Years, years ago – in another country, in another century – I was some sort of economic journalist. I even edited a business magazine (in Bangkok, 1977-80). I can remember being fascinated by movements in the securities and commodities markets. My chief interests were in two related areas: so-called “development economics” (how you turn basket-case countries into prosperous countries), and “merchant banking” (lending money for investments).
I worked near a brilliant, honest Dutchman, named Antoine van Agtmael, who invented the term “emerging markets.” I even edited a book of investment case histories he wrote. I was rather inspired by him and several others, and very briefly considered a career in banking. (I’m a whiz at math!) But soon enough my eyes glazed over, and my interests returned to the normal subjects of the dinner table: politics and religion. (Forgot to mention sex.)
So I am not the pundit to whom the reader should turn for an analysis of the current mess in international finance. I vaguely understand how we got there. I more vividly understand the potential fallout when international financial institutions fall apart. But I am more interested in the phenomena from a political and religious, or more precisely moral, view. Let the bankers and their regulators get on with the job of fixing the system. With any luck they will learn a few lessons that passed them all by in former crises, and a stronger financial infrastructure will emerge. Alternatively, we’re doomed.
One needs very little financial sophistication to grasp how the mess began. It was pretty much the way it always begins, with reckless lending. Nor is the motive behind this hard to discern. The human desire to get rich quick, with the minimum of pain, while deflecting risk to others, is fairly well established in observation. Avarice is not the monopoly of any national or cultural group. I myself have noticed examples of it everywhere I’ve travelled, and have also watched it adapting itself to every conceivable regulatory regime.
I am partial to old-fashioned free-market capitalism. Most of the operations are conducted over the table. Those under the table are against the law. But once public regulation passes a certain point of complexity, and taxation passes the point at which the dodging of taxes figures in every transaction, it becomes a mystery where the tabletop might be. Productive investment tends to morph into clever manoeuvring, and acts of conscientious frugality tend to be punished, by any system in which moral principles are displaced by bureaucratic “policy,” dictated by the most powerful players through their government lobbies.
When the laws of nature begin exacting their toll, we all get to pay. Governments simply cannot allow the biggest players to go under, lest they take the whole system down. The loan sharks who acted most greedily and irresponsibly will be at the front of the line for bailouts. Their own competitors will shovel money into their pit, for fear their failure may lead to a run on all the banks. The better pay, the worse collect.
And while it is true that players like Bear Stearns get dumped at fire-sale prices, at loss to their shareholders, their liability was limited to the value of their shares, and all previous ill-gotten gains are retained. (In practice many shareholders may be leveraged into sight of the tar pits in hell, but that is a parenthetical story.) They had their reward, and their loss now is just the pinprick on a bubble.
I am oversimplifying, given the short space in which I must turn a column, and what I have written above is more caricature than patient description. But a caricature works only if it is recognizable, and I think even my better-informed readers may recognize the validity of the caricature, so long as they retain some moral notion of what is up and down.
The attraction of a complex, regulated system is the insurance it provides against risk. It allows players to go further out on limbs, in the knowledge they’ll be caught if they fall. Nay, it compels them to go further out on limbs, for they must earn more to cover the cost of the elaborate net that has been woven beneath them. All insurance systems create moral jeopardy to at least some degree, and it will always be a judgment call, for our political masters, to decide how much moral jeopardy is “safe.” Humans that they are, born in sin, they will always be inclined to increase the dosage, until disaster befalls.
In the end, everything earthly is lost anyway, and the rain falls both on the just and the unjust, so I do not invest a great deal of hope in genuine market reforms. Nature will see to that in due course. But in principle, I wish there were a stronger “lobby” for letting bankrupts go bankrupt, and for letting responsible investors enjoy the fruits of their labour.
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