The banks in the dock

Irving Fisher (1867-1947), as famous as he was controversial, the neo-classic American economist hypothesized an ideal world in which finance, and above all banking activities, were bound to a tangible physical and not virtual equivalent, restoring de facto to the State the capacity of managing the monetary policy and impeding the banks from creating virtual reserves.
Personally affected by the massive crisis of ’29, which overwhelmed his academic reputation and his entrepreneurial activities, Fisher ended his days in oblivion.
Only in 1958, the economist, Jack Hirshleifer took up and re-elaborated the theory of interest and capital of Fisher, his principal scientific production relative to the determination, over time, of the different value of an asset, rehabilitating the fame of the economist, who died in 1947, and permitting the rediscovery of his last studies. Among these 100% Money stood out, in which the economist proposed to oblige the banks to a reserve obligation of 100% on the loans granted, to limit the risks of crisis and definitively eradicate inflation and deflation.
Over the course of time, Fisher’s theories have progressively returned in vogue, to the point of enjoying a new and wide popularity since 2008, driven by the world economic crisis and the causes which contributed to generate it.
Notwithstanding this, we must not generalize. It is necessary to evaluate the present crisis in its correct dimension, without giving way to easy and improbable terms of comparison with the crisis of ’29, seeking, on the contrary, to understand the somewhat heterogeneous measure and distribution at a global level.
The banking system has been individuated by many as the source of the present crisis, accused of having conducted arbitrary and dissonant speculations, distorting the logic of capitalism and generating, in this way, a unique and epoch-making crisis.
According to Uri Dadush, the excessive risk taken by the banks, and a somewhat questionable practice in the granting of loans, contributed in a very obvious way to the genesis of the crisis. In addition, since the failure of the great banks cannot be permitted – in order to avoid catastrophic consequences – incentives were created which further encouraged the banks to assume new and much higher risks. The Governments were then too easily persuaded of the necessity to ease regulations of the sector although in certain cases this did not happen (as in Canada and Italy).
In spite of this, Dadush adds, the conduct of the banks and the lack of adequate regulatory measures were only a part of the problem, which, in its entirety, must be found by adding to the whole picture the inappropriate monetary and fiscal policy which generated the climate of euphoria that preceded the crisis. To this must also be added the illusion produced by the successes of the Euro in the first ten years of circulation, which convinced many in the European peripheries that the interest rates determined at the German level would have continued for a long time.
The term ‘crisis’, in reality, according to Attilio Celant, is as generic as it is misused, with the risk of creating a lot of confusion over the phenomenon which concerns the markets and the world economies, at this present moment. Without a doubt it is true that the phenomenon of crisis started from an essentially financial matrix, but it has been articulated and has materialized in forms vey different one from the other.
Therefore, not only the financially exposed systems have been affected by the crisis, but also those with structural problems. For many European Countries, the crisis was already existent, Celant reiterates. It was already in decline and the momentum had long since stopped. In fact, for ten to fifteen years, at least, progress in the industrial or infra-structural sectors has not been recorded. It is clear, Celant continues, that the crisis brought to light weaknesses which, in the case of our Country – less exposed from the financial and banking viewpoint - less severe consequences resulted.
In line with the thinking of Dadush, also Celant does not see the Government support to the banks ( helped and not recapitalized) as a solution to the problem, but rather as a buffer device which has not resolved the problem, but in some cases, has exacerbated it.
However, not all Governments have reacted in the same way, just as there was no uniformity in the way in which it was decided to set up the strategies to contain the effects of the crisis.
The crisis started in the United States, but the vulnerability of Europe was greater, Dadush agrees. In certain European Countries the real-estate speculations were even superior to those of the United States, and Europe is much more dependent on bank loans than is the American System. In addition, the manufacturing sector represents a sizeable component of the European economic system, and, in this area the crisis hit the sector very hard. According to Dadush, the crisis itself has revealed huge competitive differences within the European System, in the same way as in the capacity to manage the debt with the banks.

