By now the reputation of bankers for wisdom and probity has sunk lower even that that of journalists. Although (or is it because?) we all need banks, we also hate them. I could bore a entire barroom for hours with stories of the tricks played on me by my bank: for example, of how, when I transfer money from my English to my French account, it disappears at once from the first but does not appear for days in the second. Is it the English or the French bankers, or some combination of the two, who are having their wicked way with it?
But widespread sentiments should be mistrusted, even where there is some initial justification for them. How easily does a reasoned dislike slide into scapegoating, how easily we let a pleasurable emotion such as hatred overwhelm our logic and our reason!
Recently, for example, I read an article about the economic crisis in Europe in the house journal of the British intelligentsia, the Guardian. Profit is to this organ what usury was to the medieval church, especially when it is made by financiers. Not very deep in the subconscious of its writers, and probably of most of its readers, is the image of capitalists as bloated plutocrats in silk top hats, satin-lapeled frock-coats and gaiters, to be swept from the face of the globe a la Russian revolutionary posters.
According to the writer of the article (Phillip Inman), the austerity programs instituted in several countries in Europe are merely to save the banks — principally German and French ones — that have lent heavily to those countries. As this Wall Street Journal post notes, Inman’s article originally bore the headline, “French and German banks need a haircut.”
Why, he asks, should sovereign nations accept the demands of banks for austerity programs? Surely, he continues, bondholders, whether they are German banks or anybody else, should be punished for poor lending decisions?
The writer overlooks two rather obvious points. The first is that, in order to continue to run deficits, the sovereign countries which he thinks ought to resist pressure to cut back on their expenditure would have to borrow money to do so. From whom will they borrow it? And if it has been irresponsible to lend them so much money in the past, which they cannot pay back without great difficulty, why would it now be responsible, a good lending decision, to lend them even more? It is true that, if the history of the Argentine Republic (say) is anything to go by, lenders forget previous defaults after a few years; but, putting aside the morality of default, the years following default tend, for obvious reasons, to be rather difficult from the socio-economic point of view.
Second, while it is certainly true that lenders ought to consider the creditworthiness of those to whom they lend, the normal arrangement is that the creditor has a claim on the remaining assets of the borrower once he defaults. In other words, if sovereign debt were not different from private debt, the banks would have the right to seize a defaulting country’s assets to the value of the amount that they were owed.
Of course, everyone knows that sovereign debt is different from debt contracted privately; but the quid pro quo for this difference is that the debt is not repudiated. Governments use the fact that they are governments to borrow more, at lower rates of interest, than other borrowers. This means that the moral responsibility for ensuring that the borrower is creditworthy shifts decisively to the borrower.
The underlying problem in many European countries is that they have been funding their high levels of social provision and public employment — that is to say, current consumption — with borrowed money. They have been running a scheme that makes Mr. Madoff seem like a small-time operator. They are now faced with an unenviable choice: dishonest repudiation of debt, with all its baleful consequences, or a reduction in their material standard of living (to levels that would have seen miraculously high only sixty years ago). If your material standard of living is the meaning of your life, the latter is an existential disaster.
The article in the Guardian was therefore an exercise, not untypical of the genre, in scapegoating, that disregarded both the most obvious considerations and the deeper currents. In days gone by, it would have been the Jewish money-lenders who would have been blamed; to blame the banks seems so much more acceptable, generous, and liberal-minded, but the structure of the thought is similar.