Chaos in an unfeasible model: The financial model (I and II)

The financial model, as opposed to the traditional financial model, arises when the public and financial sectors become independent of their instrumental function and exercise discretionary control over real activity. The economics or science of the correct allocation of scarce resources to satisfy the needs of the human being, degenerates into the science of negotiation and attribution of rents between competing groups. In business terms, these sectors leave their function of central services, which are a necessary cost for the company, and it is the rest of the company that becomes a cost for the central services office. All dysfunction generates disorders to the organism that suffers it; here the first is that the cost of both sectors for the whole economy is no longer optimal to tend to maximum. The second is that the invasion of the public sector and the lack of credit will suffocate the taxpayer base and the new world order of financial, ugly, pagan and elementary statism would be born.‎

‎By pointing out in a previous article (November 2008, available on the web) that the financial model is basically an erroneous exit to the abandonment of the gold standard in 1971, which is configured through successive "findings" that are now shown to be equally erroneous, it is objected that, in the time of the 80s, with Presidents Reagan and Thatcher, there was a reduction of the public sector and a liberalization of the financial following neo-liberal and neo-conservative recipes; and that such an apotheosis of debauchery (the removal of the Glass Steagall Act in 1999 and the flowering of new financial "engineering") would have caused the current crisis.‎

The evidence is very contrary to this commonplace: since before, but especially since Greenspan in 1987, the truth is that the quotas of the public, of money, or of the amount of public and private debt in relation to GDP worsen a lot. And if we measure by share of financial benefit over total profit, it almost doubles in 30 years, both in the Anglo-Saxon model (the United States between 1973 and 1985 oscillated over 16%; in 1986 it was already 19%; and in 2006, just before the current catastrophe, it reached 41%) and in the continental model (Spain in the 70s oscillated over 26% and in 2008 it stands at 41%, or 56% including sanitation).‎ ‎With social democratic or liberal rhetoric, the chaos has grown the same. In addition, the Bank for International Settlements in Basel, the cornerstone of the financing model, which has 57 central banks as shareholders and serves as a forum to establish homogeneous criteria and coordinate policies, in its 1988 Agreement (renewed in 2004) defines the ratio of own resources to total assets as an "instrument of prudential control", and assigns different consumption of own resources to the items of the asset according to their risk. As if by chance, the weighting of the "treasury, credits and debt of the public sector or central banks of OECD countries" does not consume own resources (they believed that it had no risk) while "mortgage loans" consume 50% of their amount (then there were no subprimes), and "loans to the private sector, investments in the Stock Exchange and other assets" consume 100%. Each bank's total risk-weighted figure must be backed by own resources and subordinated debt of at least 8% of that total amount; this makes it possible to multiply own resources by more than 100 times.

‎The public is already the provident and protagonist State, which delays the adjustment and dilutes the imbalances caused by its electoral spending through successive issues of currency and debt, while logically reducing the productivity of the use of available resources (which no longer seem scarce because money is created at will). The immense present debt and its ubiquity (international, national, regional and local) is explained by this dynamic of concentration in the public from its privileged rating; but it is no longer enough to "cook" the representative statistics (CPI, GDP, unemployment ...) because the debt problem could only be squared with new taxes in implausible amount.‎

A sector in crisis: In the traditional model, banking was a “fat dog business” (instrumental of the real sector, that is, with many operations and little leverage): Sometimes by having a large package of shares and others by his banking career, a great Western banker accessed management as an orderly businessman and loyal representative; his salary was about 400,000 euros today (about 30 times the lowest salary). Both bankers and bank executives lacked incentives to lose self-control (even today this mentality can be noticed in banks and small banks, besieged by asymmetric competition) and accounting, although not an exact science, tried to reflect the faithful image of the banking company. Since he could not retire at 45, “his house” (the bank) was something he had to protect in order to maintain a fairly well-off life while he was active.

In the financial model, banking becomes a "resource management business" (independent of the real sector, with fewer operations and leverage in a big way). Bankers and bank executives access management as "masters of the universe", large signings who do not risk their own capital, take the permission of the shareholders' meeting and exotic annual income (about 250 times the lower salary) is stoked. Their incentive is to maximize short-term profits, real or accounting, because that's where the bonus of the year goes; accounting is already an impressionistic science, reflecting an image of negotiated tones. Survival only depends on your systemic risk, on whether it is “too big to fail”

The only thing that has not changed in banking is the propensity to fit the public sector losses and, when they are too large, claim the rescue. The only way to break the sequestration implicit in poor management is "creative destruction," the same one that works miracles in the private sector or in small banking enterprises.‎

‎Perhaps it is necessary to return to the traditional culture and redefine the banking corporate purpose, so that it is once again the boring task of allocating scarce resources in a diversified way and ensuring that its greatest productivity is obtained, instead of the exciting transfer of bets of high speculative content and in conflict of interest with customers. Perhaps it is necessary to redefine the consumption of own resources due to the risk incurred, in order to resume financing the constant improvement of productivity and stop contributing to making the financial snowball greater. Limits may need to be set on the size of today's mega-banks, whose accounts reflect the valuation of many sophisticated investments made by a patchwork of subsidiaries operating in various countries and currencies. ‎ ‎The control and management of such rich diversity without moral hazard does not seem sustainable and its effectiveness in leading the actual activity seems debatable. Central banks may have to develop mother roles, the kind Euroclear does in bonds and stocks, so that the system is reliable and sustainable banking has access to economies of scale. ‎Perhaps the solution is to recapitalize the banks to replenish the own resources that have been lost (failed) or that are stuck (delinquent), and thus revive the granting of credit. Perhaps one solution is to change managers' remuneration criteria so that they have less incentive for recklessness; armchair decibels should accompany wealth creation‎. It may be necessary to establish special criteria for derivatives, legitimate operations, when it is seen that they degenerate into manipulation to alter the price of things because several "hunters" have allied to create avalanches of supply, artificial and sudden, for their own benefit and to the detriment of unsuspecting third parties. There is more, but for today this is enough.