The Price of Native Cunning

The evolution of the world economic crisis makes one aware that “native cunning” (in Spanish ‘viveza criolla’) is not just a local peculiarity of Buenos Aires, or even of Argentina as a whole, but something more general. Self-seeking cunning has been the norm in international finance, and it has been also the way in which a number of governments have hidden their real fiscal situation. These clever games end up badly, that is in bankruptcy. And yet, even when bankruptcy arrives, the brokers who abetted the scams make more money betting on the likelihood of collapse.<img133|center>

The international economic crisis has entered a new phase: we have passed from staggering private debts to staggering public ones. The risk is now one of sovereign defaults. Default is not longer an occurrence in the periphery of the world economic system, like Mexico’s default in 1995, or the Russian default in 1998, or the Argentine one in 2001. Default is now a distinct possibility in countries of the first world, or in those which aspired to join the first world: among the Nordic countries there is little Iceland on the verge of default; in Northern Europe several Baltic countries are on the brink; in the Balkans there is Greece, and in Southern Europe Spain, Portugal and Italy. Even the UK is not exempt from risk, and some suggest that the United States will, in a not too distant future, face some form of (disguised) default.

A country may be attacked by the army of an enemy power, by Internet pirates, by a terrorist network, by an epidemic, or by a natural catastrophe. It can be attacked also –may God help it then—by the markets. This is the worst attack: it is arch, it is anonymous, it wields financial weapons of mass destruction, and it is a combination of human malice and bestial ferocity. In wild life, an animal that is weak or wounded is attacked by members of its own kind or by a predator species. That seems to be the law of the jungle. In the case of a financial crisis the predators are the lenders, speculative investors, and the so-called vulture funds. However, in order to find itself in such sorry state, a country must be first a victim of its own improvidence, through the conscious or unsuspecting action of its own citizens, be they politicians, tax evaders, credit seekers, profligate functionaries, and plain old corrupt operators. They all exemplify “native cunning.”

The reasons are two. The first is the fiscal weakness of countries that spend much more than they earn, especially governments embarked in projects where cost exceeds the tax and royalty revenues. This deficit has to do, in turn, with a prebendal concept of democracy, that is, the exchange of votes for handouts, subsidies and public works (what in the US is called “pork”). To this problem we can add the bane of fiscal evasion or taxation loopholes. To make ends meet there is no other way out that acquiring debt, through the issuance of bonds and other forms of treasury IOUs. If the image of the country is “good,” and if there is a surfeit of available capital in the international markets, eager to get high returns, then credit is extended to the profligate country. This is a broker’s paradise, which gets hefty fees for each package of debt they manage to assemble. They collect at several points of the process: initiation fees, management fees, and a percentage of the benefits. This is the second reason for an impending debt crisis. The brokers are made whole no matter what, since they have devised and traded complex insurance derivatives (the infamous Credit Default Swaps or CDS), so they collect in the eventually that the financial house of cards comes crashing down. Heads I win, tails you lose. In operations of this kind, finance capital (which has come to dominate the process of economic accumulation over the last thirty years) shows itself to be a parasitic growth preying on the real productive economy. It gains are everybody else’s losses. When however, the entire Ponzi-like scheme unravels (2007-8), they threaten to bring the entire world economy to a halt. We then speak of “systemic risk.” To avoid it, governments come to the rescue of the financial sector by pumping trillions into the bank coffers. The funds come from the public that is from taxpayer’s savings. Those who in the past concentrated profits now socialize their losses. Finance capitalists become ready (and opportunistic) “socialists.” Bailout socialism is the law of the land.

