So much of the argumentation over the bail-out of US banks is reminiscent of our own experience with FINSAC that one looks on with some curiosity as to how Americans will deal with the emotions that typically shape public attitudes to these crises. Not surprisingly, those who are most affected by the current crisis are venting their anger at the culprits whose recklessness led to the financial meltdown.

From the outset, many opposed the plan to use taxpayer money to keep the banks afloat. Revelations that bail-out money was used to pay bonuses to bank executives who caused the crisis have now made them openly hostile and unleashed a rage against Wall Street insiders.

Jamaicans were similarly outraged at bankers, who, it was felt, had mismanaged depositors' money and in some cases, angry depositors sought to take physical action against bank executives. The mood in Jamaica in 1997, and up to 1999, bears a close resemblance to that in America since September of last year.

As is now happening in the USA and Britain, Jamaica's financial crisis pushed the economy into recession as bank credit dried up and businesses and households that were heavily indebted struggled to keep their doors open. Recovery in the morale and the risk appetite of local entrepreneurs has been slow and remains diluted a decade after the crisis has passed. American capitalists are far more dynamic and hence, will rebound far more quickly.

Poor risk management

High interest rates, poor risk management, the mismatch between assets and liabilities, and to a lesser extent, high leveraging, contributed to the crisis in Jamaica. Massive overleveraging in the USA and Britain was a critical factor in their meltdown, but sharp adjustments in key interest rates by the Federal Reserve after an extended period of low rates jolted the financial sector and mortgage-holders who had overcommitted themselves.

In the financial crisis of the 1990s, Jamaica suffered the demise of some of its landmark financial institutions, most notably Mutual Life, which had been established in the 19th century; and the Eagle Group and Century National, which emerged in the wake of the financial liberalisation of the 1980s. The collapse of Lehman Brothers and the downsizing of former blue-chip players like Goldman Sachs has exposed the laxity of the US regulatory system, which, like Jamaica's system in the 1990s, was not geared for coordinated supervision of the different types of financial services operated under these entities.

Essentially, the capital of most of the mega-banks in the USA has been wiped out as was the case with NCB and the other intervened banks in Jamaica in the 1990s. While the Jamaican Government took direct ownership of these banks in order to clean up their toxic assets, the US government is applying other methods of financial engineering. This is in a bid to avoid the conflict with free-market ideology, which it is perceived would be caused by a conditioned bank-nationalisation programme.

The costs of the US financial meltdown in terms of government bail-out are mind-boggling. When the actions by the Federal Reserve are included, the bill is likely to exceed US$14 trillion, or 100 per cent of the country's annual GDP. That is without counting the loss suffered by shareholders of the collapsed entities and the fall in value of the stocks for those entities still in business. In Jamaica's case, the cost of the Government bail-out through FINSAC was estimated at some 40 per cent of GDP, which was one of the most burdensome at that time.

In fact, Jamaica's debt ratio, which had fallen to just over 70 per cent of GDP prior to the advent of FINSAC, having come down from as high as 150 per cent in the 1980s, went back up to over 130 per cent in the late 1990s, and has not gone below 100 per cent since then. Americans are seriously concerned about the impact of the bank bail-out on the fiscal deficit of their government, which, this year, could climb to as high as 10 per cent, a level not seen in decades.

The money being pumped into the financial system is also pushing up America's national debt to worrisome levels. Indeed, their main creditors, China, have spoken up about the dangers to the stability of the US dollar. Steep adjustments are going to be required in the allocation of US national income if the hikes in both the fiscal deficit and the national debt are to be reversed. A larger share of national income must go to the government in order to balance the Federal budget and in the process pay down the debt owed to foreigners.

Noteworthy casualty

We are already seeing how cutbacks in US consumer spending has dented the world production and disrupted a wide range of major global industries. The automobile industry is perhaps the most noteworthy casualty, as the industry saw its 17th consecutive month of declining sales in the US market. That market, which in a normal year absorbs up to 17 million new vehicles, is now operating at half that level.

Because American consumers are buying fewer vehicles as they cut their spending and boost their savings, this means that the demand for aluminium products is going to fall. As aluminium demand goes down, then the world needs less bauxite and alumina, which hurts Jamaica and other producers around the world. This chain reaction applies to many other industries.

This is the paradox that the world and America now faces and which was echoed by President Obama in London when he warned that the USA cannot be expected to drive world consumption to the extent it has in the recent past if it is to correct its fiscal and external-account deficits. Rebalancing of the US economy and hence, recovery of world-economic growth may, therefore, be more protracted than we were expecting.

Dennis E. Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.