‘Laissez faire – laissez passer’ should not apply to toxic products

Νοέ 11th, 2008 | | Κατηγορία: Οικονομικά, Πολιτική | Email This Post Email This Post | Print This Post Print This Post |

Suppose someone imported contaminated milk from China. Could he, if caught, invoke the free market principles to pursue his trade? Certainly not. However, the executives who issued sub-prime mortgages in the USA and spread them to unsuspecting customers by including them in various innocent-looking packages – a practice (mis)named securitisation – got away with murdering financial stability all over the world. To ask for better policing of this market is not harming free enterprise but ensuring its survival.

These investment bank whiz kids, who designed an opaque and highly unregulated way to lend money to people who could not pay it back, really set up a huge pyramid scheme which blew up in everybody’s face. The greedy bankers who sold these ‘toxic’ products are certainly to blame but so are the greedy mortgage brokers who peddled these loans just to make a commission. No doubt steps must be taken to end such practices that have led to the present credit crunch..

When Mr Alavanos of SYRIZA explodes against the Government in the Greek Parliament shouting: ‘We have a crisis of capitalism and you say long live capitalism!’ he simply expresses his furious anger that the system he hates makes progress both through innovation and through failure

The American film company ‘20th Century Fox’ is already working on a sequel to its famous 1987 classic ‘Wall Street’ in which Michael Douglas won an Oscar, portraying Gordon Gekko the predator-in-chief of the junk bond boom. One blogger suggested that this time Mr Gekko must be shown leading markets out of their slump. ‘But he would need a new vocabulary’ notes the Economist that ran the story in its 18 October issue. ‘His era-defining catch phrase in the original, Greed – for lack of a better word – is good jars in these harsh times. Greed – provided it is sufficiently regulated – is tolerable, might be more appropriate’. The truth is, of course, that the ‘creative destruction’ which, according to Joseph Shumpeter, writing in 1940, is in the nature of capitalism is once again coming into play on a global scale this time. When Mr Alavanos of SYRIZA explodes against the Government in the Greek Parliament shouting: ‘We have a crisis of capitalism and you say long live capitalism!’ he simply expresses his furious anger that the system he hates makes progress both through innovation and through failure.

The opposition attacked the Government for its bill that makes available to the nation’s banks the sum of twenty eight billion euros (at 10% interest) to ease the lending crisis. Once again Greeks were served the usual tales of woe about a populace that suffers while greedy bankers are being bailed out by taxpayers’ money. Karamanlis did explain, to no visible effect, that the 28 billions were no gift and that the Greek state would eventually even make a profit once the shares it had bought with this sum started to increase in price.

This columnist is no expert but talking to people in the trade he got a totally different picture from that which emerged from the parliamentary debate on the subject. The Greek banks, he was told, are nowhere like the European ones and far from having reached the end of their tether. They make good money and need no emergency aid to survive as they have not, on the whole, been exposed to ‘toxic’ products. If some smaller ones are facing difficulties – which they did long before the recent credit crunch – they can disappear unlamented.

Question: – So why is the Government proposing a law to help banks that are such paragons of health?

As it happens, the only banks in Greece that have purchased ‘toxic’ products, had the lowest profits, and the worst possible management are the ones where the state is already a majority holder i.e. the ‘ATE Bank’ and the ‘Hellenic Post Bank’. No wonder that they are the only ones to have embraced the Government plan. So let the Government bail out its own failed banks but do no harm to the private ones.

Answer: – Because, as it says, it wants banks to continue to lend to Greek small business and consumers at good rates, to get the economy moving and help it face its looming budget deficit. However, nowhere in Europe has Government assistance to the banks come automatically, hand in hand, with Government participation in the capital of these banks. As it happens, the major Greek banks do not need bailing out by any state aid like the UK banks while they and their foreign investors reject government interference, especially as this will entail the appointment of a civil servant on their boards armed with the power of veto on banking policy in general and on personnel management in particular including giving jobs to ‘our boys’. As it happens, the only banks in Greece that have purchased ‘toxic’ products, had the lowest profits, and the worst possible management are the ones where the state is already a majority holder i.e. the ‘ATE Bank’ and the ‘Hellenic Post Bank’. No wonder that they are the only ones to have embraced the Government plan. So let the Government bail out its own failed banks but do no harm to the private ones.

