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Banbury Cross

a pillow for lost thoughts...

Archives for: July 2014

Strings wanted

In the old days, the business of lending was more local, more straightforward and thus more transparent and responsible. The local banker would interview the borrower and make a sound risk assessment. It was crucial to do so, because bank carried the debt and was responsible for the loan repayment.

It seems that in the modern finance the debts (particular on the state level) are issued through a magic fairy and then hurled into the global securitized cauldron where they lose all sense of identity. No one carries any responsibility for poorly conceived, designed or executed loans. The actual market dynamics that could possibly track performance of such monstrosities is hidden behind several complex layers of semitransparent statistical fudging. Any visible links to underlying reality have been lost in the chaotic maze of economic models. No strings are attached to objects entering this maze.

Or consider public spending. Keynes said "government should spend in bad times, and save in good ones". Yet somehow that other part fell out of the picture. Fiscal discipline and common sense are dirty words. "Let's deficit spend today, and live responsibly tomorrow" has been the mantra of our Snake Oil Brigade for the past few years. Our national debt has more than doubled in the past decade. But when our expenditures do not generate economic growth and when they do not improve lives, no one takes the fall. No one answers for the malinvestment, for squandered funds and misallocated capital.

And private sphere is not much better. Was there anyone held responsible for the 2008 crisis? During the previous banking crisis in early 1990s, some 200 executives were charged and some sentenced. This time around? A big long silence. The bozos who brought the world to the brink of financial destruction walked away unscathed. In some cases, executives even got golden parachutes.

And that is exactly what is wrong. No one has personal responsibility for wasted money, for poorly designed expansions, for unbalanced public books, for nominal growth at any cost, for plundering natural resources. If too much bad debt clogs the system, the central bank just prints oodles of new money and off we go again. We paper over any personal responsibility. In the never ending monetary shower, we can no longer spot the good investment. Yet that is how capitalism should work. Reward the smart, punish the stupid. The present cycle of privatizing profits and socializing losses is a very poor replacement of that old mechanism. It rewards only the ones who are well connected to the printing presses so to speak.

Yet the longer we postpone the simplification - the poorer the rest of us will be. We have to find strings. For laws, for political decisions, for money. Where it comes from, who earned it, and where it will be invested. After all, you can print new money, but you cannot create new value. You can print tomes of regulations that no one reads, but you cannot create character and honesty. And most of all, you cannot print wealth.

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