This week we have seen again the two main actors of current economic crisis at play: governments and banking sector. The former is doing everything it can to save the latter. I was not in favor if this in 2008 and I still oppose it today. What I am trying to figure out is if elected governments are acting in our name for our interest when they spend trillions on saving private banks.
There are two articles one by Alana Greenspan and the other by Lucian Croitoru (adviser to the Governor of NBR) which treat the same subject. In both articles the state interventions seems to be demanded by the public. In fact Mr. Croitoru goes further and implies “social contract” between the electorate and its governments with the deal that when times are bad government should step in and when times are good governments should stand aside. He attributes this to the Keynesian view of economics.
As the two authors mention governments were pushed by markets to intervene and save the banking sector. But was that really the view of the entire electorate? Investors, people active within the boundaries of financial markets, had a vested interest in governments interventions. But governments should cater the the needs of all people. Governments should use tax money to enhance wealth of an entire nation.
Here is how see things. Governments will always look for an excuse to intervene. Saving the day is always going to bring votes. In the same time governments seem to forget the other roles they have: referee and regulator of markets. Although I am in favor of very small public sector the one that is in place should do its job. Thus, the cries for help from investors or households or simple citizens or not without reason. The people hold their governments responsible for the current mess and therefore they demand to fix it. Of course there were different ways to fix the huge problem in the banking sector but governments chose, in my view, the most expensive and with the most damage to future growth of all.
Governments were asked by markets to intervene as a party responsible for the whole mess and not as a white knight. If minimum control* control would have been imposed the damage to world financial sector and world growth perspectives would have been much smaller.
*In few day I will tell you the current situation of top ten bank in Romania and the way it is managing it’s Financial Markets department. You will see that regulators are still not up to the task even today.