An asymmetrical crisis

According to Marco Giovanniello, at a distance of two years from the Lehman Brothers bankruptcy – which put the world finance on the edge of the abyss, sparking off the worst economic crisis since the Great Depression – the recovery of the GDP in the world occurred in an absolutely unequal manner.
For the Countries of the Pacific Asia, Brazil and many others such as Turkey in which previously, there was a very strong trend of development, the crisis was of a temporary nature and the growth was, if anything, only decelerated.
In the Western European Countries where the financial and real-estate bubble was at its maximum intensity, as in Ireland, Iceland and Spain, the crisis remains very serious, while in the United Kingdom it is going a little better, probably due to the shock-absorber effect of a high public deficit which, however, must now be eliminated because it is not sustainable over time.
In Eastern Europe, Giovanniello continues, the key to understanding is given by the pre-existent macroeconomic imbalances. Where these were high they have undermined the economies, while, where the equilibrium was stable and characterized by a more or less health picture, as in Poland, there has never been a real crisis.
Instead, the United States – where the strong imbalances of the State Budget and the exchanges with foreign Countries, dating from the Reagan Administration, and where the financial position of families is characterized by a constant debt situation – the strongly expansive fiscal and monetary policies have allowed for the containment of the crisis although at the price of a very strong weight on the national debt.
Therefore, Giovanniello is concordant in sustaining that the crisis hit hardest those who had large imbalances, and that certain Countries were able to put into effect anti-cyclical policies, enjoying credit, in all senses, on the International financial markets.
Generalizing the phenomenon, according to Uri Dadush, the developing Countries suffered the crisis less than the others, for two reasons. In the first place because their financial systems were relatively less integrated from those of the more advanced Countries, remaining at the edge of each intensification of the effect of the crisis; and in alternative, because the greater part of the developing Countries was characterized by a macroeconomic picture decidedly better than that of the more advanced Countries, therefore, being better able to withstand the impact of the phenomenon of crisis.
According to Dadush, China is an extreme and very particular case in virtue of its capacity of control over its capital, de facto that the banks are owned by the State, and for the extraordinarily strong macroeconomic values of the Country itself. Not only, as Dadush recalls, China is still a programmed economy in which, therefore, a very extensive stimulus policy can generate effects very rapidly. Furthermore, there are important differences among the more advanced Countries. Some were hit mainly through their trading system, according to Dadush, their financial system not being particularly exposed and they had been able to count on a faster recovery. As in the case of Australia, Israel and Canada.
Others were very badly hit on their financial system front, but had had the capacity of recovery thanks to their own competitiveness and to their concomitant ability to exploit the resumption of the world trade. As in the case of Germany and Sweden.
The advanced Countries of the European periphery, instead, suffered from their scarce competitiveness due to the lack of growth in trade or for the combination of more factors like the tragic effect of the speculative bubble of the real-estate sector in Spain.
The irony of fate Dadush adds, was that the United States had reacted better to the crisis – notwithstanding that the crisis originated there. They were advantaged for their minor dependence on the manufacturing and construction sectors, for a minor dependence on bank credit and for a private sector which had known how to react more rapidly than others to the manifestation of the crisis. Instead, what is worrying, according to Dadush, is that the institutional system that underpins the Euro and Europe, could turn out to be inadequate.

