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    “For God’s sake, what aspect of this crisis psychological!”

    Güven Sak, PhD31 January 2009 - Okunma Sayısı: 1378

     

    Doomsday Superstitions Catalogue; Entry No Two: "For God's sake, what aspect of this crisis psychological!"

    Since the international banking crisis hit the shores of Turkey, a form of explanation that is not even slightly related with the reality began to spread around. Whenever you say the word "crisis", people, with the common pedantry of those who does not know anything, take the lead and say "hey, that is totally psychological" even before you start talking about the measures needed to be taken. They assume such an attitude as if there is no problem in reality and you had a sort of a nightmare so that all problems will disappear once you wake up. Or, as if the problem will disappear completely right away if you do not ever mention it. Well, this is not the case. The people thinking that this is the case are those who believe that the "ostrich" tactic will work against the crisis. But, it will not work. Let us make the second entry of the "Doomsday Superstitions Catalogue" today. The first entry was under the topic "bro, the textile industry in Turkey is over". And apparently, today's topic is "For God's sake, what aspect of this crisis is psychological!"

    Let me present some figures to begin with. Rate of capacity utilization in industry has been falling down since February 2008. In December, the rate fell down by 22 percent as compared to that of December 2007. According to the latest data, the number of employed people decreased by 263 thousand from September to October. The number of businesses shut down rose in 2008 by 58 percent and reached 37 thousand. Export markets are rapidly narrowing down. Overseas order trend indicators in expectation surveys point out that the contraction will continue. Consumer confidence, though recovered slightly in December, is still ranging in between low levels proving that the contraction in the domestic market will continue. Forward sales disappeared and all transactions are carried out in cash. Recorded loss of companies solely due to high-cost inputs reached millions of dollars. And the important thing is all of these happened in the last three months. So, please tell me, which of the outcomes listed above are psychological or fictitious? Are not all of those indicated in the figures announced by state agencies? Are not all of them extremely real? Yes, they are.

    The reason why "the crisis is psychological" superstition goes in the catalogue is obvious: The aim of this statement is to underrate the storm surrounding us. Since one who overrates the condition will be reluctant in introducing precautionary measures, "the crisis is psychological" statement is extremely dangerous for Turkey. It is a huge threat for those struggling to bring home the bacon. It is extremely dangerous as it will prevent the policy makers from taking the necessary measures. In reality, the crisis is highly severe. Therefore, it will be wise to not consider the biggest crisis humanity faced in the last century as a temporary light breeze.

    There are two problematic areas. First, firms, though they have stock in hand, do not prefer to make sales unless the customer pays in cash. Why is that so? In Turkey, transactions are made with postdated checks. When a businessman sells goods, he receives from the other party a postdated check with different maturity terms. The postdated checks are used intensively as they enable funding via working capital credits extended by banks. In the recent period, this chain of the economy has been broken. This is the first problematic area and is not psychological at all. The developments are highly real in terms of their outcomes.

    Is there any psychological incident when the emergence of the problem is considered? One saying "yes, there is" should be unaware of the reality and the course of the business world. Why is it so? Producer firms receive orders from customers. The orders are received before the date that production starts. If the volume of orders decreases, the firm has to cut down the level of production decided depending on a certain flow of orders. Otherwise, stock of the firm accumulates. Keeping stocks is costly as it will be necessary to finance it. What does a firm executive observing that flow of orders is falling down and the stocks are accumulating do? Does he say "This is a psychological situation as rulers also states. I shall keep on producing; accumulate stocks for a while and continue financing the stock"? Or, does he start wondering whether other firms are suffering from a similar problem or not? What is your answer? If, the rulers saying that "it is a psychological situation, the contraction is temporary" cannot explain "reasonably and logically" why it is temporary, would not you wonder whether everyone else is suffering from similar problems? What would you do if you learn that everyone faces the same problem? Of course you would cut down production. You cannot make any sales since you do not know how the crisis affected the others.

    Second, banks prefer to lend the cash they have to the Treasury instead of offering credits to the corporate sector. Let us see the resultant interest rate movement. The central bank cut down the market rate to 12.75. Banks lowered the deposit rate to 15 to 16 %. Rate for the credit to be extended to the soundest firm remains constant at 30 % level. The decrease in the funding costs for banks is not reflected in the corporate sector as a fall in the credit cost. Why? If you wonder why, please read the two paragraphs above again. Banks are also monitoring the market and watching the fall in the cash flows to the banks. The fall in cash flow to a firm implies that the riskiness of that firm rises. What does this mean? The rate cut by the central bank does not have any benefit for the corporate sector. So, what aspect of these developments is psychological? None of them. In normal life, we call this ambiguity. If ambiguity rises, investment and production decisions cannot be made. And business people cannot eliminate ambiguity alone.

    So, will we wait for the mercy of God? No, we will not. This is why we have states. This is why the government members are paid for. This is why we pay taxes. It is the duty of the state to ensure stability. Of course, along with incapable states, there are also capable. For instance, in such an environment, the Federal Reserve developed a series of funding mechanisms for the corporate sector. The US is also faced with the same problem. Cash flow in the firms fell down along with the fall in sales. This increases the liquidity need of firms. Since the banks refrain from providing liquidity to the firms due to rising risks, the Federal Reserve steps in. In the United Kingdom, mechanisms including the provision of public guarantee for credits are designed in particular to enable the access of the SMEs to liquidity. As the examples are examined, it is seen that especially the existing credits are proactively restructured as a whole. A similar tendency can also be observed in Korea. In France, state-assisted receivable insurance mechanisms are designed to ensure the continuance of inter-company transactions. All of the referred countries are proactively trying to open the occlusions in the capillaries of the system. No one is following the "ostrich tactic" as done in Turkey.  Let me restate it: Responsible and capable governments should act responsibility and try to pave the way for the business world. The same shall also be done here in Turkey.

    "The crisis is psychological" superstition makes people believe that the situation is temporary and makes the public authority dysfunctional at a point where we need it the most. This is wrong and this is a meaningless belief. This is in fact same with asking "Is it possible that we can overcome the current global economic crisis without taking any measures and just assuming that the crisis does not exist?" And here is the answer: No, it is not possible to overcome the crisis without damage by just following the ostrich tactic and taking no measures. The damage created by this crisis will not be temporary; it will be permanent if we go on following the same tactic. Today gives a clue about tomorrow. It is wrong not to state the things you know.

    So, what do we know? This crisis cannot be overcome with the ostrich tactic. Until the elections, minds might focus on different issue such as the "Davos battles" thanks to the aerobatic tricks. But the result will not change: This crisis cannot be overcome with the ostrich tactic. This is not a psychological crisis. Things do not automatically get in track if you ignore the problems. In times of crises, measures shall be taken. The reality for 2009, as a statesman also suggests is this: "If one's broadest perspective is limited with the local elections, that person cannot survive until the general elections".

    The situation is serious. The no 2 entry hereby is added in the Doomsday Superstitions Catalogue, on the 31st day of January after the 2009th year after the birth of Jesus.

     

    This commentary was published in Referans daily on 31.01.2009

     

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