BMA’s sole role is financial regulation, but our monetary authority actually is charged with additional responsibilities of great importance, one of which is policy analysis and advice.

If the Bermuda Government needs the opinion of financial or economic policy experts here on the island, it turns to the BMA. Hence, our present location on their doorstep.

Our government has just asked the BMA to render an opinion on the most prudent means of reducing the island’s exorbitant capital exports.

At this point we will pause the policymaking action, for a deft political sleight of hand has just occurred which we will take a moment to examine. Bear with me, as this will take a little explaining, but essentially this confidence trick boils down to the difference between “gross” and “net”.

You see our FPC advised the Bermuda Government to reduce our “gross” capital exports, while the Government has asked the BMA how best to reduce our “net” capital exports.

It’s a bit like your savings account balance. Your account balance is influenced by deposits and withdrawals. If you want to raise your account balance, you can do one of three things. You can increase monthly deposits, decrease your monthly withdrawals, or do both.

Bermuda’s net capital exports are influenced by the flows of our gross capital exports and gross capital imports. If we want to reduce our net capital exports, we can reduce gross capital exports, increase our gross capital imports, or do both.

The FPC advised us to reduce our gross capital exports by exploring measures to encourage the retention of savings on the island. That leaves us with only one way to reduce our net capital exports — by reducing our gross capital exports.

Our government, however, has just given the BMA far more latitude in its advice. The BMA has been asked how best to reduce our “net” capital exports, and the BMA now can choose among three policy options.

Behind door number one is lowering our gross capital exports. Door number two contains raising our gross capital imports and the recommendation behind door number three is both. We’ll resume the policymaking action and see which door the BMA chooses.

BINGO! Door number two! The BMA has just advised our government to reduce our “net” capital exports by raising the island’s “gross” capital imports. And how do you think we’re supposed to do that? By relaxing 60/40, of course.

Now at this stage an even bigger sleight of hand has occurred. You see the advice given by the FPC necessarily entailed significant change here on the island. The FPC essentially were saying we need to adopt measures changing the behaviour of people here in Bermuda.

With the BMA’s advice, the intent of the policy is to change the behaviour of people overseas. The BMA wants more of them investing in Bermuda. The residents of Bermuda, however, can carry on as usual.

It gets worse, because the BMA’s advice actually conflicts with the advice of the Financial Policy Council. Under the BMA’s advice, Bermuda’s gross capital exports remain the same.

Thus, the island’s latest policy shell game is executed to near perfection. Two moves involving the Bermuda Government and the island’s financial regulator. One adroit rephrasing of a question followed by a shrewd policy selection by a purportedly independent institution, and with that the artful deception is complete.

Who said the island’s public servants don’t give good value for money? Masterful. A feint and outmanoeuvre even the great Ronaldinho would admire. Crisis defused. These policymaking authorities have certainly earned their keep.

It is only at this juncture that calm is fully restored to the island’s political and economic establishment. With Bermuda’s panel of experts from the FPC having long since departed our shores, all is right with the world again as yet another threat to the island’s existing order is evaded. Bermuda’s happy equilibrium is reclaimed.

Life on the island may continue as normal. Congratulations all round are in order, for not only does the status quo reign supreme but, even more importantly, the Bermudian people are none the wiser, and anyway, what they don’t know couldn’t possibly hurt them.

So much for the intrigue of Bermuda’s economic policymaking this week. Nevertheless, I would not want to leave you with the impression our policymaking is determined solely by the “interested error” of Bermuda’s political and economic establishment. Genuine errors of thought, no doubt, are also at play and, importantly, we will be investigating some of these mental missteps shortly.

Before we do, however, given the professed importance of foreign investment to the strategic economic policymaking of both our Progressive Labour Party and One Bermuda Alliance-led governments in recent years, perhaps we should consider the issue of foreign investment in somewhat greater detail.

Next week, we’ll be leaving the mercurial realm of island politics to return to the more terra firma terrain of policy analysis as we reflect on foreign investment in its various forms in theory and examine some of its more recent economic effects on the island in practice.

This is part of a series examining not just the principle causes, but, even more importantly, the appropriate solutions to the island’s economic crisis. Robert Stubbs is an economist, CFA, holds an International Bond Dealer Diploma and has completed the ACAS actuarial exams. He was formerly Head of Research for Bank of Bermuda and his professional interests at present lie in enterprise risk management.

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Published Feb 14, 2019 at 8:00 am (Updated Feb 13, 2019 at 11:20 pm)

Our through the looking-glass economic policymaking

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