It is necessary to change course

Uri Dadush considers that, in general terms, all of the more economically developed Countries should lay out a medium-term plan of fiscal consolidation, starting from the United States. This must include a wider base of contribution and a rationalization of the expenditure, above all, that connected to the advanced-age component, as in the case of pensions and health care.
The peripheral Countries of Europe will have to face the major challenges in transforming the work and production market, rendering it more flexible and, therefore, reversing the trend of their loss of competitiveness compared to the heart of Europe. This, according to Dadush, will required, unfortunately, cuts or smaller wage increases relative to production, with an exposure to a greater competition of the protected professions.
The crisis has divided the world also on the predictions of the future. Many, perhaps also on a wave of ideological drive, have hypothesized with the crisis, the start of an American decline, foreseeing the end of the dollar as a money of reference and the definitive consolidation of a new multi-polar system led by China, India and Brazil.
Dadush is convinced that China must redirect and progressively restructure its economy, favouring more the consumption in the internal regions – like Japan, which must increase the competitiveness in the services sector and increase the immigration flows to contain the effects of the decline of the population.
Nevertheless, as fascinating as the forecasts may appear, they lack, according to the Carnegie economist, concrete elements to justify them. While there is no doubt that the weight of America has diminished in the wake of the crisis and that China and other emerging Countries have, on the contrary, acquired an important role, it is decidedly too early to decree the end of America and its special role. The US economy, Dadush recalls, is always three times greater than the Chinese one, and the American dollar still constitutes circa 70% of the world monetary reserve, while the Renminbi is not yet completely convertible. According to Dadush, what we are observing is a slow motion film; even if we can hypothesize over the finale, a lot of time is needed before we are able to see it.

The case of Italy

The analysis of the present Italian economic crisis, according to Giovanniello, requires recognizing it as a summation of different dynamics, many of which have been in existence for a long time.
The real-estate crisis in Italy was relatively important, the banks had no real need of public support, the families are just averagely in debt, but the State must handle an enormous public debt accumulated over the years, and it is walking right on the razor’s edge of the sustainability of that debt.
Belonging to the Euro currency, Giovanniello continues, allows us, albeit with a pounding heart, to refinance the debt at low rates, but does not guarantee the recovery of the loss of competitiveness. Also we cannot underestimate the depreciation of the dollar, to which are tied the currencies of the emerging Countries, which weighs on the trade with non EU Countries.
According to Attilio Celant, one of the principal problems of Italy is to recognize the need of a major push in the industrial policy and in planning. The example of the automobile sector is, with doubt, indicative for the Dean of Economics. It has little to do with a sector crisis, and even less, with a problem tied to labour costs. The real trouble is the lack of planning and innovation – with rare exceptions.
It becomes always more necessary to offer innovative and competitive products, without losing market share. Models like the FIAT 500 – result of a powerful innovative effort – enjoy wide success in Italy and abroad. Simplifying to the maximum, Giovanniello explains that Italy does not have a problem in producing and selling in certain quality niches, where the price is not a determining factor – as in the case of luxury products or mechanics of high prestige – but it could have problems with regard to Countries of new industrialization.
At the moment polarization prevails and success smiles on Countries like Germany, which offers the maximum in technology and sells with high margins, or on those that sell an “acceptable” technology at lower prices.
A certain number of Countries are able to maintain competitive costs while producing goods of first rate technological content.
The example of FIAT is for everyone to see, with the success of the plants in Poland, the investment in Serbia and the problems of competitiveness of the Italian plants.
Dadush maintains that there is no doubt that the Italian companies and workers are able to react to the crisis like the others, but he underlines how Italy is impeded by competitive limits and by restraints which are not commensurate with a global system characterized by an intense international competition and rapid changes.
Giovanniello says that Italy, after the 1992 crisis, put a brake on the explosion of its public debt, but according to Attilio Celant, it is of fundamental importance to take urgent, courageous decisions in matters of public expenditure.
It is necessary, say Celant, to make targeted and reasoned productive investments to increase the GDP, also at the risk of an increase of the debt, if this is functional to the growth. Therefore, it is a case of making courageous choices which cannot be separated from a programme for reducing public spending.
In conclusion, Italy needs to look at itself from the outside, Marco Giovanniello sustains, to observe constantly how it is placed in the development of the world economy and, in this way, constantly compare its own choices with those of the other systems, also with those engaged in the common growth effort.