Keynes to the rescue for Lebanon

When all is said and done, bankruptcy is nothing more than an accounting phenomenon, and growth is a matter of confidence. Otherwise, why would the Bank of Japan be the sole proprietor of half of its national bond market and why are its holdings in bonds and shares in the country reaching 100% of GDP? Otherwise, why would the US Federal Reserve have intervened in 2008 in the way of 800 billion dollars the day after the fall of Lehmann in order to stymie a credit crisis that was on the brink of paralysing the world’s finance and economy… And why would it have ventured, between 2008 and 2017, into multiple quantitative easing programmes with the sole aim of injecting liquidity into the system? Why is the Bank of China showering its financial operators with liquidity at the reopening of its markets on 3 February after a forced closure of more than ten days due to the coronavirus epidemic? Conversely, how can we not forget the German resistance to the former President of the European Central Bank who was vilified for breaking with the orthodoxy, that is to say, for simply inundating the diverse set of actors with liquidity for the sole purpose of breaking the deflationary spiral?

Why would Lebanon be different and by virtue of which economic rule would it avoid the fundamental rule that an influx of liquidity can bring back confidence and restore the economy? “We are all Keynesians in the foxhole”, American economist and Nobel Prizewinner Robert Lucas asserted, and “We are all Keynesians now”, declared President Nixon, at the height of the successive economic and financial crises that had hit their country. This is why today no one can afford the luxury of ignoring Keynes’ advice, who suggested – as a joke but not entirely joking – employing workers in a time of crisis whose job would be to dig holes to bury banknotes in!  “Helicopter money” (a famous saying of US Nobel winner Milton Friedman who also recognised in this saying the infallibility of his sworn enemy, Keynes), this allegory of dropping bundles of cash from a helicopter to oil up the cogs of the economy, can quite evidently be applied to Lebanon. The Lebanese will only succeed in saving their country from bankruptcywith an influx of liquidity, because money has to circulate, and it is exactly the opposite that is currently happening.

The Lebanese Parliament should legislate for 15-year borrowing, which would force all depositors to invest 25% of their holdings there. This sum, that would be decidedly substantial (around 45 billion dollars), should be put to use to finance an armoury of Keynesian measures such as public works and infrastructure improvements that Lebanon so badly needs, and that would at the same time encourage tourism, a source of precious liquidity, reduce VAT to restore consumption, increase civil servant pay (in a country that counts a record number) to calm social unrest and reduce enticements to corruption while also stimulating spending, grant SMEs extraordinary subsidies, create a special fund to help new businesses get off the ground, increase police and military numbers to set the public and visitors at ease… This liquidity that would come out of people’s savings accounts, large and small, would come back under the control of the government by a trick of accounting entries (everything comes under accounting, even bankruptcies) and would strictly not be reused to reduce government debt, but rather to recover the economy.

These are measures that, combined with an increase in import duties, would restart the economy while also encouraging production and consumption in Lebanon, in order to avoid capital flight. They would have to be supported with an official and temporary implementation of capital controls, a devaluation of the Lebanese pound, and above all by using the Lira over the dollar, a move that over time would become systematic and compulsory.

That leaves confidence. It’s an ingredient as crucial as money in economic recovery. With the Lebanese having, not without good cause, lost confidence in their leaders – past, present and probably future – it goes without saying that this godsend resulting from bond borrowing would absolutely have to be managed by a committee of wise and neutral outsiders, because it is out of the question that a portion of these billions be perverted by corruption, bribery, favours and other backhanders. It is in fact on this one condition that such a – nearly confiscatory – measure could be tolerated by the Lebanese public, reassured by the presence of foreign experts who would oversee the process.

The economic and financial salvation of Lebanon is possible – and not complicated – for those equipped with economic insight and imagination.