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BY THEODORE PANAYOTOU
Director, CIIM Business School
Two institutions that we have trusted to serve our best interests have failed us badly, choosing to serve their own narrow interests instead. To the one, the government, we gave the right to tax away a good part of our earnings to help us do collectively what we cannot do individually. To the other, the banks, we hand our savings and allow them to lend it out many times over, thus creating new money, to finance investment, prosperity and growth. Betraying our trust, consciously or subconsciously, governments and banks colluded to enlarge themselves at the expense of the taxpayer in a tacit process of mutual support: deregulation for cash. Underlying motivation: economic and political greed.
Twenty years ago, different winds were blowing. The centrally-planned economies of the Soviet Union and Eastern Europe have just collapsed under the weight of unmanageable debt accumulated as a result of the rejection of the powerful incentives of human greed and market competition. We were then celebrating the superiority of the market, of democracy and of competition and looked forward to the future with optimism.
The climate today is very different. Greed is replaced by fear, optimism by pessimism, and confidence by self-doubt. The economies of Western Europe and America are in real danger of collapsing under the weight of unmanageable debt accumulated by the very forces of human greed and market competition which declared victory 20 years ago. No one would have imagined in their wildest dreams that a financial meltdown, followed by a stubborn economic crisis, would cripple the world economy after two decades of impressive growth and prosperity.
The hubris for the triumph of capitalism over its nemesis, communism, have let to an unholy alliance between the forces of the state and the banking system to bring much of the world’s wealth under their command for their own narrow benefit, in a collusion of economic and political greed. Through a process of “scratch my back to scratch yours”, governments deregulated financial markets and turned a blind eye to “get-rich-quick” schemes, and toxic assets purveyed by the banks, thereby laying the ground for the financial meltdown.
Returning the favour, banks invested their depositors’ hard-earned cash in bonds that governments issued by the truckload to finance over-bloated public sectors, pet projects and handouts to cronies in return for political favours. Theses bonds were supposedly risk less but they turned out to be as risky and as toxic as the banks’ packaged mortgages and structured investment vehicles.
The result? Sovereign governments which run huge deficits, but cannot borrow to pay their bills and service their accumulated debts. Banks which lost a big part of their capital to worthless government bonds and cannot recapitalize themselves, nor can they lend to their customers. A stalled economy saddled with more taxes and fewer jobs, with more risks and fewer opportunities, with more debts and less liquidity. The buck stops with the buttered taxpayer who faces an uncertain economic future and the gloomy prospect of having to bail out both governments and banks.
Yet, both governments and the banks have become so big that we can neither afford to let them fail nor do we have the means to save them. Governments, banks and other strategically placed institutions are meant to serve the public not themselves. What good is a bank that cannot lend or a government that cannot govern? As it is, government after government is forced to surrender its sovereignty to others to manage its economic affairs? A system replete with conflicts of interests and moral hazards has let to big banks and big governments that serve themselves instead of what we need: great banks and great governments that serve the public.
Our choice is not between unfettered greed and its total rejection; both lead to economic collapse. Only the intelligent regulation of self-interest and greed to preserve incentives and competition while guarding against abuses and manipulation can generate sustainable wealth and prosperity. This requires breaking up the collusion between big banks and big government, cutting them to size, redefining their role and re-dedicating them to the service of the public interest.
Banks may be thinking of themselves as a private business which, unlike any other business, have the privilege to “print” money but they are also among the very few private institutions that have (or ought to have) a public purpose, and this does not include the right to tax people to bail them out of their bad investments. Governments may relish their taxing and spending powers but this does not give them the right to borrow and grow at infinitum handing out favours and privileges at the expense of the taxpayer. We demand a new social contract to limit our liabilities and protect our assets from those that show no restraint in their appetite for aggrandisement and no hesitation in leveraging their size to extract even more and to force others to pay for their mistakes.