We must ask at this point why the international regulatory institutions, such as the International Monetary Fund and the World Bank failed to see the danger and failed to blow the whistle. I can only put forth a tentative explanation. The sheer size of available investment capital is so huge that it dwarfs the monetary reserves of the IMF, and since here as elsewhere “money talks,” the regulatory institutions tend to put their heads in the sand. With a complicitous wink they give a passing grade to countries whose financial situation is direr than anybody admits. This has been the behavior time and again of the IMF in developing countries and in the so-called emerging markets. In the particular case of Greece –a country that applied for European Union membership in 2001 and had to comply with fiscal norms—the IMF was not involved but a private American financial institution was: Goldman Sacks (popularly known as Goldmine Stacks). This great financial broker “helped” the Greek government mask its accounts, that is make the debts appear smaller than they were and its income larger than it was –an operation for which derivatives are tailor made. In short, with international financial help, the Greeks cheated the EU. In school, students often cheat in exams by bringing ready answers written on their hands or otherwise dissimulated. In the case of Greece, the cheating took a very sophisticated form, with the aid of mathematics (it is the first known case in which high math is used to lie). There you have a brilliant case of “native cunning” applied on a global scale. There is more: the same brokerage firm took risk insurance on the likelihood of a Greek default. To give an analogy: it is as if a car salesman sold someone a car with defective brakes, and then took insurance on the same automobile in case it crashed. In “normal” life this is a criminal act capable of landing someone in jail. In the world of high finance, it is a perfectly legal (i.e. unregulated) transaction involving incomparably larger sums. There are of course, less sophisticated forms of cheating, and some of these land the perpetrators in jail. But there is no chance of that when a government engages in “creative accounting,” submitting false data on inflation, GDP, revenues, and the like. Here the punishment in the end is the market itself: eventually the country goes broke and the fraud is exposed. But here again, everybody pays, but not necessarily the original culprits.

In fact, when the whole scheme is exposed, the same intermediaries who “helped” and the international regulatory institutions, which heretofore “saw no evil”, sound the alarm. They remind us of the famous scene in the movie Casablanca when Louis, the corrupt French policeman is forced by the German occupation authorities to close down Rick’s Café, which he does exclaiming “I am shocked! There’s been gambling in this place.” The international rating agencies give the country a bad mark, and the financial barons bet that is will go under, making use of CDS and effectively “shorting” the place. The regulatory agencies like the IMF then offer to lend funds in order to avoid default, but the conditions they impose are so harsh (in economic parlance “pro-cyclical’) that no government that depends on votes can impose them without risking social chaos and political suicide. Then, in extremis, the country goes into default. The just atone together with the sinners, but not all the sinners atone. The government loses, the population at large loses, some investors lose, but big financiers do not. They have names: Goldman Sacks, Morgan Stanley, Citibank, and a bunch of hedge funds. To cap it all, in the midst of the ensuing debacle (as in Argentina in 2002) come the carpetbaggers, snapping local properties for a song. The law of the jungle asserts itself. The more cunning come ahead; the less cunning lose their shirts. After all, as young financiers from Wall Street told me with unflappable mien: “We organize markets, and we sell anything to anybody.” To the lesser lights among the native cunning the lesson is clear: theft must be done cleanly and professionally.

Since in the economic world there is no free lunch, someone must pay for the mess. The list is long. It includes all those whose mortgaged homes are “underwater,” those who lost their jobs, and therefore their health insurance, the merchants whose good don’t move, the workers who work part-time, the savers whose funds are trapped in non-performing accounts or which have been suddenly devalued, the retired who can barely survive, public servants with frozen salaries, and among the institutions, resource-impoverished hospitals, schools, police and fire departments. As for those in finance, the bonuses keep flowing, and if necessary, they go into low-profile “retreats.” Their “savings” are ready to move into new bubbles, and so the world goes on. There are public gestures of contrition here and there, some charity for the poor, congressional investigations in which they feign innocence and surprise, a game of mutual accusations and “passing the buck.”

In a generalized crisis nobody is safe, although like everything else, the fallout is not equally parsed. Among nations, the worse off are those that were more exposed. In them the population at risk is not just the population alive, but also those not yet born. The poker game of finance has ruined the future as well.