This conversation took place before the rescue plan went into effect. A few days later, when the private banks let it be known that their attitude to it was ‘thanks but no thanks’, the above views were vindicated. Then something odd happened. The head of the Greek trade union movement, namely the General Secretary of the General Confederation of Greek Workers (GSEE), came out on 3 November accusing the banks of failing to accept the 28 billion euro package of state help that would allow them to continue lending to the Greek workers in need. These people are amazing. First they accuse the Government of enriching the banks through taxpayers’ money and then they accuse the banks of refusing to be so enriched…. Go figure…

One thing seems clear. For the Greek state contriving to control private corporations greed has never been good…


Mark Dragoumis

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  1. «Could he, if caught, invoke the free market principles to pursue his trade? Certainly not. However, the executives who issued sub-prime mortgages in the USA and spread them to unsuspecting customers by including them in various innocent-looking packages – a practice (mis)named securitisation – got away with murdering financial stability all over the world.»

    This is absurd, blaming the bankers instead of the customers. If I sell lower quaility milk, and I advertise it as being so, and the customers still buy it, then it’s absolutely their fault. Banks want to generate revenue, and that’s exactly what they do. It’s the customers that should have thought twice before laying their hands on subprime mortgages.

  2. Caveat emptor!

    In a free market system, it is the responsibility of the buyer to check the quality of the product he purchases. If he buys milk, he can either spend some money to test its quality or rely on his prior knowledge about the reliability of the seller. It’s his risk, his gain, his loss. If a bad seller is discovered, he loses his business and his reputation. If a bad seller knowingly puts people at risk, e.g., selling them milk he knows will threaten their health, then he’s a criminal and he should be jailed. If, on the other hand, he simply exploits their idiocy and gullibility, and bets that they won’t bother checking out the ultimate sources of the bonds he’s selling them, then he’s not to blame.

  3. How does one expect to have lower rates in Greece when the Greek government will earn 10% on the money it loans is beyond me.

    Also, how does one expect to have a liquid banking system when European banks have 2.1 trillion euro’s in refinancing coming due in the next 2 years is also beyond me.

    If the ECB wants a liquid banking sector, I think it has to backstop all the hybrid capital coming due for refinancing in all of Europe. If you let the governments do this (as the case in Greece), then the only thing you will manage to do is to wreck public finances and make an even bigger mess of things.

    This of course means that the euro will probably go to 0.90 with the dollar, but it’s better than the current state of affairs.

  4. I have not studied medicine, as the post author has, but I think perfectly good milk can kill you, if you take a large enough dose.
    The trouble with «toxic» financial practices is that it is not possible to define «toxic» as clearly as in the case of milk. Finance is the trading of promises, promises to pay. Promises that are good today can turn bad tomorrow and then turn good again the day after tomorrow. A dose of promises is good today and toxic tomorrow. Laissez faire, laissez passer in such a trade is a method to let the more capable liars thrive. The liberal apologist will argue that the truth will shine in the end. Alas, If such liars can succeed in lying about paying in the future, it is logical to infer that they will be even more capable and effective in lying about their record. Why bother about finding out the true risk, if you can sound convincing enough so that you can unload to the next holder ? It is clear from the present crisis that the market has proven itself inadequate at discovering the truth in time. One can argue that government or other mechanisms may be even worse.
    Just as laissez faire, laissez passer is not harmed by labeling of food, so appropriate disclosure of information in the financial services industry may be a partial remedy. If people insist on gulping down too much milk, one must go for a stomach pump. Nationalisation (and reprivatisation) is the messy equivalent in the case of the financial system.

  5. «…the system he hates makes progress both through innovation and through failure.»

    Really? I’d like to hear a bit more about how capitalism progresses through failure…

    I clearly remembering hearing the same old cliche back in 2001 when the tech bubble burst. Since then: two wars at Iraq and Afghanistan, the skyrocketing of the US debpt, the futrher impoverishment and deprivation of the third world, the depletion and exhaustion of the natural resources, irreversible damage to the environment and climate changes, etc. I wouldn’t call all that progress, would you?

    It rather becomes increasingly obvious, barring perhaps the capitalist apologetics, that given the current state of the global capitalisim, come the next financial crisis and the closure of the next economic cycle, then we will not be talking about ‘failure’, but a cataclysm.

  6. @rebel@work:
    How are the wars in Iraq and Afghanistan and the skyrocketing of the US debt related to the ups and downs of the business cycle (inovation and failure) and/or of individual businesses?
    The «futrher impoverishment and deprivation of the third world» is simply a non-fact. Quite the opposite.

    G. Kaisarios: BTW, your article / comments on the issue have been really enlightening for me.

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