When the hour of truth comes, and the game is exposed, the biggest operators show the last card up their sleeve, the joker card, the card of blackmail: “if you let us fall, we will bring everybody down as well.” And therefore a bailout is devised. This is the case with banks in the first world. If the bankrupt entity is a country, a bailout may come from other nations, but at the price of sovereignty. The country at risk must surrender monetary and policy sovereignty. The formulas vary, whether the country in question is part of a larger union or alone, at the mercy of international regulators. One way or another it must let others tell it what to do and swallow the bitter pill of austerity. In some Latin American cases, “dollarization” was the answer. In others, a strict currency board was established, which was a way to bind monetary policy to a foreign reserve currency. This was a policy pursued in Argentina in the nineties. It amounted to what a Brazilian diplomat told me: “hand-cuffing yourself and throwing the key away.” In the current case of Greece there is an apt Homeric tale as the analogy. When Odysseus sailed his ship near the rocks where sirens sang their haunting melody, he had his crewmen bind him to the mast, and then plug their ears with bee wax, so they could row past the danger unawares of temptation while their bound captain was seduced by the sirens’ song but could do nothing about it. In other words, native cunning leads to bondage. Greek financial cheating in the context of the European Union could, unless severely sanctioned, lead to a more general shipwreck. Ten years ago Argentina was in a similar predicament, but alone. As opposed to Greece, no neighbors could help. Only the IMF could rescue it from the mess of its own doing. The conditions however, were too stark to contemplate, and so the country went into default. It eventually recovered, but the sequel was quite horrible: massive impoverishment, social regression, and political instability. Today, ten years after the fact, the threat of default and its sequel has moved from the periphery to the center. With the Great Recession, chickens have come home to roost.

Greece and Argentina have parallel histories since World War II. Both countries oscillated between civilian and military regimes. In each case, authoritarian military governments tried to manage internal difficulties by the recourse to war –Cyprus in the case of Greece in 1974, the Falklands/Malvinas in the case of Argentina in 1982. They failed in each case, and fell. In each country external debt fuelled economic growth until it could not be sustained any longer. Then crisis and social conflict ensued. In both countries the population is quick to mobilize in protest, but incapable of joint sacrifice. In the end, all Odyssean tricks of native cunning failed and ended in near or full shipwreck.

The bankruptcy of a country, like that of a firm, can be executed in an orderly or in a disorderly fashion. In Argentina it was precipitous, and left deep scars. Greece may be spared the same fate if the rest of Europe intervenes. In each case however, the tendency among locals –hoisted with their own petard of native cunning– is to blame outsiders for their plight: the US in one case, Germany in the other. And so they sink waving the flag, which confirms the lapidary sentence of Samuel Johnson: “Patriotism is the last refuge of the scoundrel.”

What lessons follow from this terrible and heartless story of native cunning? The main lesson, at the international and collective level, is the rather imperious need to regulate and control financial capital. High finance is the pimp of world debt, a procurer of credit and a sponsor of disaster. The second lesson is that cheating in accounting practices never ends well. It is a lesson in transparency (which the financial industry avoids like the plague). The third lesson is political. True democracy cannot be based on redistributive promises. It should rest instead on the productive mobilization of everybody. Public expenditure should prioritize long-term investment, not short-term handouts and transfers to the needy. Last, in those countries that encounter natural-resource bonanza, the objective should be to sterilize the windfalls and save for a rainy day. Otherwise they will succumb to the “Dutch disease.” Sovereign investment funds are one way of doing that. The ancient Egyptians knew this well: they built granaries for times of hardship and duress.

At the end of the day, the bill for native cunning is not just a fiscal shock: it is the reckoning of a moral deficiency. A country that acquires unsustainable debt damages not only the living, but future generations as well, condemning them to a life less happy than that of its forebears. The regulating principles of all morality are two, to wit: (1) to elevate one’s own goals to a universal rule applicable to everyone, and (2) to leave to those who follow us a better world.

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